In rejecting an insurer's attempt to block confirmation of its insured's bankruptcy plan, the Fourth Circuit found that an insurer may not interject itself into plan negotiations by invoking the duty to cooperate, nor does the insurer have standing to object to an insured's "insurance neutral" bankruptcy plan.
TAKEAWAYS
- An insured's duty to cooperate under a liability insurance policy is limited to "traditional litigation activities" and does not give an insurer the right to participate in chapter 11 plan negotiations.
- A bankruptcy plan is "insurance neutral" if it does not impair a liability insurer's pre-bankruptcy rights or increase its pre-bankruptcy obligations under a liability insurance policy.
- Insurers do not have standing to object to an insurance neutral reorganization plan.
In Truck Ins. Exch. v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73 (4th Cir. 2023), the U.S. Court of Appeals for the Fourth Circuit found that an insured's duty to cooperate under its general liability insurance policies, which require the insured to assist and cooperate with litigation-related defense, does not give its insurer the right to negotiate the terms of a chapter 11 plan in the insured's asbestos 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 interest" and lacked standing 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 affiliate Hanson Permanente Cement, Inc. (together, "Kaiser") filed for bankruptcy to address its environmental and asbestos-related tort liabilities. At the time of filing, Kaiser had been named as a defendant in approximately 14,000 asbestos-related lawsuits in state courts across the country.
Kaiser negotiated a largely consensual bankruptcy plan. The plan establishes a trust under U.S. Bankruptcy Code section 524(g)—a special provision of the Code designed for asbestos-related liabilities. The plan includes a "channeling injunction" under section 524(g) that blocks claimants from asserting their claims against Kaiser and instead directs current and future asbestos claimants to the trust. The trust then assesses the claims according to a proscribed claims resolution procedure. The trust is funded by a one-time $49 million cash contribution from Kaiser's parent company, a five-year $1 million note issued by Kaiser, and an assignment of Kaiser's rights under general liability insurance policies issued to Kaiser by Truck Insurance Exchange ("Truck").
Some of the asbestos claims asserted against Kaiser were covered by the Truck policies, while others were not. Under the plan, the asbestos claims covered by the Truck policies proceeded in state courts against Kaiser "in name only" to collect on available insurance, subject a $500,000 per-claim cap under the policies. Notably, Truck's rights to defend itself from parties asserting coverage under the policies were fully preserved under the chapter 11 plan. Uncovered asbestos claims were channeled to the trust directly to be assessed under the claims resolution procedures and subject to mandatory disclosures and authorizations by claimants intended to limit payment only to legitimate claims. Outside of asbestos personal injury claims, the proposed plan would resolve all other unsecured outstanding liabilities in full, including any claims by Truck for deductibles unpaid by Kaiser prior to bankruptcy.
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