General Motors Co., the world's second-largest automaker, faces potential coverage disputes if it seeks liability insurance or reinsurance contributions to a fund that would settle mounting legal claims over ignition switch defects in millions of its cars.
GM hired lawyer Kenneth Feinberg to study establishing such a fund, even as the company last week asked a bankruptcy judge to bar dozens of ignition defect claims under the terms of its 2009 bankruptcy reorganization.
If the automaker sets up a fund and seeks insurance recoveries, insurers — or reinsurers of its Bermuda captive, General International Ltd. — could argue GM's settlements are voluntary or that it knew about potential ignition switch liabilities for years and failed to disclose them to underwriters, legal experts say.
“What's in the public record suggests a significant degree of intentional wrongdoing (on GM's part), such that insurers are unlikely to rush to contribute to any such fund,” said Barry R. Ostrager, senior partner at Simpson, Thacher & Bartlett L.L.P. in New York.
A GM spokesman said Mr. Feinberg, who managed BP P.L.C.'s Deepwater Horizon oil spill fund, is expected to make recommendations to GM about a compensation fund within six weeks. The spokesman would not comment on insurance coverage or whether GM has discussed coverage with insurers or reinsurers.
GM's first-quarter results, announced last week, include a $1.3 billion pretax charge for repairs to 7.1 million recalled vehicles, including $700 million for 2.6 million vehicles with faulty ignition switches and cylinders. The defect — which can cause cars to shut off while being driven, disabling power steering, brakes and airbags — has been linked to at least 13 deaths.
U.S. House and Senate panels held hearings on the defect last month, and a House subcommittee released internal GM documents showing engineers at the automaker and parts supplier Delphi Automotive P.L.C. knew of the switch problems for more than a decade.
A flood of litigation followed the recalls, with more than 50 class actions and two individual suits filed against GM as of last week, according to a GM court filing. Some also named Delphi and airbag maker Continental Automotive Systems U.S. Inc. Most accuse GM of fraudulently concealing the ignition switch defect and violating federal and state consumer protection laws.
GM, though, filed a motion last week in U.S. Bankruptcy Court in New York to bar the claims since they relate to cars manufactured before its 2009 Chapter 11 reorganization. The bankruptcy court order creating the “New GM” absolved it of most liabilities for cars made by the “Old GM,” the company said.
Some plaintiffs counter that GM defrauded the bankruptcy court and the reorganization plan should be reopened.
Overturning the Chapter 11 plan “is going to be an uphill battle for plaintiffs,” said Anthony Sabino, a law professor at St. John's University in New York. “They must make a powerful, powerful showing to the bankruptcy judge that GM engaged in fraud and deception.”
Several senators, meanwhile, asked the U.S. Department of Justice, which launched a criminal investigation into GM's conduct, to intervene in the civil suits to prevent GM from denying responsibility and force it to establish a victim compensation fund.
If GM creates the fund and seeks to recover some costs, there could be pushback from liability underwriters, legal experts say.
“If you are installing a product that has a known defect and you've been put on notice of that defect multiple times and you don't do anything about it, it seems unreasonable to expect (liability) insurers to pay for your knowing disregard of a known hazard,” Mr. Ostrager said.
GM historically had a large self-insured retention for general and products liability, along with high excess limits. At its reorganization, GM retained $35 million per occurrence for product liability claims, with $10 million in primary liability coverage fronted by an American International Group Inc. unit to Bermuda-based General International; and $835 million in excess limits led by AIG's Lexington Insurance Co. At least part of the excess program flowed through General International to reinsurers, court records show.
If liability coverage is through GM's captive, much would depend on provisions of its reinsurance contracts, said Lawrence I. Brandes, a reinsurance lawyer based in New York. Because reinsurance typically reimburses losses paid by a ceding company, “any contribution to a (compensation) fund like that could be viewed as voluntary,” he said.
It's possible reinsurers may contribute if they have a longstanding profitable relationship with General International on GM's risks or could negotiate concessions such as lower liability caps or payback provisions in future contracts, he said.
On the other hand, if GM and General International knew of the exposure and failed to notify underwriters, “that's a great recission claim,” unless reinsurance contracts specifically waive such claims, Mr. Brandes said.
GM, meanwhile, is financially strong enough to bear costs associated with the recalls, analysts say. Fitch Ratings, for example, has maintained a positive outlook on the company's BB+ credit rating, noting that it had more than $38 billion in liquidity at the end of 2013. The main risk to GM, Fitch said, was reputational damage caused by the recalls.