The potential for the U.S. Supreme Court to give insurers unrestricted rights to object to approved Chapter 11 bankruptcy reorganization plans has some legal experts concerned that doing so could result in future delays and force unreasonable settlements.

The justices’ questions during oral arguments last week in Truck Insurance Exchange v. Kaiser Gypsum left some legal experts believing the forthcoming ruling will establish the parameters for when an insurer can be heard during a bankruptcy proceeding.

Kaiser, named as a defendant in 38,000 asbestos injury lawsuits since 1978, filed for Chapter 11 bankruptcy protection in September 2016. Its reorganization was approved by a federal bankruptcy judge in Virginia in August 2021. 

The justices seemed sympathetic to the Farmers Group Inc. unit’s position during oral arguments, with Justice Amy Coney Barrett asking counsel for Kaiser Gypsum, “Why are you fighting this so hard?”

San Francisco-based David Goodwin, senior counsel at Covington & Burling LLP, said Truck “has a sympathetic position because it’s going to be called upon to pay a lot of money without input into how the plan is crafted.”

He said insurers will object to proposed reorganization plans if they believe claimants are being overcompensated and they disagree with the amount of contributions from excess insurers.

Chicago-based insurance coverage attorney Scott M. Seaman, a partner at Hinshaw & Culbertson LLP, said the justices, as well as Anthony A. Yang, who represented the federal government, appeared supportive of Truck’s position that it was a “party in interest.”  

“The justices seemed to recognize that the concept of party in interest was broad and that the insurer’s initial status as creditor, based upon deductibles it was owed, as well as being party to executory contracts with the debtor, i.e., the insurance policies, made it a party in interest under the bankruptcy code,” he said.

Mr. Seaman added that the justices’ ruling will likely have a significant impact on bankruptcy actions involving insurers.

Sherilyn Pastor, a New York-based attorney at McCarter English LLP, said the case is important for policyholders because the ongoing debate over an insurer’s involvement and rights in bankruptcy cases has become a sticking point in recent mass tort bankruptcy cases.

Ms. Pastor said counsel for Kaiser as well as the asbestos claimants had “some tough sledding” when fielding questions from the justices who seemed to agree with Truck that insurers should be heard during the formation of a bankruptcy reorganization plan.

She said one concern in giving insurers the ability to object to a proposed reorganization plan is that they would benefit from “delaying and derailing the process,” which “is contrary to the important function of moving the bankruptcy forward and approving it.”

A debtor’s insurance coverage is often its most valuable asset in a Chapter 11 bankruptcy proceeding, and policy proceeds are often the source of funding for mass tort settlements such as those involving Kaiser Gypsum and its sister company Hanson Permanente Cement Inc.

Truck provided commercial general liability policies to Kaiser from the 1960s to 1983. The policy at issue in the bankruptcy proceeding was issued in 1974, has no aggregate limits and provides coverage of $500,000 per claim.

The insurer is seeking the right to lodge objections to Kaiser Gypsum’s Chapter 11 reorganization plan, which includes the establishment of a $50 million trust for asbestos claims, court records show.

Truck, which bears the financial burden for 14,000 insured claims, expressed concerns about a portion of the plan that contains fraud-prevention measures only for uninsured claims.

A federal bankruptcy court judge in Virginia as well as the 4th U.S. Circuit Court of Appeals found that Truck was not a party in interest that could object to Kaiser Gypsum’s proposed bankruptcy plan because it was insurance neutral, meaning it did not change the insurer’s coverage obligations.

Mr. Seaman said that silencing or excluding insurers that do not agree to the plan or that wish to interpose objections or have input to root out fraud, unfairness and abuse adversely impacts the insurers and their interests in a direct and significant way.

Chicago-based insurance recovery attorney Seth Lamden, a partner at Blank Rome LLP, said the tort system offers protection against fraudulent submissions by claimants.

“If a claimant is submitting a proof of claim they're doing so under penalty of perjury. So, there are safeguards in place to protect against that,” he said.

Representatives for the parties did not respond to requests for comment.