Chapter 8, A. Maintaining Insurance Coverage During Bankruptcy

• Jurisdiction: United States

A. Maintaining Insurance Coverage During Bankruptcy

An insured who has filed for bankruptcy should be concerned with maintaining insurance coverage on its property and obtaining liability protection. Insurance coverage provides protection for the assets of the estate and also protects the debtor against certain claims of liability. Because of the importance of maintaining insurance coverage, a debtor will generally continue to make insurance payments and maintain coverage.

At the inception of the bankruptcy proceeding, there is an order to the debtor-in-possession entered by the bankruptcy court that may require it to maintain insurance coverage. Also, the U.S. Trustee or the chapter 13 trustee may require insurance coverage to protect the assets of the estate during the pendency of a chapter 11 or 13.

The payment of insurance premiums for post-petition coverage is typically considered an actual and necessary administrative expense for preserving the bankruptcy estate.¹⁹³ In addition, in many instances, a debtor may be required by state law to maintain certain types of insurance such as workers' compensation or liability insurance. Alternatively, the bankruptcy court may require the debtor to maintain insurance coverage. For example, to establish that any secured collateral, such as an automobile, is adequately protected, the court may require the debtor to maintain insurance coverage on the automobile with the secured party named as an insured on the policy.¹⁹⁴

I. Executory Contracts

A debtor can generally maintain insurance coverage post-petition by either purchasing an entirely new policy, or by accepting an existing insurance policy that can be classified as an "executory contract" under the Bankruptcy Code. Section 365 authorizes the debtor or trustee to assume or reject any executory contract. Most courts conclude that a contract is "executory" when the obligations of both the debtor and the other party to the contract are so far unperformed that the failure of either to complete performance could constitute a material breach excusing performance of the other.¹⁹⁵ A court will look to see whether the decision to reject an executory contract is in the best interest of the estate under the "business judgment test."¹⁹⁶

An insurance policy is considered an executory contract if the policy imposes duties to perform upon both the debtor and the insurance company.¹⁹⁷ A policy where the debtor has paid the premiums completely in advance will not likely be considered an executory contract, as the insured completely would have fulfilled its obligations under the contract before filing for bankruptcy. Similarly, an insurance policy that expires prior to the filing of bankruptcy by the insured is not an executory contract and cannot be assumed or rejected by the debtor or the trustee.¹⁹⁸ Where the obligation to pay premiums on the insurance policy continues into the future...