This first sections of this paper discusses methods for obtaining insurance payments during bankruptcy.\u00a0 Specifically, it\u00a0 addresses obtaining insurance payments in bankruptcy under property insurance, director and officer liability insurance, business interruption policies, and key man policies.\u00a0 It also discusses obtaining insurance payments during bankruptcy on personal injury claims and life insurance.<\/p>\n
The latter sections of the paper focus on Trustee representation and litigation.\u00a0 It is meant to give an overview of both logistical and substantive considerations.<\/p>\n
A majority of courts have determined liability insurance policies are property of the bankruptcy estate.\u00a0 MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1998); Tringali v. Hathaway Mach. Co., 796 F.2d 553 (4th Cir. 1986); In re Davis, 730 F.2d 176 (5th Cir. 1984); In re Minoco Group of Cos., Ltd., 799 F.2d 517 (9th Cir. 1986).\u00a0 An insurance policy and proceeds deemed part of the bankruptcy estate are subject to the protection of the automatic stay.<\/p>\n
In Lexington Ins. Co. v. Buckingham Gate, Ltd., Inc., 993 S.W.2d 185 (Tex.App.\u2014Corpus Christi 1999, pet. denied), the insured brought an action against their property insurer and broker claiming misrepresentation of coverage on docks under an all-risk policy.\u00a0 The insurer claimed the statute of limitations barred the DTPA action because the insured served the insurer nine months after limitations expired.\u00a0 The insured\u2019s counsel explained the delay was in part due to the insured\u2019s creditors putting it into involuntary bankruptcy, and that he moved diligently as soon as the trustee gave him permission to proceed.\u00a0 The court of appeals held because the suit was filed prior to the statute of limitations, 11 U.S.C. \u00a7 108(a) tolled the limitations period and the insurer was timely served.<\/p>\n
In any suit to recover under a contract of insurance, the insurer has the burden of proof as to any avoidance or affirmative defense that must be affirmatively pleaded under the Texas Rules of Civil Procedure.\u00a0 Any language of exclusion in the policy and any exception to coverage claimed by the insurer constitutes an avoidance or an affirmative defense. \u00a0Tex. Ins. Code \u00a7 554.002.\u00a0 Thus, defendant insurers bear a separate, statutorily-imposed burden of proving the applicability of any claimed exclusion that permits it to deny coverage under Texas law.\u00a0 Venture Encoding Service, Inc. v. Atlantic Mut. Ins. Co., 107 S.W.3d 729 (Tex.App.\u2014Fort Worth 2003 pet. denied);\u00a0 Sentry Ins. v. R.J. Weber Co., Inc., 2 F.3d 554 (5th Cir. 1993).<\/p>\n
Entrustment in an exclusionary provision has been defined as \u201cthe idea of the delivery or surrender of possession of property by one to another with certain confidence regarding the others care, use or disposal of the property.\u201d\u00a0 Imperial Insurance Co. v. Ellington, 498 S.W.2d 368, 372 (Tex.Civ.App\u2014San Antonio, 1973, no writ).\u00a0 Entrustment \u201cclearly suggests the existence of a consensual bailment situation where the person to whom possession is delivered to use the property for the purpose intended by the owner and stated by the recipient.\u201d\u00a0 Id.\u00a0 The controlling element is the intent of the owner of the property.\u00a0 Balogh v. Pennsylvania Millers Mutual Fire Ins. Co., 307 F.2d 894 (5th Cir. 1962).<\/p>\n
In Lone Star Heat Treating Co., Ltd. v. Liberty Mut. Fire Ins. Co., 233 S.W.3d 524 (Tex.App.\u2011Houston [14th Dist.] 2007, no pet.), a company in the business of heat treating metal was ripped off by a man who claimed to be picking up steel for a customer.\u00a0 The employee on duty at the time gave the man the steel, and as a result steel belonging to two customers was lost.\u00a0 The company\u2019s insurance policy covered the property of others in the insured\u2019s possession or control.\u00a0 The insurer denied the company\u2019s claim based on a dishonesty exclusion which provided the insurer would not cover dishonest or criminal acts by the insured, its agents\/employees, or those it entrusted with property.\u00a0 The trial court granted summary judgment and the court of appeals reversed and rendered in favor of the insured.\u00a0 It reasoned the employee\u2019s entrustment to the thief could only be imputed to the company if the employee had actual authority, which he did not have.<\/p>\n
