Insurance Coverage and
Bankruptcy at the Crossroads:
What You Should Know
By Dennis J. Nolan and Marshall Gilinsky
T
he domains of bankruptcy and insurance law
each present their own hazards. When their
paths intersect —and they frequently do —
competing interests collide and the way forward
can get bumpy. Here, we offer a brief navigational
guide through the intersection of bankruptcy and
insurance coverage law.
sonant with Chapter 11’s value-preservation policy.
Bankruptcy’s automatic stay provisions generally
preclude insurance companies from canceling
policies post-petition for nonpayment of premiums, except financed premiums, where the finance
company can terminate a policy as attorney-in-fact
for the insured.
Maintenance of Insurance
Self-Insured Retentions
Maintaining insurance during bankruptcy is not
optional. The bankruptcy code provides that failure
to maintain adequate insurance may be “cause”
to dismiss a debtor’s case. State law and various
regulations often require that insurance be in place
in order to maintain good standing, and the guidelines of the U.S. trustee, who oversees Chapter 11
cases, also mandate sufficient insurance coverage.
Debtors must obtain court approval to pay their
insurance obligations. While the bankruptcy code
does not expressly permit such payments, courts
routinely grant payment applications under
their broad equitable powers because it is con-
As a general matter, self-insured retentions, or
SIRs, typically represent the policyholder’s “skin in
the game.” For an insolvent policyholder, however,
any requirement that it actually pay loss in order
to exhaust a SIR often conflicts with the dual goals
under bankruptcy law of providing a debtor breathing room and avoiding the favoring of one creditor
over another. What if the debtor cannot pay the SIR?
Most courts do not
permit insurance companies to escape their
coverage obligations
when a policyholder
lacks the financial resources to pay the SIR;
however, the insurance
company is only liable
for amounts exceeding
its attachment point, and
generally is not required to
“drop down” to provide coverage
below that attachment point unless
such coverage is promised under the
insurance policy. Either the underlying claimants or the insurance company,
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