Introduction

The past year saw courts continue to wrestle with recurring insurance-law themes: The scope of D&O exclusions, the insurability of restitutionary remedies, the treatment of regulatory settlements, and the extent to which sophisticated commercial parties may shape coverage outcomes through policy wording and forum-selection provisions. New York courts generally continued to construe exclusions narrowly and enforce contractual risk-allocation provisions, while Delaware courts issued several decisions likely to influence coverage disputes nationwide.

Fraudulent Transfer Claims in Bankruptcy Are Not Insurable

In Scottsdale Insurance Co. v McGrath, a federal district court applying New York law held that a bankruptcy trustee’s fraudulent-transfer claims did not seek a covered “loss” under a management liability policy because the trustee sought only the return of funds allegedly transferred to the insured. 2025 WL 2509190, at *19-20 (S.D.N.Y. Sep. 2, 2025). The court characterised the remedy as restitutionary rather than compensatory and concluded that under New York law, the recovery of wrongfully transferred funds was uninsurable as a matter of law.

Although arising in the bankruptcy context, the decision reflects New York’s longstanding distinction between covered damages and restitutionary relief. See, eg, Vigilant Ins. Co. v Credit Suisse First Bos. Corp., 10 A.D.3d 528, 528 (1st Dep’t 2004) (“The risk of being directed to return improperly acquired funds is not insurable.”). The ruling suggests that directors, officers, and other insureds facing claims seeking only the return of allegedly improper transfers may confront significant coverage obstacles, even in the absence of allegations of personal fraud.

New York courts remain reluctant to treat restitutionary remedies as insurable loss. Policyholders confronting fraudulent-transfer claims should evaluate at the outset whether the claimant seeks compensatory damages, restitution, or both.

Court Rejects Expansive Reading of D&O Policy’s Subsequent Acts Exclusion

In AmTrust Financial Services, Inc. v Forge Underwriting Ltd., a federal district court applying New York law declined to dismiss a coverage action based on a D&O policy’s “subsequent acts” exclusion. 823 F. Supp. 3d 397 (S.D.N.Y. 2026). The underlying securities action arose from the policyholder’s statements that it would maintain certain preferred stock as publicly traded while otherwise taking the company private. Two months after the take-private transaction, the company announced that it would delist the preferred stock.

The insurer argued that the post-transaction decision to delist preferred stock triggered the exclusion because it occurred after the policy’s cutoff date. The court disagreed, finding that the alleged “wrongful act” identified in the underlying securities action was that the policyholder’s pre-transaction statements were false and misleading, while the later delisting merely functioned as a corrective disclosure. Further, even if the term “wrongful act” was ambiguous because of the broad “based upon, arising out of, … in any way involving” lead-in language, the court held that ambiguity would likely cut against the insurer, precluding dismissal. Id. at 401.

The decision underscores that even broadly worded exclusions remain tied to the misconduct actually alleged in the underlying complaint. Courts applying New York law continue to construe exclusions narrowly and place a substantial burden on insurers seeking to bar coverage, particularly at the pleadings stage.

New York Choice-of-Law Clause Enforced Despite Texas Insurance Statutes

In Danaby Rentals, Inc. v Mt. Hawley Insurance Co., a federal district court in New York enforced a policy’s New York choice-of-law provision notwithstanding the insured’s argument that Texas insurance statutes required the application of Texas law. 2026 WL 440758, at *5-8 (S.D.N.Y. Feb. 17, 2026). The insured argued that New York General Obligations Law § 5-1401 – which permits parties to a contract involving a transaction of USD250,000 or more to agree that New York law will govern without requiring a traditional choice-of-law analysis – was trumped by the Texas Insurance Code, which requires Texas law to govern insurance contracts payable to citizens or inhabitants of Texas by an insurance company doing business in Texas. See Tex. Ins. Code art. 21.42; id. § 982.303. The court found that there was no basis under New York’s choice-of-law rules to allow another state’s public policy to invalidate a New York choice-of-law clause.

The decision continues a trend of New York courts enforcing contractual New York choice-of-law provisions in large commercial insurance policies. See, eg, My Invs. LLC v Starr Surplus Lines Ins. Co., 2024 WL 4859027, at *3 (S.D.N.Y. Nov. 20, 2024); Berkley Assurance Co. v MacDonald-Miller Facility Sols., Inc., 2019 WL 6841419, at *2-3 (S.D.N.Y. Dec. 16, 2019). In doing so, the court emphasised New York’s strong interest in providing certainty and predictability to commercial parties selecting New York law to govern their agreements.

For large commercial programmes, New York choice-of-law clauses remain a powerful risk-management tool and may be enforced even when the insured’s home state has statutes favouring the application of local law.

Delaware Follows New York in Rejecting Automatic Characterisation of SEC Disgorgement as a “Penalty” and Excluded from Coverage

In Clear Channel Outdoor Holdings, Inc. v Illinois National Insurance Co., a Delaware Superior Court addressed whether an approximately USD16 million disgorgement award paid pursuant to an SEC settlement order was a “penalty” excluded from coverage. 2026 WL 1347392, at *9-15 (Del. Super. Ct. Apr. 28, 2026). The policy defined “loss” to include “damages” and “settlements” but specifically excluded “civil or criminal fines or penalties imposed by law”. Id. at *2.