In Nat\u2019l Am. Ins. Co. v. Columbia Packing Co., Inc., No. 3-02-CV-0909-BD, 2003 WL 21516586 (N.D. Tex. 2003) (mem. opinion), National American argued that a security guard who had stolen over $200,000 worth of meat from a warehouse that he was supposed to be guarding at night had been \u201centrusted\u201d with the stolen meat, and thus coverage under the insurance policy for the theft was excluded.\u00a0 The court, considering the plain meaning of the word \u201centrusted\u201d and several other Texas cases that have defined that word, found that it could not grant National American summary judgment on the submitted entrustment issue because it was unclear as to how much control the guard actually exercised over the meat. Whether or not the guard had permission to (1) enter the locked warehouse; (2) handle any of the meat inventory; and\/or (3) remove meat from the premises were all fact questions that had to be considered, precluding the granting of summary judgment.<\/p>\n
In Glick v. Excess Ins. Co., 198 N.E.2d 595 (N.Y. 1964), there was a fact issue as to whether a jewelry store operator had entrusted jewelry to a thieving employee.\u00a0 The employee had reentered the store at night to steal the jewelry from the safe.\u00a0 But, although the employee had a key to the store and the combination of the safe, he\u00a0 did not have authorization to open the store or the safe outside the operator\u2019s presence. \u00a0\u00a0Thus, whether or not entrustment had occurred was a question for the jury, which had evidence to support its finding that the wholesale jewelry dealer could recover against the insurance company for refusal to cover the theft.<\/p>\n
In re ML & Assoc., 302 B.R. 857 (Bkrtcy. N.D. Tex. 2003), involved a general contractor which filed for bankruptcy after being sued by a city for damages in connection with its construction of a municipal complex.\u00a0 The debtor\u2019s insurer brought an adversary proceeding to declare its obligations, if any, to defend and indemnify the debtor.\u00a0 The insurer contended the city\u2019s complaint did not assert property damage covered by its policy.\u00a0 The policy stated it would cover \u201cdamages because of\u00a0 bodily injury or property damage.\u201d\u00a0 It defined \u201cproperty damage\u201d as \u201cphysical injury to tangible property, including all resulting loss of use . . . or [l]oss of use of tangible property that is not physically injured.\u201d\u00a0 The city alleged that it lost the use of the building at issue because of the damage to the building.\u00a0 Consequently, the court found the property damage asserted was covered.<\/p>\n
In In re ML & Assoc., 302 B.R. 857 (Bkrtcy. N.D. Tex. 2003), the debtor\u2019s insurer also tried to escape the duty to defend by claiming an impaired property exclusion which excluded coverage for property damages to impaired property arising out of a defect, deficiency, inadequacy or dangers condition in the insured\u2019s product or insured\u2019s work.\u00a0 The city\u2019s petition stated damages to the municipal complex building were caused by MLA or its subcontractors.\u00a0 The court found that the policy\u2019s definition of impaired property did not include the insured\u2019s work, and therefore, the exclusion did not apply.<\/p>\n
In Betco Scaffolds Co., Inc. v. Houston United Cas. Ins. Co., 29 S.W.3d 341 (Tex.App.\u2014Houston 2000, no pet.), Betco brought suit against its property insurer for breach of contract after the insurer refused to cover losses from burglaries.\u00a0 Prior to bringing the claim, Betco was burglarized twice.\u00a0 It reported both burglaries to the police, but failed to notify the insurer until discovering an additional shortage in its annual inventory.\u00a0 The insurer denied the claim under the inventory exclusion provision and for failure to provide a sworn proof-of-loss statement within ninety-one days of the original burglaries.\u00a0 The inventory exclusion at issue provided the policy did not cover losses or shortages disclosed upon taking inventory.\u00a0 The trial court granted the insurer\u2019s motion for summary judgment.