Insurance Coverage Litigation in Bankruptcy Court

As a result of the adverse economic impacts caused by the COVID-19 outbreak, it is likely that a corresponding increase in bankruptcy filings will follow.  If you’re an insurance carrier, don’t be surprised if you find yourself litigating in bankruptcy court.

A Policyholder that files for bankruptcy may attempt to resolve an insurance coverage dispute as an Bankruptcy Court - Legal imageadversary proceeding in bankruptcy court.  Whether to oppose the bankruptcy court’s jurisdiction in this context will be a strategic decision based on all of the relevant circumstances and the carrier’s internal practices/preferences.

The critical determination is whether the insurance coverage dispute is a “core proceeding” or a “non-core proceeding.”   Some jurisdictions take a narrow view on what constitutes a core proceeding, ruling that insurance coverage actions are non-core proceedings if the insurance policy was issued prior to the bankruptcy petition.  See In Re Ramex International, Inc., 1988 U.S. Dist. LEXIS 11015 (E.D. Pa. 1988).  Multiple courts have ruled that disputes between debtors and their insurance carriers are non-core proceedings, including courts in Pennsylvania, New Jersey, Delaware, and Illinois.

On the other hand, other courts have taken a more liberal view of what constitutes a core proceeding.  For example, the court in In re United State Lines Inc. ruled that an important factor is whether the insurance proceeds are the largest asset potentially available to pay off the debtor’s debt.  197 F.3d 631 (2d Cir. 1999).  In that case, the court determined that the coverage dispute was a core proceeding and accepted jurisdiction.

As you can see, these matters are highly dependent on the unique facts of each case, including the timing of the insurance contract, the amount of insurance proceeds potentially available, and the expected beneficiary of the insurance proceeds.  Bankruptcy court jurisdiction over insurance coverage actions is a complicated legal analysis that can vary by jurisdiction.  If you find yourself litigating insurance coverage in bankruptcy court, do not hesitate to contact the Insurance Industry Group here at Timoney Knox, as we are staying on top of the issue!

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