The Truck policies, which were in effect from 1965 through 1983, cover both defense and indemnity costs arising from asbestos personal injury claims, subject to certain exceptions. Under the policies, Truck is obligated to indemnify Kaiser (up to the $500,000 per-claim cap), with no aggregate limit. In turn, Kaiser pays a per-claim deductible of $5,000. Under the policies, Truck must investigate and defend each claim or suit “even if [the] claim or suit is groundless, false or fraudulent.”
In the District Court, Truck objected to the plan on three main grounds. First, Truck argued that the plan was not proposed in good faith because Kaiser did not extend the disclosure and authorization requirements to insured claims. Second, Truck objected to Kaiser’s request for a judicial declaration that Kaiser did not violate its assistance and cooperation obligations or breach the implied covenant of good faith and fair dealing in connection with bankruptcy plan negotiations. Third, Truck asserted that the proposed plan did not comply with section 524(g).
The District Court overruled Truck’s objection by finding that Truck lacked standing, and it adopted the Bankruptcy Court’s recommendation to confirm Kaiser’s chapter 11 plan. Truck then appealed to the Fourth Circuit Court of Appeals.
The Fourth Circuit did not rule on the substance of Truck’s three plan confirmation objections, instead finding that Truck lacked standing to object because the plan was insurance neutral. (The Circuit Court’s analysis of the standing issue, however, effectively required it to review substantive issues relating to Truck’s objection to the plan to determine whether the plan impaired Truck’s rights under its policy.) A chapter 11 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, those insurers do not have standing to object, except to dispute whether a plan is insurance neutral.
Truck argued that it had standing to object to the plan because it impaired Truck’s right to defend coverage based on Kaiser’s alleged failure to comply with its contractual duty to cooperate, and that such failure mandated a finding that Kaiser had also breached the implied covenant of good faith and fair dealing. The Truck policies’ cooperation clause states, in relevant part, that:
[Kaiser] shall cooperate with [Truck], and upon [Truck’s] request, shall attend hearings and trials and shall assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits.
According to Truck, Kaiser’s obligation to “cooperate” with Truck and to “assist in effecting settlements” required Kaiser to help Truck secure the same types of disclosures and authorizations from holders of insured claims that were required from holders of uninsured claims. The Fourth Circuit disagreed, finding that attending hearings and trials, obtaining the attendance of witnesses, securing and giving evidence, and assisting and cooperating in the conduct of “suits,” all indicated that the obligation applied only to “traditional litigation activities,” not bankruptcy plan negotiations. Indeed, the Fourth Circuit noted that Truck had been unable to cite “a single decision by any court holding that such a policy’s cooperation provision encompassed an insured’s conduct in proposing a reorganization plan in a bankruptcy proceeding.” Therefore, Kaiser’s duty to cooperate did not give Truck a right to participate in plan negotiations.
Further, relying in large part on the fact that the insurance policies require Truck to investigate and defend against claims “even if such claim is groundless, false or fraudulent,” the Fourth Circuit rejected Truck’s argument that the plan altered Truck’s rights and obligations by not requiring authorizations and disclosures from insured claimants. Thus, the Fourth Circuit refused to expand Kaiser’s obligations beyond those provided under the policies, concluding that Truck lacked standing. (The Circuit Court also found that Truck lacked Article III standing in its capacity as a creditor on account of unpaid deductibles, in part because the plan paid the deductibles in full and its objections, which were based on lack of good faith and the trust’s compliance with section 524(g), did not implicate Truck’s interests as a creditor.)
Based on this decision, insurers will not be permitted to interject in bankruptcy plan negotiations by invoking the insured’s duty to cooperate, nor will they have standing to object to an “insurance neutral” plan. The decision highlights an important aspect of bankruptcy plans for companies who wish to maintain the benefit of the bargain negotiated with insurers prior to bankruptcy, and it stresses the importance of careful plan drafting to preserve that bargain. In the absence of an altered pre-bankruptcy right or expansion of an insurer’s obligation by the plan, courts will continue to curtail insurers’ attempts to expand the insured’s duty to cooperate.