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No Longer Neutral: US Supreme Court Refutes "Insurance Neutrality" Doctrine and Holds That Insurers Have Standing to Raise Objections in Chapter 11 Bankruptcy Proceedings


In Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al, No. 22-1079, __ U.S. __ (June 6, 2024), the Court held that an insurer with financial responsibility for a bankruptcy claim is a “party in interest” that was entitled to “be heard on any issue” in a Chapter 11 bankruptcy, pursuant to 11 U.S.C. §  1109(b). The case arose out of the Chapter 11 bankruptcies of two companies who faced thousands of asbestos-related injury claims. 

The debtors proposed a Chapter 11 plan that would establish and fund a trust to assume the debtors’ liabilities for all present and future asbestos claims. The proposed plan also transferred all the debtors’ rights under their insurance policies to the trust. Truck Insurance Exchange (Truck), as the debtors’ primary insurer, was obligated to defend each covered asbestos personal injury claim and typically indemnify the debtors for up to $500,000 per claim. Truck would be required to defend and indemnify insured asbestos claims in the tort system, but uninsured claims would be submitted directly to the trust for resolution. Only the uninsured claims submitted directly to the trust would be subject to disclosure requirements intended to reduce fraudulent and duplicative claims.

Truck objected to the debtors’ plan on the ground that it was not proposed in good faith, in that it “reflected a collusive agreement between the Debtors and claimant representatives” that “did not require the same disclosures and authorizations for insured and uninsured claims.” The bankruptcy court confirmed the plan after finding that Truck lacked standing because it was not a “party in interest.” The bankruptcy court based its decision on the “insurance neutrality” doctrine, meaning that the plan neither increased Truck’s prepetition obligations nor impaired its rights under the insurance contracts. The district court and the Fourth Circuit affirmed the plan confirmation.

The Supreme Court unanimously reversed the Fourth Circuit and held that Truck, as “an insurer with financial responsibility for a bankruptcy claim is sufficiently concerned with, or affected by, the proceeding to be a ‘party in interest’ that can raise objections to a reorganization plan” under Section 1109(b). The Court faulted the Fourth Circuit (and lower courts) for relying on the “insurance neutrality” doctrine, which “is conceptually wrong and makes little practical sense,” because it “conflates the merits of an objection with the threshold party in interest inquiry.” The initial party in interest inquiry “asks whether the reorganization proceeding might affect a prospective party, not how a particular reorganization plan actually affects that party.” The Court concluded that “[t]he fact that Truck’s financial exposure may be directly and adversely affected by a plan is sufficient to give Truck (and other insurers with financial responsibility for bankruptcy claims) a right to voice its objections in reorganization proceedings.”        

This case highlights the importance of carefully examining the potential financial exposure an insurer might face as a result of an insured’s Chapter 11 reorganization plan. Retaining experienced counsel to assist in analyzing coverage and bankruptcy issues can help an insurer avoid facing excessive liabilities. If you would like to speak to an attorney about coverage issues involving bankruptcy, or if you have questions about the content of this update, please contact Seslee Smith, Brian Levy, Ryan Burke, or Nathan Miles.