Chapter 21, B. Altering the Alliance of Insurer and Insured

• Jurisdiction: United States

B. Altering the Alliance of Insurer and Insured

Asbestos-related pre-packs are frequently negotiated and agreed upon between the debtor and the claimants prior to the bankruptcy filing. When a debtor faces potential asbestos liability, an insurance policy generally exists that may or may not cover the asbestos claims. In many cases, where the debtor has submitted an asbestos-related pre-pack to the bankruptcy court, the plan contains a provision requiring the debtor's insurer to pay, directly into the fund, all insurance proceeds from policies covering asbestos claims. As one court pointed out, these plans can alter "the normal alliance of insurer and insured in favor of an alliance between the insured and the claimant."⁵³¹ In fact, later in the same case, the Third Circuit disqualified a law firm from representing the debtor in the pre-packaged bankruptcy negotiations due to a conflict because the same law firm had represented the asbestos claimants in the underlying litigation.⁵³² Thus, it is clear that the insurance professional must be aware that any reorganization plan is likely to be skewed against the insurer, and that provisions of the plan can directly affect the liability of the insurance company if the insurance company fails to protect its rights...