Insurance Neutrality in Chapter 11 Plans: Balancing Debtor and Insurer Rights in Pre-Petition Insurance Coverage

Description

Insurance coverage is typically the debtor's only significant asset in a Chapter 11 case commenced to manage liability to a significant number of claimants--of which mass torts is just one possible type. A common solution is to put the insurance proceeds into a settlement trust for adjudication and distribution. How this result is achieved varies significantly depending on whether insurers, claimants, and the debtor can agree on the value of coverage and other key terms.

If the parties cannot agree, the debtor may propose a plan that conveys its coverage rights into a settlement trust and leaves the trust to litigate coverage. Plan proponents contend insurers lack standing to object to this arrangement if the plan is "insurance neutral" meaning it does not impermissibly abrogate rights and defenses for post-confirmation coverage litigation. But what rights can be affected and how much are hotly contested issues, and involve complex standing issues.

Insurers object that an assignment to a settlement trust fundamentally and impermissibly modifies insurer rights, such as to control or associate in the defense of claims, or increases the insurer's exposure through lax or undemanding claims resolution procedures. More recently, insurers have suggested that a plan which surreptitiously increases insurer risk and loss is not proposed in good faith, eliminates an insured's incentives to limit loss, and is unconfirmable.

Listen as this experienced panel of bankruptcy and insurance attorneys discusses "insurance neutrality" in Chapter 11 plans of reorganization.