The “Insurance Neutrality” Doctrine is Heading to SCOTUS

The Fourth Circuit’s decision arises from the chapter 11 bankruptcy cases by Kaiser Gypsum Company, Inc. and its affiliate Hanson Permanente Cement, Inc. (together, “Kaiser”). Kaiser commenced its bankruptcy cases in 2016 to address environmental and asbestos-related tort liabilities. At the time of filing, Kaiser was named as a defendant in approximately 14,000 asbestos-related lawsuits in state courts across the country.

The decision denied an objection by Kaiser’s insurer, Trust Insurance Exchange (“Truck”), to Kaiser’s proposed chapter 11 plan. Truck objected to the plan on the grounds that Kaiser breached its “duty to cooperate” under its insurance policy by failing to obtain certain protections against fraudulent or duplicative claims assertible against the Truck insurance policy. According to Truck, Kaiser’s contractual duty to cooperate and “assist in effecting settlements” required that Kaiser help Truck obtain these protections.

The Fourth Circuit disagreed with Truck, finding that the duty to cooperate applied only to “traditional litigation activities,” not chapter 11 plan negotiations. Because the plan did not violate Kaiser’s duty to cooperate or otherwise impact Truck’s rights and obligations, the Fourth Circuit found that Truck was not a “party in interest” and lacked standing to object to Kaiser’s plan under the “insurance neutrality” doctrine.

“Insurance neutrality” is a common law bankruptcy standing doctrine that bars insurers from interjecting in chapter 11 plan proceedings. A plan is “insurance neutral” if it does not “increase the insurer’s pre-petition obligations or impair the insurer’s pre-petition policy rights.” Because insurers’ rights and obligations are unimpacted in an insurance neutral plan, insurers do not have standing to object, except to dispute whether a plan is insurance neutral.

Truck appealed the Fourth Circuit’s decision to the U.S. Supreme Court arguing that a decision would resolve a split in authority between the Fourth and Seventh Circuits, which deny insurer standing based on the doctrine, and the Third Circuit, which allows insurer standing. Representatives for asbestos claimants and other respondents argued that the appeal was an attempt by Truck to limit its liability under policies sold to Kaiser. The Supreme Court granted Truck’s petition for certiorari on October 13, 2023. The question presented is “[w]hether an insurer with financial responsibility for a bankruptcy claim is a “party in interest” that may object to a Chapter 11 plan of reorganization.”

A decision by the Supreme Court has potentially significant consequences because it could resolve the Circuit Court split and determine the extent of insurers’ standing in chapter 11 cases of insureds. Although timing for a decision is unknown, a decision will likely be issued before the Supreme Court recesses in late June 2024. Until then, parties should consider this issue when evaluating where to file a chapter 11 case.

An updated alert will be posted after the U.S. Supreme Court’s decision.