WASHINGTON — A pivotal Supreme Court case set for arguments Tuesday could redefine the role of insurance companies in bankruptcy proceedings, with implications stretching across multiple high-stakes tort claims involving billions of dollars. The case, Truck Insurance Exchange v. Kaiser Gypsum Co., centers on whether insurers can challenge bankruptcy plans if they are required to cover claims under the proposed settlements.
Truck Insurance Exchange has hit roadblocks in lower courts, which denied its appeals to object to a reorganization plan by Kaiser Gypsum. The plan in question relates to the settlement of thousands of claims from individuals who allege asbestos-related illnesses due to the company’s products. The insurer contends its financial responsibility to these claimants should grant it standing to contest the bankruptcy plan.
Should the Supreme Court side with Truck Insurance Exchange, the ruling could significantly alter the landscape of mass tort bankruptcies, which have recently included cases like those of Catholic dioceses and the Boy Scouts of America. These groups have used bankruptcy to manage liability for vast numbers of claims, often reliant on insurers to fund settlements.
The debate gains an additional layer of complexity considering high-profile cases like that of Purdue Pharma, indicating a potentially broader impact on how bankruptcy and tort claims intermingle. Decisions by the court regarding such cases are anticipated by June.
According to Tancred Schiavoni, co-chair of O’Melveny & Myers’ insurance practice, although this case may not be widely recognized, it holds significant importance within legal circles dealing with mass torts. Proponents argue that because insurance companies like Truck bear the financial burden of covered claims, they inherently have a vested interest that qualifies them to challenge bankruptcy plans.
This standpoint is bolstered by concerns around fraud. Insurers assert their involvement helps mitigate fraudulent claims, which in turn protects not only their interests but also the integrity of the bankruptcy process. Historically, insurance companies have been proponents of stringent claim evaluation standards in tort cases.
Conversely, opponents of this view argue that allowing insurers such standing could lead to disruptions in the bankruptcy process by inviting objections from any parties negatively impacted by a reorganization plan. Robert Peck, president of the Center for Constitutional Litigation, expressed concerns that broadening the scope of who can object might complicate victims’ access to compensation unnecessarily.
In 2020, the US Bankruptcy Court for the Western District of North Carolina approved Kaiser’s Chapter 11 plan, which included a trust for settling the asbestos claims but lacked specific anti-fraud measures for insured claims. Truck argued that this omission left it exposed to potentially fraudulent claims, stating its financial stake should equate to a right to challenge the plan.
However, the bankruptcy court ruled that the insurer did not qualify as a “party in interest”, a decision upheld by higher courts which found the plan did not alter the insurer’s obligations and was therefore “insurance neutral”.
The insurer argues that although the plan does not change its responsibilities, it still bears significant impact from the settlement structure—pointing out that the primary choice facing them was between a plan with or without anti-fraud measures, directly affecting their obligations.
As the justices weigh the arguments, the outcome could redefine the participation of insurance companies in the bankruptcy process and possibly set a precedent on how “party in interest” is interpreted under U.S. bankruptcy laws. The intricate balance between ensuring efficient company reorganizations and mitigating fraud, as well as allowing meaningful stakeholder participation, hangs in the balance.
Legal representation for Truck comes from Gibson, Dunn & Crutcher LLP, while Kaiser Gypsum is represented by Jones Day. The decision in this case could potentially reshape the complex interplay of bankruptcy law, insurance obligations, and the rights of tort claimants nationwide.