Consider the Risks - An Insurance Law Blog
It is fair to say that the
law is of two minds when it comes to viewing insurance policies as personal
services contracts between specific insureds, and their insurers.
In some contexts, courts
focus on the personal nature of risk and the relationship between the insured
and the insurer, and impose coverage restrictions where there has been an
unwarranted change in the personal nature of the risk transfer. Examples of
this view include enforcement of a vacancy exclusion in a homeowner’s policy,
misrepresentation defenses for non-disclosure of medical conditions under a
life insurance policy, and even late notice or notice/prejudice determinations
which focus on the insured’s actual knowledge and conduct and the impact of
notice deficiencies on the insurer in the specific circumstances of individual
claims.
In other situations, courts
view insurance as a transferable asset that lubricates the wheels of commerce,
or as a means to accomplish a desired social outcome. Examples of this view
include decisions applying mandatory insurance requirements, such as no-fault
auto insurance, notwithstanding non-compliant conduct by the specific insured,
or upholding statutes precluding individualized underwriting considerations,
such as precluding consideration of race based mortality differences by life
insurers, or decisions which view insurance contracts as fungible assets of the
insured to be allocated among various creditors in bankruptcy. In this latter
context, the ability to transfer the insurance as an asset of the insured in a
bankruptcy proceeding, may depend on whether the loss has already occurred and
whether the proposed transfer is limited to the insurer’s payment obligation
and on the specific assignment provisions in the policy.
A recent filing by Chartis
(f/k/a Commerce & Industry Insurance Co. and American International
Specialty Lines Insurance Company) in the United States Bankruptcy Court for
the Southern District of New York objecting to an environmental property damage
settlement and assignment of insurance proceeds between the debtor, Tronox
Inc., a specialty chemical maker, and certain newly created trusts, illustrates
this dichotomy. Click here to view a copy of Chartis’s filing.
The plan for Tronox’s
reorganization included a settlement agreement between Tronox and various
governmental entities for Tronox’s share of environmental liabilities at owned
and non-owned sites. Pursuant to the settlement agreement which is an integral
part of the proposed reorganization plan, Tronox’s environmental liabilities
were acknowledged and funded through several special purpose trusts which were
to be funded in part by Tronox and in part by anticipated insurance recoveries
from policies issued to Tronox by Chartis.
Of note here is that the
Chartis policies at issue are not garden variety CGL policies providing
coverage for property damage caused by pollution based upon an inability to
apply a pollution exclusion with a sudden and accidental exception, or a legacy
CGL policy dated prior to the adoption of the pollution exclusion. Instead,
these policies are recently issued specialty liability insurance policies
specifically designed to address the insured’s legal liability resulting from
pollution. Two of the polices are entitled “Pollution Legal Liability and Cost
Cap Insurance,” while the third provides “Pollution Clean-Up and Legal
Liability” coverage.
Such specialized coverages
are usually individually evaluated and priced by underwriters with technical
expertise in pollution costs, and involve either individual project based
assessments regarding the extent and timing of an insured’s liability at a
single known site or collection of sites. This individualized underwriting and
policy issuance may include a number of factors which are insured specific, including
the insured’s financial incentives as an ongoing business to minimize its
liability at known sites and/or the insured’s ability to control clean up costs
by influencing the adoption of specific clean up methods, or the insured’s
anticipated participation in testing or clean up at the site.
Chartis’s objections to the
environmental settlement agreement incorporated into the reorganization plan
and the assignment of the Chartis policies to the newly created trusts included
an assertion that the insured (pre-bankruptcy) had a financial incentive to
avoid and/or minimize such liabilities, while the special purpose trusts had
the incentive to fully address environmental liabilities and maximize insurance
recoveries. In making its objections, Chartis focused on the personal nature of
the risk transfer between Tronox and Chartis:
The
duties of the insured to the insurer (including the insured’s duties to cooperate and to minimize costs) are current and ongoing. Accordingly, as we
now demonstrate, assignment of these policies violates sections 1129(a)(1) and
(3) of the Bankruptcy Code because the assignment is prohibited by applicable
non-bankruptcy law and is not authorized by the Bankruptcy Code. Assignment
without Chartis’s consent is also prohibited by section 365(c)(1)(a) of the
Code because Chartis is excused from accepting performance from anyone but the
debtor.
…
Because the policies are in-force and executory, applicable nonbankruptcy law enforces the consent-to-assignment provision of the policies. E.g.,Travelers Casualty & Surety Co. v.
United States Filter Corp., 895 N.E.2d 1172 (Ind. 2008). That is, because the duties of
an insured under an in-force policy are personal to the insured, see, e.g., Couch on Insurance § 35:5-7
(3d ed. 2004); 2A-70 Appleman on Insurance § 1193 (2005), Chartis is not
required to accept performance from any party other than its insured. As the
Court stated in Travelers: “Insurance providers have a legitimate business
interest in restraining assignment — these provisions protect them from a
material increase in risk for which they did not bargain, specifically because
of a change in the nature of the insured. Consequently a consent-to-assignment
clause is generally enforced against attempted transfers of the policy itself .
. .
Chartis also argues that
pursuant to the voluntary payment provisions of the policy, the environmental
settlement itself cannot bind Chartis in the absence of its consent which it is
withholding. Because its policies are not “expired,” Chartis argues that
judicial decisions permitting the assignment of liability policies in
bankruptcy are inapposite. Chartis also notes that two such decisions (allowing
assignment) are pending before the US Court of Appeals for the Third Circuit,
citing In re Federal-Mogul Global Inc.,
385 B.R. 560, 567 (Bankr. D. Del. 2008), aff’d,
2009 U.S. Dist. LEXIS 24302 (D. Del. Mar. 24, 2009), appeal pending, No.
09-2230 (3d Cir.) and In re Global Indus.
Techs., Inc., No. 08-3650 (3d Cir.) (en banc argument October 13, 2010).
While it is clear that
Chartis was forced to react to the proposed settlement and insurance policy
assignment in the Tronox case on short notice, it would be well advised to
develop the facts supporting the personal nature of the risk insured and the
specific circumstances of the underwriting. Other insurers faced with
assignment efforts in bankruptcy proceedings would be well advised to do the
same, and to be ready to document the personal nature of the insured’s
cooperation obligations, which continue even after the loss has occurred.
The social objective of
using insurance proceeds to fund environmental clean ups that a bankrupt
insured cannot otherwise afford may, at first blush, seem laudable, there is,
however, a real danger to this “insurance as fungible asset” based view in the
context of risk management. The individual underwriting involved in modern
pollution legal liability insurance considers the insured’s ability to limit
its pollution legal liability and sets pricing based on the risk and on the insurer’s
assumption that in the event of a covered loss, that specific insured will
perform its cooperation obligations to mitigate pollution losses. This
individual risk assessment/premium setting process, repeated across the market
increases the costs of any individual insured’s environmental non-compliance
and effectively promotes risk reduction practices. The alternative “fungible
asset” view of insurance results in higher premiums for all, as insurers must
spread the increased cost across all policies, thereby removing at least some
portion of the insured’s financial incentive to control risk in exchange for
lower premiums.
