Chapter 21, C. Standing of the Insurer

• Jurisdiction: United States

C. Standing of the Insurer

Insurers have objected to asbestos-related pre-packs and the valuation of the allowable claims because the insurers may be bound to pay the claims. A party objecting to a reorganization plan, however, must be "directly and adversely affected by the bankruptcy proceeding."⁵³³ Courts have concluded that an insurer will not be directly and adversely affected by the bankruptcy proceeding merely because there is a question as to coverage with regard to the proposed allowable claims.⁵³⁴ Therefore, these courts have found that insurers do not have standing to object to certain plans.⁵³⁵ This is especially true if the proposed plan contains a provision providing that the plan will not alter or affect pre-petition rights.⁵³⁶

Certain bankruptcy courts have taken notice of pre-packs, which do, in fact, alter the rights and obligations of the insurers. In the Congoleum case, an insurer sought to object to a pre-pack pursuant to its contractual right to participate in the litigation between the debtor and the asbestos claimants.⁵³⁷ The debtor resisted the insurer's efforts, arguing that the plan contained a provision providing that the rights of the insurer to contest coverage would not be prejudiced.⁵³⁸ The debtor argued that the provision rendered the reorganization plan "insurance neutral."⁵³⁹

The court rejected the debtor's argument and found that the insurer had standing to object to the pre-pack.⁵⁴⁰ The court noted that under the plan, the trustee had sole authority to contest asbestos personal-injury claims, even though it was possible that the insurers would be found liable to pay those claims.⁵⁴¹ The court ruled that the "ability of the insurers to contest coverage is not co-extensive with the right to participate in the litigation or the settlement" of the asbestos claims. The possible infringement of the insurer's pre-petition right to elicit the insured's assistance in contesting claims gave the insurers a sufficient stake in the plan to have standing.⁵⁴²

However, when bankruptcy courts have denied insurers the right to object to pre-packs, insurers have found themselves in a precarious position in state court coverage litigation. Certain state courts have determined that the approval of a reorganization plan can constitute an adjudication for purposes of coverage under an insurance policy, requiring the insurer to pay the claims allowed in bankruptcy.⁵⁴³ In Fuller-Austin, a bankrupt insured sued its insurer under an insurance...