Why it matters

The Seventh U.S. Circuit Court of Appeals recently determined that an excess insurer of a bankrupt asbestos manufacturer lacked standing in bankruptcy court to challenge a settlement between the insured and a primary insurer. Although the excess insurer told the court it was concerned that the deal increased the likelihood that it would have to honor its obligation to the policyholder, the federal appellate panel ruled that such concern was not sufficient to create standing. Nothing in the record suggested that the excess insurer – which was not an official creditor – had the required interest in the bankruptcy proceeding entitling it to intervene, the court concluded. “Pecuniary interest is a necessary rather than a sufficient condition of such a right.” The court concluded however, that interest must be certain and not hypothetical. Columbia could not show that it would in fact benefit by a rejection of the disputed settlement.

Detailed Discussion

C.P. Hall Company, a former distributor of asbestos products, faced tens of thousands of asbestos claims and was eventually forced to file for bankruptcy protection in 2011.

At that time a $10 million policy remained with Hall’s primary insurer Integrity. But Integrity itself was bankrupt and disputed whether the policy actually covered the losses for which Hall sought indemnification. The parties agreed to a $4.125 million settlement and brought their agreement to the bankruptcy court for approval.

Columbia Casualty Company, an excess insurer for Hall, with a maximum coverage of $6 million, filed an objection to the settlement. Columbia argued that its chances of having to pay on its $6 million policy for Hall were increased by the Integrity settlement for less than the policy limits. The bankruptcy court refused to consider the objection, however, ruling that Columbia had no right to appear at the proceeding.

On appeal, a unanimous panel of the 7th Circuit agreed.

In describing the issue, the court stated that “Columbia is complaining about an imminent threat to its financial assets, a threat that is traceable to the settlement and could have been eliminated by the bankruptcy court’s enjoining the settlement.” The court rejected the premise of Columbia’s complaint, holding that “[t]he loss it fears is only probabilistic. For there can be no certainty that it would benefit from rejection of the settlement.”

Hall and Integrity could have continued to litigate, the court said, and Hall could have received more than $4.125 million – or “it might well have ended up with nothing.”

Although the panel noted that Columbia’s “desire to butt in is understandable,” the excess insurer lacked a right under the Bankruptcy Code to appear in the bankruptcy court.

Had Columbia wished to better protect itself, it could have. The court said that “[a]n excess insurer can write a policy that does not require it to pay until the coverage limit of the primary policy, $10 million in this case, has been reached.” The court also noted that Columbia could have provided that the excess policy would drop down if the primary insurer proved to be insolvent, like Integrity, giving it a “concrete stake” in the bankruptcy and enabling it to file an objection in the proceeding.

To read the decision in In Re: C.P. Hall Co., click here.