Court rules that insurers are parties of interest in bankruptcy proceedings

The U.S. Supreme Court, in a recent decision, ruled that insurers are parties of interest in bankruptcy plans and can object to reorganization plans.

The ruling earlier this month in Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., et al, allows insurers who are impacted by a reorganization plan under Chapter 11 of the Bankruptcy Code to participate in the bankruptcy proceedings as a party in interest and comment and object to reorganization plans that affect their interests.

Companies faced with numerous mass tort claims, such as asbestos claims, often seek bankruptcy protection. Reorganization plans may include § 524(g) channeling injunctions in which insurance assets are put into a trust to pay tort claimants. Although insurers are routinely involved in negotiating these reorganization plans, a question arose as to whether an insurer had standing to object to such a plan under § 1109(b) of the Bankruptcy Code.

Kaiser Gypsum manufactured and sold asbestos containing products and faced tens of thousands of asbestos-related lawsuits. Kaiser filed for Chapter 11 bankruptcy and as part of a reorganization plan proposed an Asbestos Trust under 11 U.S.C. § 524(g). Under that provision, debtors may fund a trust and present and future asbestos claims are all channeled into the trust. The plan transferred all of Kaiser’s rights under their insurance policies to the trust. Eventually, Kaiser, all the claimants and other creditors agreed to the plan, including all of its insurers except for Truck Insurance Exchange.

Truck was Kaiser’s primary insurer from 1965 to 1983. Truck objected to the plan for three reasons. First, Truck argued that the plan was not proposed in good faith and was a collusive agreement between the debtor and the claimant representatives as it did not require “the same disclosures and authorizations” for insured and uninsured claims. Truck argued that this would expose it to fraudulent claims. Second, the plan altered its rights under the policies, including under the assistance and cooperation clause. Third, the plan did not comply with § 524(g), including that it did not “deal equitably with claims and future demands.”

The Supreme Court found that an insurer “with financial responsibility for a bankruptcy claim is a ‘party in in interest’ because it may be directly and adversely affected by the reorganization plan.” The court stated that § 1109(b), permitting any party in interest to be heard, was broad in its application of who is a party in interest. Anyone with a direct financial interest should have an opportunity to be heard if it affects their interests. The Bankruptcy Code is designed to prevent reorganization plans that “will simply turn out to be too good a deal for the debtor’s owners.”

Insurers have a right to be heard in bankruptcy court

What insurance companies need to know in the wake of the Truck ruling “is that when they are involved as an insurer in a bankruptcy proceeding which involves asbestos, but also in other mass tort type of situations, that they now have a definitive right to be heard by the bankruptcy court, and the right to object to any of these reorganization plans that may impact the insurer who may be really the only party who has a real financial stake in the matter at the end of the day,” said Bruce Engel, partner with the law firm Goldberg Segalla.

Situations that lead to a case like Truck occur frequently in the commercial insurance realm, Engel said.

“It happens frequently with general liability policies, because are longtail claims,” he said. “This happens with cases involving asbestos, or similar types of claims where the insured is faced with the normal claims and goes to the bankruptcy courts for protection. So this arises in connection not only with asbestos, but with abuse claims, pollution-type claims, claims that a product caused cancer.”

Engel’s advice to commercial insurers is to “review how any proposed reorganization plan might affect their rights and to be involved in the bankruptcy proceedings. Because they are now a party in interest and have the right to object to any plans that may harm their interests.

“I believe this ruling gives the insurers, who are the ones who ultimately may end up paying these types of claims, a firmer stance to have a say in the reorganization plans.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on X @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].