Asbestos settlement trusts are a major source of payment of asbestos claims in the United States, with over fifty such trusts instituted as of March, 2011.1 While insurance recoveries are a principal source of funding for these trusts, courts generally have not allowed insurers to challenge chapter 11 plans where they are found to be “insurance neutral.” A plan is insurance neutral where the plan does not increase an insurer’s pre-petition liabilities or impair an insurer’s contractual rights under its insurance policies.

Continuing a recent trend of cases, the Court of Appeals for the Ninth Circuit has accorded insurers standing to challenge the reorganization plan for Thorpe Insulation Company (“Thorpe”) on the grounds that it is not “insurance neutral.” The plan provides for implementation of an asbestos settlement trust that assumes the liability for Thorpe’s asbestos claims.

As discussed in the November 2011 issue of Insurance and Reinsurance NewsWire, two courts in 2011 concluded that insurers had standing to object to the implementation of asbestos trusts notwithstanding the plan proponents’ efforts to include insurance neutrality provisions.2 This apparent trend continues in 2012 with the Court of Appeals for the Ninth Circuit concluding that several exceptions to the neutrality provision of the Thorpe chapter 11 plan accorded insurers that had not settled with Thorpe legal standing to challenge the plan.3 This latest decision is noteworthy as the potential limitation on reinsurance recoveries was one of the key reasons for the appellate court’s conclusion.


Thorpe is a California company that installed, repaired and distributed asbestos insulation products from the late 1940s until 1972. Faced with thousands of asbestos claims, Thorpe filed for bankruptcy in October of 2007. Ultimately, Thorpe filed a plan that channeled asbestos-related liabilities under Section 524(g) of the United States Bankruptcy Code to an asbestos settlement trust (the “Trust”). In establishing the Trust, Thorpe entered into settlements with certain of its insurers that agreed to fund the Trust in exchange for releases and protection of the channeling injunction (the “Settling Insurers”). Thorpe, however, was unable to settle with other insurers (the “Non-Settling Insurers”) which objected to confirmation of Thorpe’s plan. Relying on the plan provision that purported to make the plan “insurance neutral,” the bankruptcy court confirmed the plan without considering the Non-Settling Insurers’ objections. Following the bankruptcy court’s decision, the district court entered an order affirming the plan on 21 September 2010.  

Subsequently, the Non-Settling Insurers appealed the district court decision and requested a stay pending the appeal.

The Ninth Circuit denied the stay. The Debtors requested dismissal of the appeal as moot or redundant given that the plan became effective on October 22, 2010.

The Decision

Noting that a bankruptcy court could fashion relief that would address the Non-Settling Insurers’ concerns, the Ninth Circuit held that the appeal was not mooted notwithstanding that Thorpe had begun implementation of the plan.

On the issue of standing, the Ninth Circuit decided to review the effect of the plan on the Non-Settling Insurers despite language providing that the plan was “insurance neutral.” The court explained that, even if the plan contains an insurance neutrality provision similar to the language approved by the Third Circuit in Combustion Engineering: 4

care must be taken to ensure that, in fact, the insurer’s rights are completely unaffected. If the insurer’s rights are affected in any way, the insurer will have standing to object to the alterations of its rights. Here the express exceptions to Appellants’ defenses signal that the plan is not insurance neutral.

The Non-Settling Insurers argued that several exceptions to the insurance neutrality provision included in the Thorpe plan could increase their pre-petition liabilities.  

  • First, the Non-Settling Insurers’ defenses potentially were not preserved to the extent they were “affected by application of principles of res judicata, collateral estoppel, claim preclusion or issue preclusion.”
  • Second, the Non-Settling Insurers could be required to indemnify the Trust for claim payments purportedly covered by their insurance although they had no role in the valuation of the asbestos claims.
  • Third, the plan allowed asbestos claimants to sue directly the Non-Settling Insurers with permission of the Trust.
  • Finally, Non-Settling Insurers could not seek to collect against Settling Insurers for contribution or indemnity due to the injunction protecting Settling Insurers. Any such claims had to be asserted through the Trust mechanism.

The court agreed with several of the Non-Settling Insurers’ objections:

  • First, the court found that under the plan the Non-Settling Insurers may not be able to challenge the Trust’s liability determinations for asbestos claims they potentially insured even where they had defenses. This was due to the plan provision that Non-Settling Insurers’ defenses were not preserved to the extent they were affected by issue or claim preclusion principles. Moreover, the Non-Settling Insurers could be bound by the Trust’s valuation of asbestos claims although the insurers were excluded from the process of valuing the claims.
  • The Non-Settling Insurers’ rights to collect reinsurance from Settling Insurers that reinsured them were held to be potentially limited. Due to the injunction protecting the Settling Insurers, the Non-Settling Insurers could not bring their reinsurance claims against the Settling Insurers. The Non-Settling Insurers’ only recourse was against the Trust for a dollar for dollar reduction of a judgment in favor of the Trust resulting from litigation involving the Trust and Non-Settling Insurers on asbestos claims.5 If a Non-Settling Insurer’s reinsurance claim included litigation costs which could not be recovered through a judgment reduction, the Non-Settling Insurer could seek payment of the amount from Trust funds. If, however, the Trust ran out of money before the claim was paid, then the Non-Settling Insurer’s claim would be lost. Given that “the vast changes to the insurance policies and relationships have the potential substantially to impact Appellants economically,” the Ninth Circuit concluded that the Non-Settling Insurers had the requisite standing to object to Thorpe’s plan.


The Thorpe decision continues the recent trend of cases that have accorded insurers standing to challenge a bankruptcy plan despite a plan’s purported “insurance neutrality.” A court may look beyond the plan’s insurance neutrality provisions to determine the effect implementation may ultimately have on insurers. In the event that a plan limits an insurer’s ability to recover reinsurance as provided for in the Thorpe plan, a court could conclude that insurers have standing to object to confirmation.