An article by the National Underwriter Company discusses a recent Moody’s report that asbestos claims are again on the rise after years of declining or flat claims.1 This has led several insurers to increase their asbestos reserves and Moody’s views this trend as a warning flag for the property and casualty insurance industry as a whole.
One major means of addressing asbestos claims has been through an asbestos settlement trust implemented under section 524(g) of the United States Bankruptcy Code (the “Bankruptcy Code”). These trusts are typically funded by insurance recoveries assigned to the trusts by a debtor in a chapter 11 bankruptcy case. Nevertheless, courts have previously concluded that insurers do not have the right to object to these trusts, because the chapter 11 plans that create them are “insurance neutral.” As reflected in two recent decisions, however (and despite the purported insurance neutrality of a chapter 11 plan), a court may allow an insurer to object to an asbestos trust where the plan ultimately proves not to be insurance neutral, either because of the circumstances surrounding the plan or the plan’s provisions.
Background
In connection with a chapter 11 plan, a court may issue a “channeling injunction” under section 524(g) of the Bankruptcy Code, enjoining parties from asserting asbestos-related claims against a debtor and channeling such claims into an asbestos settlement trust.
As of March 2011, 56 asbestos settlement trusts have been implemented on behalf of companies in chapter 11. The largest 26 trusts have paid out $10.9 billion to 2.4 million claimants through 2008.2 Most recently, asbestos settlement trusts have been implemented in connection with the Thorpe Insulation Company and the General Motors chapter 11 cases. More asbestos trusts are in the pipeline.
Although asbestos trusts are often funded primarily through substantial insurance recoveries assigned to them by the debtor, courts have held that insurers do not have the legal right or standing to object to the implementation of these trusts. According to a line of decisions, insurers lack standing, or the requisite legal harm, to voice their objections where the plan is found to be “insurance neutral.” A plan is considered “insurance neutral” where the assignment of insurance proceeds to a trust does not increase an insurer’s pre-petition obligations or impair their pre-petition contractual rights under the insurance policies. The decisions discussed below should be considered by insurers in reviewing future proposed asbestos trusts that purport to preserve insurance neutrality.
- Global Industrial Technologies, Incorporated Decision
- Lower Court Decisions
In 1998, Global Industrial Technologies, Inc. (“GIT”) acquired A.P. Green Industries, Inc. (“APG”), a manufacturer of refractory and other industrial products. Beginning in the 1980s, APG faced substantial asbestos-related claims as a result of its use of asbestos in some of its products. APG also faced silica- related claims (from another component of some of its products), although on a far smaller scale. As a result of the asbestos-related claims, in 2002, GIT and certain subsidiaries including APG (together, the “GIT Debtors”) filed for relief under chapter 11 of the Bankruptcy Code.
The GIT Debtors proposed a plan that provided for two separate trusts, one for asbestos-related claims under section 524 (g) and one for silica-related claims under a separate section of the Bankruptcy Code.3 The GIT Debtors’ rights in certain insurance policies could be assigned to either the asbestos or the silica-related trust. Insurers (“Objecting Insurers”) whose coverage was to be assigned to the silica-related trust objected to confirmation of the bankruptcy plan.
Under the Bankruptcy Code, a court could confirm a plan that implemented a silica-related trust only after a showing that the channeling injunction for the silica-related claims was both necessary to the reorganization and fair. Accordingly, the GIT Debtors had to show that the silicarelated liability was sufficiently onerous to imperil the GIT Debtors’ reorganization, if not resolved through the silicarelated trust and channeling injunction. APG, though, had few silica-related claims prior to its bankruptcy. In order to satisfy the requirements of the Bankruptcy Code, the GIT Debtors solicited votes for their plan from counsel for individuals who had asserted claims, not against the GIT Debtors, but against an unrelated company in bankruptcy. Thereafter, the GIT Debtors were flooded with silica-related claims. The GIT Debtors then obtained the votes in favor of their plan from the requisite majorities of asbestos and silica-related claimants.
The Objecting Insurers argued that the GIT Debtors’ plan should not be confirmed because the silica-related claims were inflated due to collusion. The GIT Debtors’ plan included an insurance neutrality provision based upon Third Circuit precedent which provided that: “nothing therein or in Planrelated documents or in the Bankruptcy Court’s confirmation order would preclude those insurers from asserting any rights or defenses under the policies, except those related to ‘anti-assignment provisions.’”4 In confirming the GIT Debtors’ plan, the bankruptcy court ruled that the Objecting Insurers did not have the requisite standing to challenge the reorganization plan, because it was “insurance neutral” in that it preserved the insurers’ rights and defenses. The bankruptcy court’s decision was affirmed by the district court and subsequently appealed to the Third Circuit.
