Last month the United States Court of Appeals for the Sixth Circuit issued its anticipated decision in Indian Harbor Insurance v. Zucker, affirming a 2016 decision from a federal district court in Michigan that an Insured v. Insured (“IVI”) exclusion bars coverage for a claim brought by a post-bankruptcy litigation trustee for the benefit of the insured debtors’ creditors. The district court’s Indian Harbor decision was driven largely by the mistaken conclusion that a post-bankruptcy trustee is an ordinary assignee of the debtor company—an insured—and therefore purportedly stands in the shoes of the insured debtor for purposes of the IVI exclusion. As we described at the time, that decision, however, ignores the fundamentally different nature of transfers pursuant to Bankruptcy Code Section 1123 when compared to ordinary assignments pursuant to state contract law and the fact that a post-bankruptcy trustee assumes special powers as an estate representative. Unfortunately, after appeal, this issue still remains unresolved.
The Insured v. Insured (“IVI”) exclusion is a frequent and important issue for directors & officers (“D&O”) liability coverage, particularly where the bankruptcy of an insured entity may blur the lines of who is an insured and who is acting on behalf of an insured. Nevertheless, because the exclusion generally bars coverage for a claim made against an insured individual that is “brought or maintained by or on behalf of” the insured entity, whether the IVI exclusion applies is often the single most important coverage issue for the many claims often asserted against a debtor’s former directors and officers in bankruptcy.
Although the applicability of the IVI exclusion to bankruptcy-related claims has been litigated several times and often decided in favor of insurers, none of those cases has addressed the critical question of the primacy of Bankruptcy Code Section 1123, and how this provision may prevent application of the exclusion in such circumstances. Therefore, as insurers become more emboldened by their prior victories, debtors, their former directors and officers, as well as their bankruptcy and coverage counsel should be careful to consider Section 1123 both when drafting the debtor’s plan of reorganization and in any subsequent insurance coverage litigation. Continue reading “The Insured v. Insured Exclusion and Section 1123: the Primacy of Bankruptcy Law and the Importance of Planning Ahead”
Bankruptcy of the insured does not relieve an insurer of its obligations under its insurance policy, including to pay covered liability claims held by creditors of the bankruptcy estate. Generally, for a creditor to obtain a distribution from the estate, the creditor must file a timely “proof of claim” in the bankruptcy proceeding, and the claim must be “allowed” by the bankruptcy court. Because a debtor’s assets are typically insufficient to compensate all creditors for the full allowed value of their claims, creditors usually are paid only a fraction of the dollar value allowed. Disputes have, as a result, sometimes arisen between debtor insureds or their successors on the one hand, and their insurers on the other, over whether the insurer is obligated to pay the allowed value of an insured claim (“pay-as-allowed”), or instead only the fractional amount the creditor actually would receive from the estate if there were no insurance coverage (“pay-as-paid”). Continue reading “What’s the Insured Value of an Allowed Bankruptcy Claim? Pay-as-Allowed, Pay-as-Paid, and a Novel Variation”
The Second Circuit’s June 4, 2013 decision in Ali v. Federal Insurance Co. addresses when and how a policyholder may recover from excess liability insurance policies for future liabilities when underlying insurers are insolvent. (Opinion linked here). A number of insurer-leaning commentators have cast the case as a rethinking of Zeig v. Massachusetts Bonding & Insurance Co., 23 F.2d 665 (2d Cir. 1928), the seminal Second Circuit decision authored by Judge Augustus Hand, which first established the principle that policyholders could recover against excess insurance policies even if the policyholder did not collect the full limits of underlying insurance policies. In Zeig, the Second Circuit rejected an excess insurer’s attempt to walk away from its insurance obligations simply because Mr. Zeig settled his claim against a separate insurance company. Zeig established the principle, recognized by numerous courts since, that a policyholder’s settlement with one insurer does not forfeit the policyholder’s rights against other insurers.
The characterization that the Second Circuit has now called Zeig’s common-sense, and widely recognized principle into question, however, seriously misreads the decision in Ali. To understand Ali—what it does and does not hold—requires an understanding of the issues that were actually ruled on by the district court and affirmed by the Second Circuit. Continue reading “The Second Circuit’s Ali Decision Supports Zeig on Exhaustion of Insurance”