Chapter 10, B. Insurance Policy Does Not Necessarily Include Proceeds

• Jurisdiction: United States

B. Insurance Policy Does Not Necessarily Include Proceeds

A distinction is made between an insurance policy and the proceeds of that policy. A debtor's claim to property does not mean that every aspect of the property is part of the debtor's estate.²⁶⁸ The debtor must have a legal right to payment of the proceeds before it can be argued that the proceeds of an insurance policy, as opposed to the policy itself, are property of the estate. This distinction is critical. While the insurance policy, as a contract, is generally property of the estate, it does not necessarily follow that the proceeds are property of the estate.

The relevant inquiry in determining whether or not policy proceeds become property of the debtor's estate is this: Would the debtor have a right to receive and keep the proceeds that the insurer may become obligated to pay? If the insured has no ownership interest in the property, then it would not have an interest in the insurance proceeds.²⁶⁹

The interpretation of an insurance policy, and coverage under that policy, requires the application of nonbankruptcy law.²⁷⁰ The provisions contained within the Bankruptcy Code do not authorize the bankruptcy court to create rights not otherwise available under applicable law.²⁷¹ An insured that has filed for bankruptcy has no greater right to the proceeds of an insurance policy than it did before filing for bankruptcy protection.²⁷² Even though it may be a bankruptcy court, essentially a court of equity with very broad powers, that is interpreting the policy, the court should remain obligated to interpret the contract as written.

If payment by the insurer under the policy would not inure to the pecuniary benefit of the debtor's estate, then that payment neither enhances nor decreases the value of the debtor's bankruptcy estate. If there is no impact on the value of the estate, the proceeds are not property of the estate. Therefore, if the debtor has no legally cognizable claim to the insurance proceeds and the proceeds would not be available to the creditors of the estate, then those proceeds are not considered property of the estate.²⁷³ More importantly, the debtor in bankruptcy is not entitled to distribute the proceeds of an insurance policy to anyone except a covered claimant.²⁷⁴

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Notes:

^[268] Matter of Carousel Int'l. Corp., 89 F.3d 359 (7th Cir. 1996).

^[269] See In re Florian, 233 B.R. 25 (Bankr. D. Conn. 1999) (finding debtor/lessee of equipment was not entitled to proceeds paid by...