In rejecting the insurer’s attempt to prevent the confirmation of an insured’s bankruptcy plan, the Fourth Circuit found that the insurer may not interfere with plan negotiations by invoking a duty to cooperate, and the insurer may not object to the insured’s “insurance neutral.” bankruptcy plan.
Take
- The insured’s duty to cooperate under a liability insurance policy is limited to “traditional litigation activities” and does not give the insurer the right to participate in Chapter 11 plan negotiations.
- A bankruptcy plan is considered “insurance neutral” if it does not weaken the insurer’s pre-bankruptcy rights or increase its pre-bankruptcy obligations under a liability insurance policy.
- Insurance companies do not have standing to object to a neutral insurance reorganization plan.
in Ins truck exchange. v. Kaiser Gypsum Co. (For Kaiser Gypsum Co.), 60 y. It does not give its insurer the right to negotiate the terms of a Chapter 11 plan in an asbestos insured bankruptcy because the duty to cooperate is limited to “traditional litigation activities.” The Fourth Circuit also found that the insurer was not a “party in the interest” and lacked capacity to object to the plan because by leaving the insurer’s rights and obligations under the policy intact, the plan was “insurance-neutral.”
In 2016, Kaiser Gypsum Company, Inc. and its subsidiary Hanson Permanente Cement, Inc. (together, “Kaiser”) filed for bankruptcy to address its environmental and asbestos compensation obligations. At the time of filing, Kaiser was named as a defendant in nearly 14,000 asbestos-related lawsuits in state courts across the country.
Kaiser negotiated a largely consensual bankruptcy plan. The plan creates a trust fund under Section 524(g) of the US Bankruptcy Code—a special provision of the Code designed for asbestos-related liabilities. The plan includes a Section 524(g) “directive injunction” that prevents claimants from asserting their claims against Kaiser and instead directs current and future asbestos claimants to the trust. The Fund will then assess the claims according to the Prohibited Claims Settlement Procedure. The fund is funded by a one-time cash contribution of $49 million from Kaiser’s parent company, a five-year $1 million warrant issued by Kaiser, and a waiver of Kaiser’s rights under general liability insurance policies issued to Kaiser from the Truck Insurance Exchange (“Truck”) ).
Some of Kaiser’s confirmed asbestos claims were covered by truck policies, while others were not. Under the plan, asbestos claims covered by truck policies were brought in state courts against Kaiser “in name only” to collect available insurance, subject to a maximum of $500,000 per claim under the policies. Notably, Truck’s rights to defend itself from parties asserting coverage under the policies are fully reserved under the Chapter 11 plan. Uncovered asbestos claims are directed directly to the Trust to be assessed under claims settlement procedures and are subject to mandatory disclosures and authorizations by claimants with a view to limiting payment to claims Only legitimate. Beyond asbestos personal injury claims, the proposed plan would fully resolve all other outstanding unsecured liabilities, including any claims by Truck for deductions not paid by Kaiser prior to bankruptcy.
Truck policies, which were in effect from 1965 through 1983, cover both defense and compensation costs arising from asbestos personal injury claims, subject to some exceptions. Under the policies, Truck is obligated to compensate Kaiser (up to a maximum of $500,000 per claim), with no total limit. In turn, Kaiser pays a deductible for each claim of $5,000. Under the policies, Truck must investigate and defend every claim or proceeding “even if [the] The claim or suit is unfounded, false or fraudulent.”
In the district court, Track vetoed the plan on three main grounds. First, Track argued that the plan was not proposed in good faith because Kaiser did not extend disclosure and authorization requirements for insured claims. Second, Truck objected to Kaiser’s request for a court declaration that Kaiser did not breach its obligations to assist and cooperate or breach an implied covenant of good faith and fair dealing in connection with bankruptcy plan negotiations. Third, TRAC has asserted that the proposed plan does not comply with Section 524(g).
The district court overruled Truck’s objection by finding that Truck lacked standing, and upheld the bankruptcy court’s recommendation to affirm Kaiser’s Chapter 11 plan. Truck then appealed to the Fourth Circuit Court of Appeals.
the decision
The Fourth Circuit did not rule on the substance of the three truck plan assertion objections, instead finding that the truck lacked standing to object because the plan was insurance-neutral. (However, the Circuit Court’s analysis of the standing case required it to review the substantive issues of the truck’s objection to the plan to determine whether the plan violated the truck’s rights under its policy.) “Increase the insurance company’s liabilities before a petition is filed or prejudice the rights of the pre-insured policy.” Since the rights and obligations of insurers are not affected in a neutral insurance plan, these insurers have no standing to object, except for a dispute as to whether the plan is insurance neutral.
Track argued that it had a position to object to the plan because it weakened Truck’s right to defend coverage based on Kaiser’s alleged failure to comply with its contractual duty to cooperate, and that this failure forces a finding that Kaiser also violated an implied covenant of good. Faith and fair dealing. The Cooperation Clause of Truck Policies states, in the relevant part, that:
[Kaiser] You must cooperate with [Truck]And on it [Truck’s] request, shall attend hearings and trials and assist in making settlements, securing and presenting evidence, obtaining the presence of witnesses and in the conduct of cases.
According to Truck, Kaiser’s obligation to “cooperate” with Truck and “help implement settlements” required Kaiser to assist Truck in securing the same types of disclosures and clearances from insured claimants that were required from uninsured claimants. The Fourth Circuit disagreed, finding that attending hearings and trials, obtaining the presence of witnesses, securing and presenting evidence, and assisting and cooperating in the administration of “claims,” all indicated that the obligation applied only to “traditional litigation activities,” not bankruptcy plan negotiations. In fact, the Fourth Circuit noted, Truck was unable to cite “a single determination by any court that a requirement to cooperate in such a policy includes the insured’s conduct in proposing a plan of reorganization in bankruptcy proceedings.” Therefore, Kaiser’s duty to cooperate did not entitle Track to participate in plan negotiations.
Further, relying heavily on the fact that insurance policies require Truck to investigate and defend against claims “even if that claim is unfounded, false, or fraudulent,” the Fourth Circuit rejected Truck’s argument that the plan altered Truck’s rights and obligations by not Request permits and disclosures from insured claimants. Thus, the Fourth Circuit declined to expand Kaiser’s obligations beyond those set forth in the policies, concluding that the truck lacked prestige. (The circuit court also found Truck lacking Article III as a creditor because of unpaid deductions, in part because the plan paid deductions in full and its objections, which were based on a lack of good faith and fund compliance. With section 524(g), it did not implicate Truck’s interests as a party a credit.)
Takeaway
Based on this decision, insurers will not be allowed to interfere with bankruptcy plan negotiations by invoking the insured’s duty to cooperate, nor will they have the status of objecting to a “insurance neutral” plan. The decision highlights an important aspect of bankruptcy plans for companies that want to preserve the benefit of the deal that was negotiated with insurance companies before bankruptcy, and stresses the importance of formulating an accurate plan to preserve this deal. In the absence of a variable right prior to bankruptcy or an expansion of the insurer’s obligation under the plan, the courts will continue to limit attempts by insurers to expand the insured’s duty to cooperate.
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