\u00a0 On appeal Betco argued the exclusion only meant a loss reflected on the insured\u2019s books instead of an actual shortage of goods based on the Fourth Circuit case of Betty v. Liverpool & London & Globe Ins. Co., 310 F.2d 308 (4th Cir. 1962).\u00a0 It contended that the \u201cpaper loss\u201d interpretation was a reasonable interpretation to be construed in its favor as the insured because another court had accepted the interpretation.\u00a0 The court of appeals disagreed with this approach, but stated: \u201c[w]e recognize that a regularly scheduled inventory could coincide with the investigation of a casualty in such a way that the inventory is intended by the insured as a means to quantify the loss.\u00a0 In that event, the inventory exclusion provision would not\u201d apply.\u00a0 Betco Scaffolds Co., Inc., 29 S.W.3d. at 347.<\/p>\n
Am. Stone Diamond, Inc. v. Lloyd\u2019s of London, 934 F.Supp. 839 (S.D. Tex. 1996), involved a loss sustained when the rental car\u00a0 of a wholesale jewelry salesman was robbed.\u00a0 Several pieces of jewelry were stolen from the trunk of an unattended rental car while the salesman went into pay for gas at a service station.\u00a0 The property insurer denied the claim because the man was not actually in the car when the theft occurred.\u00a0 It argued on summary judgment that the language excluding losses from vehicles when there is not \u201cactually in or upon such vehicle, the Assured, or a permanent employee of the Assured, or a person whose sole duty it is to attend the vehicle\u201d was unambiguous.\u00a0 The court agreed, and also rejected the plaintiff\u2019s argument that the policy exclusion was unconscionable on the facts of the case.<\/p>\n
Words matter.\u00a0 It is possible to plead your case into a policy exclusion.\u00a0 Careful pleading can also keep your case alive.<\/p>\n
In In re ML & Assoc., 302 B.R. 857 (Bkrtcy. N.D. Tex. 2003), a general contractor filed for bankruptcy after being sued by a city for damages in connection with its construction of a municipal complex.\u00a0 The debtor\u2019s insurer brought an adversary proceeding to declare its obligations, if any, to defend and indemnify the debtor.\u00a0 As to the duty to defend, the court explained the duty to defend was \u201c\u2018triggered if at least one of the several claims in the [city\u2019s] complaint potentially falls within the scope of coverage, even if other claims do not.\u2019\u201d Id. at 862 (citing Federated Mut. Ins. Co. v. Grapevine Excavation, Inc., 197 F.3d 720, 726 (5th Cir. 1999)) (emphasis in original).\u00a0 The court found the duty to defend existed because the city\u2019s pleadings that negligent performance (a covered claim).\u00a0 It further stated:\u00a0 \u201cThe complaint does not allege that MLA intended not to perform [under the contract] or MLA intended to cause damage to the building.\u00a0 Rather, the court infers from the complaint that the city alleges that MLA\u2019s negligence in performance caused the damage. . . .\u201d\u00a0 Id.<\/p>\n
III.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Director and Officers\u2019 Liability Insurance<\/p>\n
Director and officer liability insurance (\u201cD&O insurance\u201d) is often used by corporations to induce talented individuals to accept positions of authority by providing them with a shield from personal liability against potential claims arising out of their duties in the corporation.\u00a0 See In re La. World Expo., Inc., 832 F.2d 1391, 1398 (5th Cir. 1987).<\/p>\n
There are three basic types of D&O insurance\u2014 corporate indemnification coverage, individual liability coverage, and entity coverage.\u00a0 Corporate indemnification coverage provides reimbursement to a corporation for the expenses it incurs as a result of indemnifying officers and directors for wrongful acts.\u00a0 Individual liability coverage is paid to the officers and directors when a corporation does not indemnify them.\u00a0 Finally, entity coverage provides insurance against claims brought against the corporation which are not covered in any other way.<\/p>\n
