Following Sam Bankman-Fried’s guilty verdict, former FTX executives are now fighting over the company’s limited insurance funds to pay for their legal defenses, highlighting the growing fallout from the exchange’s downfall.

FTX Insurance Dispute

The legal entanglements of FTX have intensified as internal strife among former executives surfaces over insurance funds meant for legal costs. Bloomberg reports that Sam Bankman-Fried, in a preemptive strike, sued Continental Casualty for not covering his legal fees, only to withdraw the claim later.

This legal maneuver came amid allegations from FTX’s ex-general counsel, Daniel Friedberg, who decried the unequal distribution of the $20 million insurance policy among the executives.

The dispute underscores the broader turmoil within FTX, as the insurance squabble transitions from a public legal confrontation to a more private negotiation in the aftermath of Bankman-Fried’s conviction.

The controversy surrounding insurance coverage at FTX has escalated into a broader debate about the fairness of insurance payouts in situations where many executives are implicated in legal proceedings.

With more than 20 FTX executives entangled in various criminal probes and civil actions stemming from the exchange’s implosion, insurers are under pressure to allocate finite legal defense funds. 

This predicament highlights a critical vulnerability in directors’ and officers’ insurance policies when faced with the collapse of a high-profile company like FTX, where claims can quickly exceed available resources.

Ex-FTX Executive Challenges Insurance Fairness

Bloomberg has highlighted Daniel Friedberg’s firm stance against what he perceives as unjust practices by insurers amid FTX’s legal maelstrom.

Friedberg, labeled by FTX’s new leadership as an accomplice in company misconduct, contends that insurers are obligated to divide defense funds equitably among the executives, failing which they demonstrate “bad faith.” 

The dispute over insurance fairness dates back to July 2023, when Friedberg first contested the proposed distribution strategy of the D&O carriers.

This was in response to FTX’s new management taking legal action against him, alleging his pivotal role in facilitating Bankman-Fried’s misappropriation of billions in client assets.

Friedberg’s confrontation with FTX’s insurers has shed light on the personal financial toll of the company’s collapse. Having already spent $800,000 on legal defense without tapping into Directors & Officers (D&O) insurance, Friedberg asserts he cannot sustain these expenses alone.

The complexity of FTX’s insurance setup, encompassing four D&O carriers each with a $5 million policy limit, adds to the challenge. While Beazley Plc and QBE Insurance Group fulfilled their obligations early on, Continental Casualty halted payments after contributing $871,000, as per Bankman-Fried’s lawsuit.

The final insurer, Hiscox, recognizing the potential for further legal developments, has sought the court’s assistance to ensure equitable fund distribution.

The court’s involvement came on the heels of Friedberg’s challenge to the insurers’ payment plan, which now awaits legal clarification.

Hiscox’s decision to defer to the judiciary reflects the insurer’s caution in a case where litigation outcomes could significantly influence fund allocation decisions, thus prolonging the resolution of this financial deadlock for the former executives.