Mass Tort Bankruptcies, Long-Tail Claims, and Disputed Insurance Policies

In mass tort bankruptcies, the debtor’s insurance coverage is often important to successfully resolving the case. But the scope of the debtor’s coverage can be uncertain, especially where the debtor’s purported liabilities arise from long-tail claims asserting injuries that happened decades earlier and implicate similarly old insurance policies. These circumstances regularly lead to disputes over whether alleged policies were issued (and/or their terms) because copies of the alleged policies cannot be located, and those involved in procuring or issuing the debtor’s insurance are no longer around.

Moreover, mass tort bankruptcies implicate a constituency foreign to traditional coverage disputes: the unsecured creditors committee. See 11 U.S.C. 1102(a). This committee often represents the interests of the underlying personal injury claimants, whose claims will be paid from the assets of the debtor’s estate according to the bankruptcy plan. The committee may, among other things, investigate the debtor’s assets, participate in formulating a bankruptcy plan, and advise its constituents whether to accept or reject a plan. See 11 U.S.C. 1103(c)(2)-(3). Accordingly, the committee is separately incentivized to investigate and pursue its constituents’ interests respecting the debtor’s insurance.

A tool available only in bankruptcy, useful for investigating disputed insurance policies, is a Bankruptcy Rule 2004 examination. Under this rule, a bankruptcy court, on a motion by a party in interest, can order the examination of an entity regarding, among other things, the “debtor’s acts, conduct, or property.” Fed. R. Bankr. P. 2004(b)(1)(A). The examination frequently takes the form of document requests, and can seek, among other things:

• Policy documents;
• Correspondence between a policyholder, its broker, and/or an insurer regarding negotiations over disputed policies, and/or historical insurance claims or policies;
• Any extant underwriting materials concerning the insurer’s evaluation of the putative policyholder, changes in the policyholder’s risk profile, and the terms of coverage the insurer was willing to write;
• The policyholder’s internal memos or board meeting minutes regarding the policyholder’s intent to procure insurance coverage;
• The policyholder’s internal financial records showing the payment of insurance premiums—or lack thereof—for the disputed policy; and
• Policies issued after the disputed policy, which may indicate on the declarations page that the policies were “renewals” of previous coverage.

However, disputed policy issues tend to be positioned differently in bankruptcies than in traditional coverage litigation. Coverage disputes are not often adjudicated in bankruptcy court. In terms of the underlying tort liabilities, the parties tend to focus on aggregated amounts in an effort to reach a global deal. In parallel, a Rule 2004 examination is typically used to assist in obtaining basic information about the existence and terms of a debtor’s insurance assets.

For those seeking to maximize insurance assets, it is important to think critically, and creatively, in order to identify materials to help build their case that a disputed policy was issued, because the types of secondary evidence that could be relied on to prove the existence and/or terms of a policy are many. Although policyholders or committees may hope to unearth a single “smoking gun” showing that a policy was issued, the existence of a missing policy more typically may be proven by weaving together multiple pieces of evidence that make a compelling case that a policy was issued. Particularly in jurisdictions that only require proof of a policy by a preponderance of the evidence, all types of evidence should be considered in assembling a disputed policy case. Evidence that may not initially seem relevant could prove useful once other information about a policy’s issuance or terms is discovered.

However, while a bankruptcy court can approve an insurance settlement under Bankruptcy Rule 9019, absent settlement, bankruptcy court typically is not the venue for the adjudication of disputed policy and other coverage issues. Rule 2004 examinations do not supplant litigation discovery—indeed under the “pending proceeding” rule, Rule 2004 cannot be used where there is a pending lawsuit in which discovery over the same issues could be taken. Rather, disputed coverage issues are more appropriately litigated in an adversary proceeding or after the conclusion of the bankruptcy (including confirmation of a plan that preserves all rights and obligations under the debtor’s policies).

In sum, accurately identifying all coverage issued to a debtor may assist in driving a case towards resolution. Bankruptcy Rule 2004 offers a tool that may be used, in lieu of coverage litigation, to assess what coverage the debtor does or does not have when policies are in dispute.