Asbestos Bankruptcies Plague Insurers Do prepackaged arrangements deprive carriers of right to defend against claims?

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

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

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

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

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

Mr. Shelley said such bankruptcies, simply by virtue of being filed, attract more claims because they represent “an easy paycheck” with “extremely lax” criteria used for Trust Distribution Procedures.

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

As Mr. Shelley describes it, future claimant representatives who are 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 firms and asbestos creditors committees.

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

The bankruptcy, Mr. Shelley said, becomes a claims magnet by estimating values and producing a dollar figure before claims are even asserted.

Nevertheless, Jason Komorsky, one of the attorneys that represented the Fuller-Austin Settlement Trust against a challenge by insurers, argues that prepackaged bankruptcies are “good for insurers.”

In the Fuller-Austin case, which is now on appeal to the California Court of Appeal Second Appellate District in Los Angeles, a California jury ruled last May that several U.S. and British insurers must pay $188.7 million to cover future asbestos claims against the bankrupt Fuller-Austin Insulation Co. over the next 36 years.

The trust fund of nearly $1 billion anticipates receiving 100,000 asbestos-related claims against the firm that installed insulation containing the hazardous material.

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

Once a settlement is reached, he noted, insurers obtain what is known 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 had refused to pay claims and had at one point offered to pay five cents on the dollar. Fuller-Austin, he said, “wouldnt have gone into bankruptcy if they [insurers] had stepped up to the plate” and reached a settlement.

Mr. Shelley agreed that a settlement with a bankrupt firm under 524 (g) can provide “a finality that is attractive to insurers. But if you have to pay an inflated number of claims at inflated values per claim on an accelerated basis, then it becomes less attractive” for insurers.

He said that in the prepackaged asbestos bankruptcies that have been approved so far, they have initially been challenged in court by insurers and then settled. In one case, the J.T. Thorpe bankruptcy in Houston, after the court ruled insurers had no standing to challenge the arrangement, a settlement was reached while an appeal was pending before 5th U.S. Circuit Court of Appeals in New Orleans.

Mr. Shelley noted that so far there has not been a finding in any court that gives insurers broad-based standing to challenge the prepackaged arrangements.

Joanne McMahon, an attorney and senior claims specialist with GE Reinsurance in Barrington, Ill., said that there was “a small glimmer” 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 prepackaged bankruptcy plan by Congoleum Corp. so that London market insurers could go ahead with an action in state court where they are contending that the manufacturer had breached policy conditions and no coverage for a settlement existed. With a bankruptcy filing, lawsuits are automatically stayed. Judge Ferguson lifted the stay on the policy dispute so it could continue.

On March 1, however, insurers lost a round before Judge Ferguson when their objections to a future claims representative, a general attorney for the debtors and others, on conflict-of-interest grounds were rejected.

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

Mr. Komorsky, without reference to Congressional action, said an increase in asbestos bankruptcy actions was inevitable as the tide of asbestos claims in the court rises above companies ability to pay 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 take portions of its firm into bankruptcy “without the entire enterprise following in.”

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

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

“The question is, 'Could such a company be allowed to structure a workout for just that exposure?'” he said. The professor said he didn'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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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