A recent U.S. Supreme Court ruling allowing insurers a seat at the table during Chapter 11 bankruptcy plan negotiations involving mass tort settlements is a big win for insurers but could prolong the process of reaching resolutions that satisfy all parties, experts say.

The justices unanimously ruled that a Farmers Group Inc. unit is a party in interest in construction products manufacturer Kaiser Gypsum’s bankruptcy proceeding, and the insurer can voice its concerns about the establishment of a $50 million settlement trust to pay asbestos injury claimants.

The June 6 ruling in Truck Insurance Exchange v. Kaiser Gypsum is an “important victory” for insurers, said Scott M. Seaman, an insurance coverage attorney at Hinshaw & Culbertson LLP in Chicago.

“Asbestos and mass tort claims usually involve significant dollars and bankruptcy has the potential to impact insurers’ rights and obligations substantially,” he said.

Insurers often play a significant role in bankruptcy cases, and their ability to voice concerns ensures a more comprehensive and just decision-making process, said Washington-based insurance coverage attorney Laura Foggan, a partner at Crowell & Moring LLP, which represented the American Property Casualty Insurance Association and Complex Insurance Litigation Association, which filed amicus curiae in the case.

“This decision will afford bankruptcy courts the benefit of important insurer insights about a proposed bankruptcy plan and enhance the fairness and effectiveness of bankruptcy proceedings,” she said.

Several bankruptcies have been driven by mass tort claims involving asbestos, talc, opioids and sexual misconduct, and the justices’ ruling will affect how claims are administered and coverage disputes are resolved in the future, said Washington-based insurance recovery attorney Joseph Saka, a partner at Nossaman LLP.

Kaiser Gypsum filed for Chapter 11 bankruptcy protection in September 2016 as it faced 38,000 asbestos injury suits dating back to the 1970s. Truck Insurance Exchange Co., which issued commercial general liability policies to Kaiser Gypsum from the 1960s until 1983, attempted to intervene in the proceedings. 

Both a federal judge in Richmond, Virginia, and the 4th U.S. Circuit Court of Appeals ruled that the insurer did not have standing to intervene because it was not a party in interest and because the settlement plan was “insurance neutral,” or had no bearing on Truck’s pre-bankruptcy insurance agreements.

Mr. Seaman said insurance neutrality provisions are acceptable when reorganization plans and proposed settlements are neutral because “they can add clarity and stave off some insurer objections.” 

Sometimes, however, the provisions are abused by debtors, claimants and courts when they are used to deny insurers the opportunity to be heard on issues that affect them, he said. 

“An insurance neutrality provision does not justify denying an insurer party in interest status because other provisions of a plan and the bankruptcy process itself still may impair an insurer’s interests,” he said.

In seeking to intervene in Kaiser Gypsum’s bankruptcy plan, Truck Insurance Exchange argued that the settlement fund included anti-fraud provisions only for uninsured claims that did not fall under its policies. 

There are some drawbacks to allowing insurers to have a seat at the table, said Sacramento, California-based Christopher D. Hughes, a bankruptcy attorney at Nossaman.

Prior to the U.S. Supreme Court’s decision, the 3rd U.S. Circuit Court of Appeals had allowed insurers to be a party in interest in bankruptcy proceedings, he said.

“It’s also going to allow the insurance companies an opportunity to object to Chapter 11 plans in ways they haven’t before, which could increase the administrative costs of bankruptcy cases going forward,” he said. 

John Koch, a Philadelphia-based policyholder attorney with Flaster Greenberg P.C., said the ruling will probably significantly affect the bankruptcy process rather than insurance coverage issues. 

Mr. Seaman said that while the ruling is “not a panacea for all the ills potentially involved in bankruptcy,” allowing insurers to be involved in negotiations will help in the formation of agreements that minimize fraud.

“A contrary ruling would have undermined confidence in the bankruptcy process, permitted insurer rights to be stomped on, and bankruptcy could be used as a superhighway for fraud,” he said.

Doctrine of insurance neutrality factors into high court decision

A crucial aspect of the U.S. Supreme Court’s ruling that an insurer can participate in a bankrupt debtor’s reorganization plan is how the justices addressed the concept of insurance neutrality.

Prior to the high court’s ruling in Truck Insurance Exchange v. Kaiser Gypsum, insurers could not object to a proposed Chapter 11 reorganization plan if it was neutral, that is, it would not increase or impair the obligations an insurer had before the company filed its bankruptcy petition.

Truck Insurance Exchange told the justices that contrary to rulings by the 4th U.S. Circuit Court of Appeals and a federal judge in Richmond, Virginia, that the plan resolving Kaiser Gypsum’s asbestos injury claims was not insurance neutral because it only had antifraud provisions for uninsured claims.

Supreme Court Justice Sonia Sotomayor wrote that the insurance neutrality doctrine is “too limited in its scope.”

“It zooms in on the insurer’s prepetition obligations and policy rights. That wrongly ignores all the other ways in which bankruptcy proceedings and reorganization plans can alter and impose obligations on insurers,” she wrote.

Laura Foggan, an insurance coverage partner at Crowell & Moring LLP in Washington, said the decision does not discard the importance of insurance neutrality but clarifies that neutrality alone is “too narrow a test” to determine an insurer’s standing.

“Insurers’ interests in policyholder bankruptcies go beyond preservation of their coverage defenses and insurance policy contractual rights. For instance, insurers’ interests include how reorganization plans impact their policyholders’ liabilities, claimants’ rights and others’ exposures to claims,” she said.