- Third Circuit Decision
In a 5-4 decision, the Third Circuit held that the Objecting Insurers had standing to object to confirmation of the GIT Debtors’ Plan on the issue of whether the plan was insurance neutral.
Citing its prior decision in In re Combustion Engineering, Inc., the Third Circuit noted that a chapter 11 plan is insurance neutral if it does not materially increase the quantum of liability faced by insurers.5 In this instance, the Debtors’ solicitation of silica-related claims and the promise of the silicarelated trust resulted in a significant increase in the number and amount of silica-related claims asserted against the GIT Debtors. Indeed, this solicitation “staggeringly increased — by more than 27 times — the pre-petition liability exposure” and was therefore potentially not insurance neutral. Moreover, notwithstanding the contingent nature of the claims, the availability of coverage defenses and the possibility that the Objecting Insurers would never be required to pay a claim, the GIT Debtors’ plan harmed the Objecting Insurers by burdening them with increased administrative costs and investigative burden in handling the additional claims. The Third Circuit remanded the case to the bankruptcy court to conduct a more thorough review of the collusion issue.
- The Pittsburgh Corning Corporation Decision
- Insurers’ Objections Due To Lack Of Insurance Neutrality
Pittsburgh Corning Corporation (“PCC”) is an insulation and glass block manufacturer that is owned by PPG Industries, Inc. (“PPG”) and Corning Incorporated (“Corning”). PCC faced numerous asbestos claims due to its prior manufacture of the insulation product, Unibestos, which contained asbestos fibers. By the time of its bankruptcy filing in 2000, PCC had resolved over 200,000 claims at an aggregate cost of $1.2 billion but was still faced with over 235,000 unresolved asbestos claims. Although Corning and PPG did not manufacture Unibestos, they were also faced with Unibestos-related claims based on alleged derivative liability due to their ownership interest in PCC (the “PCC Relationship Claims”). Corning and PPG were also subject to a limited number of their own asbestos claims that did not involve PCC or Unibestos.
Along with the Unibestos-related claims against PCC, the chapter 11 plan of PCC provided for the channeling of the PCC Relationship Claims into the PCC Asbestos Trust. The chapter 11 plan also attempted to preserve PPG’s and Corning’s claims against their insurers for their independent asbestos claims. The PCC Asbestos Trust was funded by PCC recoveries on certain insurance policies. Almost all of PCC’s insurers reached settlements with PCC and with PCC’s parent companies regarding the PCC Relationship Claims. These settling insurers were included within the scope of the channeling injunction.
Certain non-settling insurers, however, opposed confirmation of the chapter 11 plan because, among other things, the plan was not insurance neutral. According to the non-settling insurers, the insurance neutrality provision that sought to preserve the insurers’ rights and defenses was rendered incomprehensible by being made subject to a host of other bankruptcy plan provisions and related agreements that sought to protect the claims of PCC’s parent companies. The non-settling insurers further argued that it was unclear whether the insurance neutrality provision superseded or was subject to the qualifying provisions. According to the non-settling insurers, the plan therefore did not preserve insurance neutrality as required under Third Circuit precedent and could not be confirmed.
- Decision of the Bankruptcy Court
According to the bankruptcy court, the insurance neutrality language in a bankruptcy plan must be consistent with the analysis in In re Combustion Engineering and cannot be subject to a multitude of qualifications that create ambiguity about whether the insurers’ policy rights and defenses are preserved.
Ultimately, the court concluded that it was not clear whether the insurance neutrality provision in the PCC Plan took precedence over other plan provisions that conceivably would impair the pre-petition contractual rights of the insurers. Thus, the court held that the non-settling insurers had standing to object to confirmation of the PCC Plan. After considering the non-settling insurers’ objections, the court agreed with them that the PCC Plan did not satisfy the requirements of insurance neutrality and that the channeling injunction was overbroad - and therefore refused to confirm the PCC Plan. Nevertheless, the court allowed the plan proponents to propose a fourth modified plan in accordance with its decision. 6
Conclusion
The GIT and PCC decisions may provide guidance to insurers in deciding whether a future proposed plan of reorganization with an asbestos settlement trust is insurance neutral.
In GIT, insurers were accorded standing to object to the plan even though it included an insurance neutrality provision that followed the In re Combustion Engineering precedent. This provision was rendered meaningless, however, by the alleged collusion between the Debtors and certain claimants that resulted in a material increase in silica-related claims.
In PCC, the neutrality provision was similarly rendered meaningless, not by collusion, but by the terms of the plan itself. A neutrality provision must be clear that the insurers’ rights and defenses under a plan are preserved and not subject to qualifications that may make these provisions ambiguous or unclear. As illustrated by these cases, an insurer may be able to demonstrate sufficient harm and standing to object to the implementation of asbestos trusts despite the efforts of plan proponents to keep insurers at bay by the inclusion of neutrality provisions.
