May 30, 2014 Articles

Insurance 101: Seventh Circuit Limits Insurer Standing to Challenge Settlements

The Seventh Circuit Court of appeals directed that an excess insurer’s concerns about a policyholder settling “on the cheap” with a lower-layer insurer—thereby potentially increasing the excess insurer’s coverage obligations—was an issue the excess insurer should address through its policy language, not through the bankruptcy courts

by Marla H. Kanemitsu

Most practitioners would agree that bankruptcy and insurance law are complex subject areas replete with nuanced rules and policy considerations. Put them together, and you can get stuck in a quagmire pretty quickly. Judge Richard Posner, in his typically pithy manner, has stepped into this fray with a decision aimed at avoiding at least one sticky situation involving the intersection of insurance and bankruptcy law. In an April 24, 2014, decision inIn re C.P. Hall Co., No. 12 C 2978, slip op. (7th Cir.), the Seventh Circuit Court of Appeals held that an excess insurance company does not have standing to challenge a settlement between a policyholder and a lower-layer insurer. The court directed that an excess insurer’s concerns about a policyholder settling “on the cheap” with a lower-layer insurer—thereby potentially increasing the excess insurer’s coverage obligations—was an issue the excess insurer should address through its policy language, not through the bankruptcy courts.

Like so many of the bankrupty-insurance cases that came before it, the Hall decision arose in the asbestos context. The policyholder, C.P. Hall Company, was a former distributor of asbestos and asbestos products, and, as a result, had been sued by thousands of individuals alleging asbestos-related injuries. Hall filed for bankruptcy protection in 2011. At that time, it determined it had $10 million in coverage from Integrity, which was itself insolvent. Integrity disputed that it owed coverage for the asbestos claims, and the parties agreed to a settlement of $4.125 million. The parties sought approval of the settlement from the bankruptcy court—approval that was required in order for the settlement to be valid.

Columbia Casualty Company was an excess carrier with a $6 million policy. Although the record is unclear, it appears that Columbia’s policy did not sit directly above the Integrity policy, but the Integrity policy did sit in a lower-layer than the Columbia policy in Hall’s entire coverage block. Columbia filed an objection to the Integrity settlement, arguing that the settlement increased the chances that Hall would seek more coverage from Columbia for claims that Columbia contends should have been paid by Integrity. In re C.P. Hall Co., slip op. at 2. The bankruptcy court refused to consider the objection on the ground that Columbia had no standing. In its April 24 ruling, the Seventh Circuit affirmed.

Posner explained that to have standing to object to the Integrity settlement, Columbia “had to show that the Bankruptcy Code conferred the right that it sought—the right to butt into a settlement negotiation between other parties.” Id. at 4. Specifically, Columbia had to demonstrate that it fell within the scope of Bankruptcy Code section 1109(b), which provides that “a party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case [arising] under” the Bankruptcy Code. In re C.P. Hall, slip op. at 4. Noting that Columbia’s “desire to butt in is understandable,” it determined that Columbia’s claim that “Hall received so little in the settlement that it is bound to come after Columbia for the difference” was “weak” and “too remote” to entitle it to intervene. Id. at 4-5. The court explained that bankruptcy rulings frequently affect third-parties, and that under Columbia’s position, “an employee whom [Columbia] had laid off because it foresaw having to make a big payout to Hall could challenge the settlement.” Id. at 4. According to the court, “That way madness lies—settlements made impossible by crowds of objectors.” Standing to object was instead generally limited to debtors and creditors.

The court did note that an insurer in Columbia’s position was not without avenues to protect itself from such situations, and suggested two such options: First, “[a]n excess insurer can write a policy that does not require it to pay until the coverage limit of the primary policy . . . has been reached.” Id. at 7. Because excess policies typically do have such requirements for the policies sitting directly below them, this suggestion presumably would mean that an excess carrier would need to write a policy requiring horizontal exhaustion of all applicable underlying policies, not just those policies directly beneath it. Second, the court suggested that an excess policy “could provide that its coverage limit would drop down if the primary insurer proved to be insolvent.” Id. Under such language, the court determined an insurer would likely have a sufficient interest to obtain standing.

Although Columbia’s counsel in Hall argued that the position ultimately adopted by the Seventh Circuit would result in a circuit split between the Seventh Circuit, on the one hand, and the Third and Ninth Circuits, on the other hand, the Seventh Circuit distinguished the Third and Ninth Circuit rulings cited by Columbia. See In re Global Industrial Technologies, Inc., 645 F.3d 201 (3d Cir. 2011); In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012). Accordingly, it is possible that in the situations presented in those cases—i.e., an arrangement by a debtor and its creditors to establish a trust to which the debtor’s insurance policies would be assigned, and a bankruptcy order that would allegedly alter the terms of the insurance policies at issue—the Seventh Circuit would agree that the insurer would have standing. But those issues were left for another day.

 

Keywords: insurance, coverage, litigation, federal law, commercial general liability, CGL, Seventh Circuit, bankruptcy, standing, asbestos

Marla H. Kanemitsu is a partner with Dickstein Shapiro LLP in its Washington, DC, and Los Angeles offices.

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