Supreme Court Strengthens Insurance Carriers’ Right To Be Heard In Chapter 11 Cases
On June 6, 2024, the U.S. Supreme Court determined that insurers with a financial responsibility for bankruptcy claims are “parties in interest” under 11 U.S.C. § 1109(b) that “may raise and may appear and be heard on any issue” in a Chapter 11 bankruptcy case.
06.27.24
In Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., the Supreme Court unanimously rejected[1] the so-called “insurance neutrality” doctrine that had been used in some jurisdictions to bar an insurer from objecting to a reorganization plan. Under that doctrine, an insurer might be prevented from raising objections to a proposed Chapter 11 plan if the plan was deemed to be insurance neutral (i.e., the plan did not increase the insurer’s pre-petition obligations or impair the insurer’s pre-petition policy rights).
Writing for the Court, Justice Sotomayor concluded that such insurers are entitled to be heard under 11 U.S.C. § 1109(b) and that the insurance neutrality doctrine is “conceptually wrong” and “makes little practical sense.”
In Truck Insurance, Kaiser Gypsum Co. and Hanson Permanente Cement (the Debtors) filed for Chapter 11 bankruptcy protection after facing thousands of asbestos-related lawsuits. Under the Debtors’ proposed reorganization plan, an asbestos personal injury channeling trust under 11 U.S.C. § 524(g) was created by which all future asbestos-related claims would be addressed. Under the plan’s trust, all the Debtors’ liabilities were assumed and all the Debtors’ rights under the insurance contracts were transferred to the trust, including “all rights to coverage and insurance proceeds.”
The primary insurer, Truck Insurance Exchange (Truck) was contractually obligated to defend each covered asbestos personal injury claim and to indemnify Debtors for up to $500,000 per claim. The Debtors were obligated to pay a $5,000 deductible per claim and assist and cooperate with Truck in defending the claims.
As proposed under the plan, insured and uninsured claims were to be treated differently, requiring insured claims to be pursued through the tort system and the uninsured claims to be submitted directly to the channeling trust.
Truck sought to oppose the plan pursuant to 11 U.S.C. § 1109(b), which permits any “party in interest” to “raise” and “be heard on any issue” in a Chapter 11 bankruptcy. Truck’s primary concern was that the plan, as proposed, would expose it to millions of dollars in fraudulent claims because the plan did not require claimants with claims covered by insurance to provide standard disclosures about other related claims for asbestos exposure, including those filed with other asbestos trusts. Among other objections, Truck alleged that the plan was “a collusive agreement between the Debtors and the claimant representatives” that impermissibly altered Truck’s rights under its insurance policies.
Following the bankruptcy court’s recommendation, the district court affirmed the Chapter 11 plan and concluded that the plan was insurance neutral because it “neither increased Truck’s obligations nor impaired its prepetition rights under the Truck Policies.” The Fourth Circuit affirmed, agreeing that Truck was not a party in interest entitled to raise such objections to the proposed plan.
The Supreme Court reversed. Noting that “the proposed Plan would have Truck stand alone in carrying the financial burden, because the § 524(g) channeling injunction ‘permanently and forever stays, restrains, and enjoins’ any action against Debtors and other entities other than Asbestos Insurers,” the Court found that Truck must be permitted to object, as neither the Debtors nor the asbestos claimants would have any incentive to limit the post-confirmation cost of defending or paying claims.
The Court further acknowledged that Truck was likely “the only entity with an incentive to identify problems with the Plan,” and found that this realignment of the insured’s economic incentives made Truck’s participation in the bankruptcy particularly warranted.
While the Court noted that there will likely be cases in which a party’s interest is not sufficiently direct to allow it standing to object to a Chapter 11 plan, the Court in Truck Insurance has greatly solidified an insurance carrier’s right to be heard when it will be financially responsible to pay bankruptcy claims.
Co-authors Carol Slocum, partner, and Christopher Leavell, associate, are members of the Bankruptcy and Restructuring Department at Klehr Harrison.
[1] Justice Alito took no part in the consideration or decision of the case.