Porter Hayden wins ruling that insurance coverage is an asset surviving bankruptcy and defeats insurer’s motion to indemnify Porter Hayden only for actual, discounted payments of its bankruptcy-settlement trust.

March 6, 2012

On March 6, 2012, the United States District Court for the District of Maryland ruled in favor of arguments made by Hollingsworth LLP, that insurance coverage is an asset surviving bankruptcy and that Porter Hayden Company is entitled to indemnification based on Porter Hayden’s actual liability to each claimant under the § 524(g) trust procedure, not merely indemnification of the reduced payments made by the trust after discounting each resolved liability to reflect the limited assets available to the trust.  Nat’l Union Fire Ins. Co. of Pittsburgh v. Porter Hayden Co., Civil No. CCB-03-3408, at *1 (D. Md. Mar. 6, 2012).

The payouts made by Porter Hayden’s trust are substantially smaller than the Porter Hayden’s actual liability to the claimants.  Id. at 2–3.  This is because the trust discounts payments in order to ensure equity among all claimants current and future, including by preserving some assets for future claimants.  Id.  National Union, whose policies were one of Porter Hayden’s most significant assets, sought to eliminate the value of those assets by arguing that the insurance policies should pay using the same bankruptcy discount applied to Porter Hayden’s payments to asbestos claimants with resolved claims.

Building on an earlier decision in which Porter Hayden had defeated National Union’s effort to argument that any insurance obligations were eliminated entirely by Porter Hayden’s bankruptcy as the equivalent of the Monopoly game’s “Get Out of Jail Free” card, id. at 2-3, the court repudiated National Union’s argument that it could shrink its policy obligations by indemnifying Porter Hayden only for the actual payments the trust made.  Id. at *2–3.  The court recognized that a policy-holder’s legal obligation, which is what the insurer promises to cover, “is created by, and is defined by, its tortious acts, not its payments to claimants.”  Id. at 4.  The insurer’s obligation includes all costs the insured “ultimately faces the task of paying.”  Id. at *4.  Because Porter Hayden’s bankruptcy make clear that it is ultimately liable for the full amount of claims approved under the trust to the extent of assets “that are or become available to do so,” and because the insurance policies were an asset of the bankruptcy estate that would be available to pay claimants, the court held that National Union could not claim for itself the benefit of Porter Hayden’s bankruptcy.  Id. at 4-5.  As the court noted, “[t]he Bankruptcy Code is not intended to enable insurers to evade their indemnity obligations.”  Id. at 7.  To the contrary, as financial responsibility laws reveal, states require some policy holders to purchase insurance because, in the event the policy holder is insolvent, there still are assets available to tort claimants seeking recovery from that policy holder.