The Superior Court of New Jersey has ruled that Congoleum's pre-packaged bankruptcy plan settling asbestos claims is not enforceable against its insurers. The court found that the plan was unreasonable and that, under the terms of the plan, insurance obligations are not triggered because it was not shown that Congoleum was "legally obligated to pay" the claimants who would receive payments. Congoleum Corp. v. Ace American Insurance Co., No. MID-L-8908-01 (N.J. Super. Ct. May 18, 2007).

Congoleum, a tile flooring manufacturer facing numerous asbestos claims, decided to attempt to resolve all of its asbestos liability by entering bankruptcy through a pre-packaged bankruptcy plan incorporating a "Claimant Agreement." It was ultimately learned that the firm retained by Congoleum to advise it with respect to the bankruptcy was co-counsel with the asbestos claimants' attorney on a number of related asbestos claims. Therefore, the firm that initially acted as Congoleum's bankruptcy counsel was disqualified during the course of the bankruptcy and ordered to disgorge nine million dollars in collected attorney's fees. See In re Congoleum Corp., 426 F.3d 675 (3d Cir. 2005). Congoleum's many insurers were not involved in the settlement negotiations or the creation of the pre-packaged plan. The insurers denied coverage for the Claimant Agreement settlements and Congoleum brought this coverage action to determine its rights.

The court began its analysis by stating that, "[u]nder New Jersey law, a settlement entered into without the consent of insurers may be enforced against those insurers only if the settlement is reasonable and entered in good faith." In conducting its analysis, the court questioned the purpose of the bankruptcy plan, stating that the settlement and pre-packaged plan were created merely to provide the policyholder with disputed insurance proceeds and to relieve the policyholder of its asbestos liabilities, a result that "clearly harmed" the insurers, given that they were not permitted to be "meaningful contributors to the terms of the settlement."

The court also questioned the validity of the Claimant Agreement, finding that its apparent purpose was to make the asbestos claimants—represented by the conflicted attorneys—into secured creditors in the event of bankruptcy. The court found it "disconcerting" that Congoleum could argue that the settlement was reasonable even though it had been negotiated by conflicted attorneys. The insurers had no reason to consent to such a settlement, the court found, especially because the Claimant Agreement would provide coverage to claimants that would be barred from recovery in the tort system. The court noted that the Claimant Agreement resulted in the abandonment of viable defenses including product identification, statute of limitations, and "the existence of deferred dockets for claims of unimpaired claimants." The court further found that the Claimant Agreement contained "no meaningful provisions to ferret out fraudulent claims." Furthermore, the court questioned the structure of the Claimant Agreement, in that it failed to properly apportion liability to Congoleum in accordance with New Jersey allocation law.

Finally, the court briefly considered the insurers' arguments that the Claimant Agreement did not make Congoleum "legally obligated to pay" within the meaning of the insurance policies. The court noted that the settlement was structured such that any recovery by the asbestos claimants was limited to the recovery of insurance proceeds. It concluded that such an agreement "does not persuade this Court that Congoleum was obligated to pay these claims."