In denying coverage, the insurer argued that “disgorgement” was not a “loss” but, in substance, a “penalty” and invoked the Supreme Court’s decisions in Kokesh and Liu. The court disagreed, explaining that the policy’s exclusion language mirrored the SEC’s statutory authority and that the policy exclusion applied narrowly and specifically to instances in which the SEC imposed civil monetary penalties, not disgorgement. Importantly, the court relied heavily on the New York Court of Appeals’ reasoning in J.P. Morgan Securities v Vigilant Insurance Co., 37 N.Y.3d 552 (N.Y. 2021). Quoting the Court of Appeals, the court found that “Kokesh ‘was not interpreting the term “penalty” in an insurance contract’, and ‘the meaning of that term may vary based on context’”. Clear Channel, 2026 WL 1347392, at *14 (quoting J.P. Morgan Sec. Inc., 37 N.Y.3d at 568). Because Kokesh and Liu did not concern insurance coverage and could not have informed the parties’ reasonable expectations at the time of contracting, those decisions did not control. The court held that the insurer had failed to meet its burden to show that the exclusion barred coverage for the disgorgement amount.

New York Court Permits Bad-Faith Claims Based on Claims-Handling Conduct

In Renergy, Inc. v Mt. Hawley Insurance Co., a federal court applying New York law rejected the insurer’s argument that bad-faith claims are categorically limited to first-party insurance policies. 2026 WL 1192415 (S.D.N.Y. May 1, 2026). The dispute arose after the insurer allegedly relied heavily on a third-party consultant’s work and ultimately reimbursed the insured for only a small portion of its claimed costs. The insured argued that the insurer should be subject to a bad-faith claim because the insurer relied heavily on the consultant’s determinations without sufficient independent analysis, issued duplicative and burdensome document requests, and ultimately adopted the consultant’s recommendation to pay only a small portion of the claim. The insurer argued that New York’s bad-faith claims-handling doctrine, and any associated consequential damages, is confined to first-party property policies. The insurer further argued that the insured’s real complaint was that the insurer failed to pay enough under the policy, and New York generally does not permit standalone bad-faith claims that simply duplicate a coverage claim.

The court agreed with the insured and found that New York law does not automatically foreclose bad-faith claims simply because the policy provides third-party liability coverage rather than traditional first-party coverage. The court further held that allegations concerning an insurer’s investigation and handling of a claim may support consequential damages independent of a breach-of-contract claim where the alleged misconduct extends beyond the denial of coverage itself.

The decision reinforces that, under New York law, insurers may be held liable for extra-contractual damages by failing to exercise good faith when investigating claims and making coverage determinations.

Complex Commercial Division’s Broadened Authority Over Complex Commercial Insurance Coverage Disputes

Effective 3 November 2025, amendments to the New York Complex Commercial Division rules clarify that additional categories of complex insurance coverage disputes clearly fall within the Commercial Division’s jurisdiction. See 22 N.Y.C.R.R. §§ 202.70(b), (c). The amendments expressly encompass many commercial coverage controversies, including coverage under policies insuring directors and officers, errors or omissions (E&O), cyber, business interruption, as well as other sophisticated commercial insurance disputes. The rules also broaden the court’s ability to hear environmental and mass-tort coverage cases and eliminate the prior exclusion applicable to first-party insurance claims.

Taken together, the amendments reflect a policy judgement that complex insurance disputes increasingly belong in New York’s specialised business court. The changes, which align with the approach of several other jurisdictions, should increase the number of significant coverage actions litigated before judges with substantial experience handling complex commercial matters.

New York policyholders and insurers should expect a growing number of major coverage disputes to be heard in the Commercial Division, where litigants may benefit from more specialised judicial management and a developing body of commercial insurance precedent.

Delaware Supreme Court Narrows the Reach of D&O Bump-Up Exclusions

New York courts frequently look to Delaware courts for guidance on corporate law issues, particularly where Delaware law is more extensive. See, eg, In re Tops Holding II Corp., 646 B.R. 617, 692 n.361 (Bankr. S.D.N.Y. 2022) (“Where New York law is not as robust as Delaware law regarding matters of fiduciary duties, New York courts have looked to Delaware law for guidance”.); In re Perry H. Koplik & Sons, Inc., 476 B.R. 746, 796 (Bankr. S.D.N.Y. 2012) (noting that courts addressing D&O duties “have often looked for guidance” to Delaware law, where “the thinking in this area has evolved”), adopted in part, 499 B.R. 276 (S.D.N.Y. 2013), aff’d, 567 F. App’x 43 (2d Cir. 2014). New York courts “have looked to Delaware courts for guidance” on insurance-related issues, such as “indemnification and advancement”, which “Delaware courts have often addressed”. Suk Joon Ryu v Hope Bancorp, Inc., 2018 WL 1989591, at *8 n.5 (S.D.N.Y. Apr. 26, 2018); see also Ficus Invs., Inc. v Priv Cap. Mgmt., LLC, 61 A.D.3d 1, 9 (1st Dep’t 2009) (“Delaware courts have had ample opportunity to address these issues of indemnification for and advancement of expenses and, although not binding as to… New York law, their holdings can be instructive”).

