Supreme Court Decision on Bankruptcy Claims Involving Insurers

On June 6, 2024, the U.S. Supreme Court ruled in the case of Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al., No. 22-1079. The Court determined that insurers responsible for bankruptcy claims qualify as “parties in interest” under 11 U.S.C. § 1109(b), allowing them to raise issues and participate in Chapter 11 proceedings.

The petitioner, Truck Insurance Exchange (“Truck”), serves as the primary insurer for companies involved in manufacturing and selling asbestos-containing products. Two of these companies, Kaiser Gypsum Company, Inc., and Hanson Permanente Cement, Inc. (referred to as the “Debtors”), initiated Chapter 11 bankruptcy proceedings after encountering numerous lawsuits linked to asbestos. Within the bankruptcy framework, the Debtors proposed a reorganization plan that established an Asbestos Personal Injury Trust to address current and future asbestos-related claims. Truck would be contractually mandated to defend claims and indemnify the Debtors for claims up to $500,000 each.

Truck contested the reorganization plan under § 1109(b) of the Bankruptcy Code, which allows any “party in interest” to raise and be heard on any issue in a Chapter 11 case. Truck argued that the plan could expose it to fraudulent claims due to a lack of uniform disclosure requirements for insured versus uninsured claims and that it altered the insurer’s rights established in existing policies.

The lower courts ruled that Truck did not qualify as a “party in interest” regarding the plan’s approval, stating that the plan was “insurance neutral.” This meant Truck’s obligations prior to bankruptcy were not increased, nor were its contractual rights impaired.

The Supreme Court overturned this decision, clarifying that the text, context, and historical intent of § 1109(b) indicate that insurers like Truck are considered “parties in interest.” This is because they can be directly and adversely affected by reorganization plans. The Court noted that the term “party in interest” has a broad application and emphasized that allowing insurers to participate promotes more robust involvement in reorganization processes.

Furthermore, the Court rejected the “insurance neutrality” doctrine, arguing that it incorrectly intertwines the validity of objections regarding the plan with the preliminary question of whether an insurer might be impacted. The Court dismissed concerns that hearing Truck’s objections would endanger reorganization efforts, asserting that the opportunity for insurers to be heard is distinct from having a vote or veto regarding proceedings.

Justice Sotomayor wrote the Court’s opinion, which was joined by all Justices except Justice Alito, who abstained from participating in the case’s consideration or decision.