What to Do When the Insured Files Bankruptcy: A Checklist for the Claims Representative
January, 2005
1) STOP any contact with insured and any claimant. Once an insured has filed bankruptcy, no claim or litigation can be pursued against the insured. All claims, including the commencement or continuation of litigation (including service of process), enforcement of a judgment, attempt to take possession of property or perfect a lien, collect a claim or set off a debt are stayed pursuant to 11 U.S.C. § 362(a).
The claimant cannot pursue its claim against the insured. Therefore, the insurer cannot negotiate with claimants or settle any claims against the insured. This is a violation of the automatic stay. The Bankruptcy Code provides certain penalties for a violation of the automatic stay:
An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney fees, and in appropriate circumstances, may recover punitive damages.
2) NOTIFY the claimant of the filing of bankruptcy by the insured and the existence of the bankruptcy stay. The claims representative should not communicate or deal with any claimant until the claimant has obtained a modification of the stay which allows the claimant to pursue the claim against the insured to the extent that insurance proceeds are available. The order modifying the bankruptcy stay should also allow the claimant to deal directly with the claims representative and/or insurer.
Courts will generally modify the stay to allow litigation to proceed when the claimant or plaintiff stipulates that it will not seek recovery from the insured/debtor or the insured/debtor's estate and will only pursue collection of its claim to the extent there is insurance coverage.
3) ASSURE that any pending litigation in state or federal court has been stayed. The claims representative cannot adjust claims against an insured who has filed bankruptcy. Obtain a copy of the stay order.
4) FILE a Proof of Claim against the insured for any claim the insurer may have for a deductible, unpaid premium or other potential claim such as contribution or indemnity in the subrogation context. (Caution: This may subject you to the jurisdiction of the bankruptcy court)
5) MONITOR the bankruptcy proceeding and carefully review the plan. The plan often contains provisions dealing with insurance, e.g., continuation of the policy or how the proceeds will be used to fund the plan. Also, the insurer does not want the debtor handling or settling any claims that may implicate its coverage without the ability to participate.
6) INVESTIGATE policy terms. For example, will the policy expire by its own terms or is there an automatic renewal? Remember, the policy cannot be canceled due to the insured's bankruptcy, but can be canceled, with court approval, for legitimate breach of policy terms such as non-payment of post-petition premiums.
Please contact Susan N.K. Gummow at (312) 606-7802 or sgummow@clausen.com with any bankruptcy related questions. ?
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