Additionally, while the automatic stay may prevent litigation against a corporate debtor from proceeding, it does not necessarily protect officers and directors from claims asserting their contribution to the corporate debtor\u2019s failure.\u00a0 See Matter of S.I. Acquisition, Inc., 817 F.2d 1142 (5th Cir. 1987).\u00a0 Whether proceeds of a D&O policy are considered property of the bankruptcy estate is a key determination.\u00a0 Executives attempting to draw from the policy for protection are considered creditors, and thus subject to the automatic stay, if the policy and its proceeds are deemed to be part of the estate.\u00a0 11 U.S.C. \u00a7362.\u00a0 However, if proceeds are not considered part of the estate, they are not subject to the bankruptcy priority rules, and will be available for corporate executives to fund their individual defense costs.<\/p>\n
In re La. World Expo., Inc., 832 F.2d 1391, 1398 (5th Cir. 1987), involved a corporate debtor which purchased D&O insurance proceeds pre-petition in order to protect its officers and directors against potential liability.\u00a0 The policy had both indemnification and liability coverage subject to a single coverage limit.\u00a0 The corporate-debtor\u2019s creditors filed suit against the officers and directors for mismanagement, and the executives filed a claim with the insurer for legal expenses.\u00a0 The creditors sought to prevent the reimbursement of legal fees by asking the bankruptcy court to deem the proceeds property of the estate subject to the stay.\u00a0\u00a0 On appeal, the Fifth Circuit held the proceeds of the liability portion were not property of the corporate debtor\u2019s estate.\u00a0 It did not address whether the indemnification proceeds of the policy were part of the estate.<\/p>\n
In In re Edgeworth, 993 F.2d 51 (5th Cir. 1993), the Fifth Circuit further expanded its jurisprudence on the subject of insurance proceeds and the bankruptcy estate.\u00a0 It explained, \u201c whether the debtor would have a right to receive and keep [] proceeds when the insurer paid the claim\u201d is the operative question in determining whether insurance proceeds are property of the estate.\u00a0 Id. at 55.\u00a0 Following that reasoning, it would seem indemnification proceeds would not be property of the estate.\u00a0 However, answering the Edgeworth question in regards to indemnification proceeds is often fact-intensive and not as simple as it seems.<\/p>\n
In In re Vitek, 51 F.3d 530 (5th Cir. 1995), a prostheses manufacturer filed for bankruptcy after several products liability claims were filed.\u00a0 The trustee gained permission from the bankruptcy court to enter compromises with the corporate-debtor\u2019s liability insurers to protect the carriers from third-party suits.\u00a0 Executives from the corporate debtor objected to the court approved settlements because it left them exposed to litigation and denied them liability coverage under the policy.\u00a0 The Fifth Circuit recognized the analysis presented in Louisiana World Exposition and Edgeworth was incomplete.\u00a0 Namely, it did not address the question of how to treat proceeds when the policy- owning debtor is not the only insured, the rights of the other insured are not derivative of the primary insured, and the potential liability exceeds the aggregate limits of insurance coverage.\u00a0 However, the court declined to address the open question.\u00a0 Instead, it hung its hat on the fact the insurance coverage at issue was entity coverage to protect the corporation itself, and declined to recognize the executive\u2019s property interest in the D&O proceeds.<\/p>\n
In In re Zale Corp., 62 F.3d 746 (5th Cir. 1995), parties filed a motion with the bankruptcy court to approve a settlement agreement between the debtor and the debtor\u2019s D&O insurer.\u00a0 The bankruptcy court approved the settlement and entered an order enjoining third-party claims against the insurer.\u00a0 The court of appeals reversed.\u00a0 It held the bankruptcy court did not have jurisdiction to enjoin.<\/p>\n
Introduction This first sections of this paper discusses methods for obtaining insurance payments during bankruptcy.\u00a0 Specifically, it\u00a0 addresses obtaining insurance payments in bankruptcy under property insurance, director and officer liability insurance, business interruption policies, and key man policies.\u00a0 It also discusses obtaining insurance payments during bankruptcy on personal injury claims and life insurance. The latter
LEER M\u00c1S<\/a><\/p>\n