Joining with Bankrupt Insured Protects Insurer of Derivative Action
Mass-tort liability of entities with asbestos operations typically results in their filing for bankruptcy protection. The Bankruptcy Code allows a court to supplement a confirmed plan of reorganization by entering an injunction that channels this liability to a trust set up to compensate persons injured by the debtor’s asbestos.
In certain circumstances, channeling injunctions can also protect the interests of non-debtors, such as insurers.
In In re: W.R. Grace & Co., et al, Reorganized Debtors, Continental Casualty Company; Transportation Insurance Company v. Jeremy B. Carr, et al. Jeremy B. Carr, et al., No. 17-1208, United States Court Of Appeals For The Third Circuit (August 14, 2018) the Plaintiffs are a group of individuals suffering from asbestos disease as a result of exposure to the asbestos mining and processing operations in Libby, Montana (the “Libby Facility”) of W.R. Grace & Co. and its related entities (collectively “Grace”). They seek to hold Grace’s insurers, Continental Casualty Company and Transportation Insurance Company (collectively “CNA”), liable der various state-law negligence theories for their injuries (the “Montana Claims”). CNA, however, seeks to enforce a third-party-claims channeling injunction (the “Injunction”) entered under Grace’s confirmed plan of reorganization (the “Grace Plan”) to bar the Montana Plaintiffs’ action.
Channeling of Third-Party Claims in Asbestos Bankruptcy
Section 524(g) of the Bankruptcy Code authorizes bankruptcy courts to form a trust and issue an injunction to channel certain claims to that trust in conjunction with a confirmed plan of reorganization in asbestos bankruptcies. Congress intended § 524(g) to address the unique problems and complexities associated with asbestos liability, particularly the long latency period of many asbestos-related diseases, which typically creates a large pool of future claimants whose disease has not yet manifested.
CNA issued a variety of insurance policies to Grace between 1973 and 1985, including policies for workers’ compensation and employers’ liability (collectively the “Workers’ Compensation & Employers’ Liability Policies” or “CNA Policies”).
After Grace filed voluntary chapter 11 petitions in the District of Delaware, the Bankruptcy Court confirmed the Grace Plan. It included the Injunction under § 524(g) barring certain suits against third parties and instead channeling them to an asbestos personal injury trust (the “Asbestos PI Trust”) designed to compensate those injured by Grace’s asbestos.
Along with the Grace Plan, CNA and Grace entered into a settlement agreement (the “Settlement Agreement”) in which CNA agreed to contribute $84 million over a period of six years to the Trust, $13 million of which could be reimbursed for any payments CNA makes for asbestos personal injury claims that are not successfully channeled to the Trust.
The Montana Plaintiffs’ argument that the Injunction does not, by its terms, bar the Montana Claims but the court concluded that the CNA Policies are among those covered by the Injunction’s terms, though buried in a befuddling maze of defined terms, and that the Montana Claims do not fall under the Injunction’s workers’ compensation exclusion.
Claims barred by the Injunction include tort claims made against certain protected third parties directly or indirectly resulting from personal injury and exposure to Grace’s asbestos. Third parties protected from these claims include CNA and other insurance companies who entered into settlement agreements with Grace. They are protected, however, only to the extent their policies are identified as subject to a settlement agreement.
Twenty-five CNA policies are identified in the Settlement Agreement, along with a catch-all for “all known and unknown policies, or portions of policies,” issued by CNA to Grace through June 30, 1985 that actually or potentially provide insurance coverage for asbestos-related claims of bodily injury. Excluded from protection are any rights or obligations that pertain solely to CNA’s coverage for state workers’ compensation benefits.
The Montana Plaintiffs argue the CNA Workers’ Compensation & Employers’ Liability Policies are not included among the 25 listed policies and thus are not covered by the Injunction. Our review, however, shows that CNA entered into a settlement agreement with Grace, that the catch-all for all “known and unknown policies” includes the CNA Policies, and that the CNA Policies provide coverage for bodily injuries caused by Grace asbestos. Hence they are covered by the Injunction though they are not specifically listed.
The Permissible Scope of the Injunction under Section 524(g)(4)
The parties do not dispute that CNA is identified as protected by the Injunction; this satisfies the first condition for coverage by a third-party-claims channeling injunction. The Third Circuit only assessed the second and third conditions for protection: whether the Montana Claims seek to hold CNA “directly or indirectly liable for the conduct of, claims against, or demands on” Grace, i.e., the “derivative liability” requirement, and whether CNA’s alleged liability “arises by reason of” its provision of insurance to Grace, i.e., the “statutory relationship” requirement.
The incentive for third parties, particularly insurers, to contribute to an asbestos personal injury trust is their diminished exposure to asbestos liability from the asbestos debtor’s conduct or claims against it. Protecting these third parties from derivative exposure resolves lingering uncertainty about their liability and sustains the trust’s ability to compensate current and future claimants.
Related to jurisdiction exists over actions against non-debtors involving contractual indemnity obligations between the debtor and non-debtor that automatically result in indemnification liability against the debtor. Such is the case here, as the Trust is obligated by contract to indemnify CNA up to $13 million for its asbestos personal injury liability within the meaning of § 524(g)(4). Hence the Third Circuit had no doubt that the Bankruptcy Court had jurisdiction to enforce the Injunction.
As a result the Third Circuit affirmed the Bankruptcy Court’s decision that the Montana Claims are included in the terms of the Injunction.
The Third Circuit made it clear that insurers of long tail claims like asbestosis should work to join with the insured into setting up a trust like was done on behalf of Grace and CNA. The incentive for insurers to contribute to an asbestos personal injury trust is their diminished exposure to asbestos liability from the asbestos debtor’s conduct or claims against it. By setting up a trust, even one with baffling and hard to understand language, cuts the long tail to a Doberman’s nub.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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