Against that backdrop, and taking note of the fact that New York courts have not independently addressed similar issues, the Delaware Supreme Court’s decision in Illinois National Insurance Co. v Harman International Industries, Inc., 2026 WL 204209 (Del. Jan. 27, 2026) represents one of the most significant D&O coverage decisions of the past year. In Harman, a class of Harman shareholders sued after Harman’s 2017 acquisition under the federal securities laws, alleging that the proxy contained misleading disclosures. After the case settled years later, Harman’s D&O insurers denied coverage under the policy’s “bump-up” exclusion, which barred settlement coverage if (i) the claim underlying the settlement alleged inadequate deal consideration for an acquisition, and (ii) the settlement amount represented an effective increase in deal consideration.

Although the court agreed with the insurers that the underlying securities complaint alleged inadequate deal consideration in an acquisition because it pleaded that the proxy statement’s disclosures deprived investors of the “true value” of their shares, the court concluded that the insurers failed to establish that the settlement functioned as an effective increase in merger consideration – a separate requirement under the applicable bump-up exclusion.

By distinguishing recent decisions from other courts siding with insurers on the exclusion’s reach, the Harman decision articulates significant limiting principles for courts to cabin the bump-up exclusion’s application. The decision reinforces that even where a complaint challenges merger consideration, insurers must still demonstrate that the settlement itself functioned as additional consideration before a bump-up exclusion will apply. The decision’s analysis also underscores how differences in policy language, including the precise formulation of certain exclusions, may lead to different coverage outcomes.

Artificial Intelligence Likely to Become the Next Insurance Coverage Battleground

Artificial intelligence (AI) is quickly becoming a focal point of insurance coverage negotiations. As AI-related litigation proliferates – including claims involving intellectual property, privacy, consumer protection, and professional liability – insurers are increasingly responding through refinements, and potential coverage limitations in policy language. At the same time, “silent” coverage continues to exist for the AI-related risks that commonly accompany major technological innovations, including those arising from disclosure obligations, corporate governance, and board oversight. Yet AI also presents unique challenges, including the unprecedented pace of its adoption and the ability of boards of directors to meaningfully understand and oversee AI-related capabilities. In addition, new endorsements, exclusions, sublimits, and definitional changes directed at “generative AI” or AI-assisted activities have begun appearing across a range of commercial policies. AI is also reshaping professional-risk profiles, including within the legal industry itself.

So-called “AI hallucinations” – the generation of inaccurate or entirely fictitious citations, authorities, or factual assertions – have emerged as a recurring source of concern for lawyers and other professionals using generative AI tools. The phenomenon has become sufficiently widespread that commentators now maintain databases tracking court decisions addressing AI-generated hallucinations in legal filings. According to one such database, as of 7 August 2026, courts worldwide had addressed over 1,840 cases involving alleged AI hallucinations, including over 920 cases during 2026 alone, with at least 39% involving attorneys rather than merely pro se litigants. See Damien Charlotin, AI Hallucination Cases (last visited 7 August 2026).

As courts, regulators, and litigants continue to grapple with AI-related conduct and its consequences, insurers and policyholders alike are evaluating whether traditional professional liability, cyber, D&O, E&O, and related coverages adequately address risks arising from AI-assisted activities, including professional errors resulting from AI-generated outputs. The most significant AI coverage disputes may be won or lost at policy placement. As with cyber risks a decade ago, the market appears to be entering a period in which coverage outcomes will depend heavily on policy drafting and underwriting practices. Policyholders should therefore evaluate AI-related exclusions, endorsements, sublimits, and definitional changes with the same scrutiny traditionally applied to cyber, intellectual property, and professional-liability provisions.

Conclusion

The year’s developments reflect a continued emphasis on policy language and the precise nature of the underlying conduct at issue. Courts generally resisted efforts to expand exclusions beyond their stated terms, whether in the context of subsequent acts exclusions, disgorgement exclusions, or D&O bump-up provisions. At the same time, courts generally declined to adopt categorical coverage defences, instead focusing on the particular remedy at issue, the specific policy language, and the reasonable expectations reflected in the parties’ bargain.

The decisions also illustrate the growing importance of policy drafting and claims-handling practices. Commercial parties continued to benefit from New York’s willingness to enforce bargained-for choice-of-law provisions, while insurers faced scrutiny not only for coverage determinations, but also for the manner in which claims are investigated and adjusted. Looking ahead, emerging risks associated with artificial intelligence are likely to accelerate these trends, placing even greater emphasis on underwriting decisions, policy wording, and careful allocation of risk at the time coverage is purchased.