Asbestos Bankruptcies Plague InsurersDo prepackaged arrangements deprive carriers of right todefend against claims?

Attorneys describing asbestos claims litigation action contendthe main focus for legal battles continues to be in bankruptcycourt, where some say insurers have taken a judicial beating.

The activity in that arena that draws the particular ire ofinsurance carrier advocates is the creation of prepackagedbankruptcies, which they argue deprive carriers of a right todefend against claims. For some insurers, however, a prepackagedprocess can work to their advantage, according to lawyers.

(A prepackaged bankruptcy, essentially, is a reorganization planwhich a company negotiates with its creditors and which thecreditors vote upon, before the company actually files forbankruptcy.)

William Shelley, chairman of the insurance coverage practicegroup at Cozen O'Connor law firm in Philadelphia, said bankruptcies“are still a hot issue” in asbestos insurance claim litigation andthat a number of major cases where insurers are contesting thebankruptcy plan are now in the formative stage.

But the prepackaged arrangements, he said, “threaten to turn thewhole insurance litigation system inside out.”

Mr. Shelley said such bankruptcies, simply by virtue of beingfiled, attract more claims because they represent “an easypaycheck” with “extremely lax” criteria used for Trust DistributionProcedures.

Under section 524 (g) of the federal bankruptcy code regulatingprepackaged bankruptcies, claims are channeled into a trust that iscreated. In Mr. Shelley's view it is a “nefarious” process wheredebtor firms with asbestos claims against them typically agree tooverpay current claimants from the trust to extricate themselvesfrom litigation and “negotiate with insurers' money.”

As Mr. Shelley describes it, future claimant representatives whoare selected for the fund have a built-in conflict because they“get paid huge fees. So they want to do it over and over again,”and the persons selecting them for the work are the debtor firmsand asbestos creditors committees.

“They wind up approving a plan no matter what,” even though itmay be inconsistent with the best interests of future claimants, hesaid.

The bankruptcy, Mr. Shelley said, becomes a claims magnet byestimating values and producing a dollar figure before claims areeven asserted.

Nevertheless, Jason Komorsky, one of the attorneys thatrepresented the Fuller-Austin Settlement Trust against a challengeby insurers, argues that prepackaged bankruptcies are “good forinsurers.”

In the Fuller-Austin case, which is now on appeal to theCalifornia Court of Appeal Second Appellate District in LosAngeles, a California jury ruled last May that several U.S. andBritish insurers must pay $188.7 million to cover future asbestosclaims against the bankrupt Fuller-Austin Insulation Co. over thenext 36 years.

The trust fund of nearly $1 billion anticipates receiving100,000 asbestos-related claims against the firm that installedinsulation containing the hazardous material.

Although Lloyd's of London, Stonewall Insurance Co. andHighlands Insurance Co. suffered a punishing verdict in the case,Mr. Komorsky points out that 14 other insurers reached a settlementand are now protected from further claims againstFuller-Austin.

Once a settlement is reached, he noted, insurers obtain what isknown as a “channeling injunction” and the carriers obligations“have ceased to exist.”

Besides giving insurance companies finality to end such claims,it allows them to avoid defense litigation costs, he said.

Mr. Komorsky noted that the insurers who went to trial hadrefused to pay claims and had at one point offered to pay fivecents on the dollar. Fuller-Austin, he said, “wouldnt have goneinto bankruptcy if they [insurers] had stepped up to the plate” andreached a settlement.

Mr. Shelley agreed that a settlement with a bankrupt firm under524 (g) can provide “a finality that is attractive to insurers. Butif you have to pay an inflated number of claims at inflated valuesper claim on an accelerated basis, then it becomes less attractive”for insurers.

He said that in the prepackaged asbestos bankruptcies that havebeen approved so far, they have initially been challenged in courtby insurers and then settled. In one case, the J.T. Thorpebankruptcy in Houston, after the court ruled insurers had nostanding to challenge the arrangement, a settlement was reachedwhile an appeal was pending before 5th U.S. Circuit Court ofAppeals in New Orleans.

Mr. Shelley noted that so far there has not been a finding inany court that gives insurers broad-based standing to challenge theprepackaged arrangements.

Joanne McMahon, an attorney and senior claims specialist with GEReinsurance in Barrington, Ill., said that there was “a smallglimmer” of hope for insurers in a ruling this February by U.S.Bankruptcy Judge Kathryn C. Ferguson in Trenton, N.J.

Judge Ferguson held up the timetable for a prepackagedbankruptcy plan by Congoleum Corp. so that London market insurerscould go ahead with an action in state court where they arecontending that the manufacturer had breached policy conditions andno coverage for a settlement existed. With a bankruptcy filing,lawsuits are automatically stayed. Judge Ferguson lifted the stayon the policy dispute so it could continue.

On March 1, however, insurers lost a round before Judge Fergusonwhen their objections to a future claims representative, a generalattorney for the debtors and others, on conflict-of-interestgrounds were rejected.

Ms. McMahon speculated that if Congress fails to put somethingin place to deal with the mountain of asbestos claims, there couldbe even greater activity in bankruptcy court.

Mr. Komorsky, without reference to Congressional action, said anincrease in asbestos bankruptcy actions was inevitable as the tideof asbestos claims in the court rises above companies ability topay them.

Sam Issacharoff, a Columbia University Law School professor,agreed that “the prepacks are the way everybody is going.”

The big issue now, he said, is whether a company could takeportions of its firm into bankruptcy “without the entire enterprisefollowing in.”

Professor Issacharoff gave the purely hypothetical example of acompany like entertainment giant Viacom “a giant entity with someasbestos exposure.” The asbestos exposure, as large as it is, issmall relative to total assets of a company like that, he said.

(According to Viacom's 10-K filing for 2003, the company, withrevenues of nearly $27 billion, had asbestos settlement costsarising from a predecessor firm, Westinghouse, only in the tens ofmillions in recent years, and has not been found liable for anythird-party claims to date.)

“The question is, 'Could such a company be allowed to structurea workout for just that exposure?'” he said. The professor said hedidn't believe any company had done that to date but, nonetheless,it is a possibility that could be on the horizon.

Reproduced from National Underwriter Edition, May 10, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.