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September 2016 -- The Effect of an Insured's Bankruptcy on Coverage

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September 2016
Volume 28, Number 9

The Effect of an Insured's Bankruptcy on Coverage

In a perfect world, all your insureds would remain in business (and continue to be your customers) in perpetuity. However, in the real world, this is not always the case and sometimes one of your insureds may end up filing for bankruptcy. When this happens, one issue your insured may face is what effect does the bankruptcy have on its insurance coverage?

​​​On a Related Note
Please also feel free to let us know about any issues or topics that you may want us to address in future issues of The E&O Report. Many of the topics we write about in The E&O Report originate from issues agents and brokers bring to our attention through telephone calls and emails. If you have any ideas in this regard, please reach out to Jim Keidel​ and let him know what you have in mind. From our experience, an issue that one New York insurance agent or broker is facing may actually be much larger and affect many other producers across the state.

The effect of bankruptcy on an insurance policy depends, at least in part, on whether the insured had paid its premiums in full prior to filing for bankruptcy.

Where an insured has paid its premiums in full prior to the time when the bankruptcy is filed, the filing for bankruptcy should have little effect on insurance coverage. In fact, bankruptcy courts have found on several occasions that, even where the insurer would have otherwise been permitted to cancel the insurance policy at will, the insurer cannot do so where the reason for doing so is based upon the insured having filed for bankruptcy.[1]
An insured’s bankruptcy filing will also provide at least some protection against the insurer canceling the insured’s policy, even where the cancellation is predicated on the insured having failed to pay its premium, or a material change in conditions exists that would otherwise permit the insurer to cancel the policy. Filing for bankruptcy triggers an “automatic stay,” which prohibits a variety of actions against the debtor, including “any act to … exercise control over property of the estate.”[2] In interpreting this provision, courts have held any attempt by an insurer to cancel an insurance policy constitutes an act to exercise control over property of the estate and violates the automatic stay.[3]
Courts have also routinely found notices of termination and cancellation issued to debtors are void and without effect.[4] Since many policies of insurance will automatically renew unless the insurer issues an effective notice of non-renewal, such insurers will likely be powerless to prevent the policy from renewing, at least absent relief from the automatic stay. On the other hand, policies that expire on their own terms will likely do so irrespective of any automatic stay.

That being said, the automatic stay does not leave an insurer whose insured has filed for bankruptcy without any remedy where the insured falls behind on payments or where other circumstances arise justifying the insurer’s cancellation of the policy. In such circumstances, an insurer can petition the bankruptcy court for relief from the automatic stay.[5] However, the bankruptcy court is not required to grant this relief in every situation, and it may deny the relief where the requested cancellation would significantly impair the bankruptcy proceeding.[6] This process also gives the trustee time to cure any problem causing the insurer to cancel the insurance policy.
Of course, every situation has its own peculiarities. While your insureds should be aware that filing for bankruptcy might provide them with some degree of protection against their insurers cancelling their insurance policies, you should direct your insureds to speak to their bankruptcy attorney about the specific facts of their bankruptcy to determine how this protection may apply in their particular case.
Submitted by
Robert W. Lewis, Esq.
Keidel, Weldon & Cunningham, LLP

[1] See, In re Cahokia Downs, Inc., 5 B.R. 529, 531-32 (Bankr.S.D.Ill 1980)
See, 28 .U.S.C. § 362(a)(3)
[3] See, In re Minoco Group of Companies, Ltd., 799 F.2d 517 (9th Cir. 1986); Matter of Pester Refining Co., 58 B.R. 189, 191(Bankr.S.D.Iowa 1985)
[4] See, In re Elder-Beerman Stores Corp., 195 B.R. 1019, 1023-24 (Bankr. S.D. Ohio 1996); see, Minoco, 799 at 518.
[5] See, In re Payless Cashways, Inc., 305 B.R. 303, 306 (Bankr.W.D.Mo. 2004)
[6] See, Matter of Amber Lingerie, Inc., 30 B.R. 736, 737 (Bankr.S.D.N.Y. 1983)

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker’s errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island and Philadelphia, Pennsylvania.
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