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Hollingsworth LLP obtains important asbestos coverage victory for policyholders.

news | August 19, 2009

Judge Andre Davis (D.Md), who has been nominated to the US Court of Appeals for the 4th Circuit, issued rulings today in the National Union (AIG) v. Porter Hayden coverage case on two significant issues. (Click here to view the Order and Memorandum Opinion.)  Porter Hayden was an installer of asbestos-containing insulation, and it is one of the first companies to emerge from bankruptcy under the special asbestos-bankruptcy code provisions (section 524(g)).

Hollingsworth LLP represents Porter Hayden. The bankruptcy resulted in a discharge of Porter Hayden and, now that the bankruptcy stay against litigation has been lifted, the establishment of a trust to pay claims as they are presented.

AIG argued that, because of the bankruptcy discharge, claimants could not seek recovery from Porter Hayden so there was nothing against which to indemnify Porter Hayden. Were this argument to prevail, AIG’s contractual obligations would be negated.

The court rejected this argument and adopted Porter Hayden’s view of the matter. Following bankruptcy, Porter Hayden remains “liable” but a plaintiff cannot seek execution against it; Porter Hayden delegated its performance to pay to the Trust.

AIG made several other arguments that the court rejected.  Accordingly, nothing in the bankruptcy of Porter Hayden or its establishment of a trust to pay claims results in a forfeiture of coverage.  Put differently, the discharge of the debtor, Porter Hayden, does not result in a discharge also of its insurer with respect to the same debts, that is, the liabilities to the asbestos tort claimants.

Further, Porter Hayden also filed a motion saying that the administrative costs of running the trust were legal fees and expenses to which the duty to defend applies.  No court lawsuit can be filed against Porter Hayden; instead claimants submit a form electronically to the Trust.  Porter Hayden and the Trust retained a company to evaluate whether claims satisfy the medical criteria and exposure information such that the claimant is entitled to compensation under the terms of the Trust Distribution Procedures that were created in connection with the bankruptcy proceedings.  Here, again, Porter Hayden won, and the court found that the costs of resolving individual claims were covered costs of defense under the policies.  This too is a groundbreaking decision; one prior case addressed a similar point but otherwise in none of the mass tort cases where trusts have been created has the question of defense coverage for running the trust been resolved.

According to Porter Hayden’s lead counsel, a Hollingsworth LLP partner, the court’s decision “ensures that the benefits of the coverage policyholders bought and paid for are not forfeited when the liabilities the policies are meant to cover overwhelm the policyholder such that it needs bankruptcy protection.”  As in many similar bankruptcies, the liability insurance policies are the “most important asset” of the policyholder-debtor, and any contrary ruling in the Porter Hayden case would undermine the ability of bankruptcy courts to marshal assets and organize liabilities to ensure compensation mechanisms to tort claimants.  The applicability of insurance to a bankrupt insured’s pre-petition liabilities has been “settled law for a century.”   While the issues were initially addressed by courts in early automobile accident cases, the principles that insurance coverage is neither forfeited nor reduced due to the insured’s bankruptcy remain the same, even though modern mass tort liabilities often are resolved through complex trust or alternative dispute resolution mechanisms.

Donald R. McMinn and Robert E. Johnston of Hollingsworth LLP represent Porter Hayden.  The Firm represents policyholders nationwide in coverage disputes, and it has represented numerous other policyholders with asbestos, environmental, toxic tort, and mass products liability.  Mr. McMinn and Mr. Johnston are partners at Hollingsworth LLP and represent policyholders in coverage matters and defendants in mass tort or complex tort litigation.