Eleventh Circuit Bankruptcy Decision Marks Significant Implications For Insurance Companies, Their Counsel

• Published date: 14 December 2021
• Subject Matter: Insurance, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Insurance Laws and Products
• Law Firm: Armstrong Teasdale
• Author: Rafael X. Zahralddin, Patrick J. Kenny and Michelle D. Alarie

The Eleventh Circuit recently ruled that an insurer's effort to intervene in an underlying wrongful death action was subject to the automatic stay and that the insurer was not deprived of due process as a consequence.

Significant to insurers and their counsel was the portion of the opinion dedicated to due process concerns raised on appeal by the insurer, and in particular, the opportunities that the Court felt the insurer had exhausted and those that it miscalculated. The Court's review of the automatic provisions of the United States Bankruptcy Code as applied to insurers is a useful reference for those who practice at the intersection of bankruptcy and insurance law. In re Gaime, No. 20-12240, 2021 WL 5321974, at *2-3 (11th Cir. Nov. 16, 2021).

Background

The facts of the case are heartbreaking. A mother drugged her two young sons and then attempted to kill herself and her children in a garage with their car running. The mother was convicted of second degree murder for one of her sons. She had automobile and homeowners insurance with the insurer. The estate of the dead child, his brother and father ('Survivors') filed a wrongful death and bodily injury suit against the mother in state court. Although initially agreeing to defend the mother, the insurer filed a parallel declaratory judgment action in state court to determine that the policies didn't cover the incident and that it had no duty to defend or indemnify her.

The Survivors filed a fourth amended complaint in the wrongful death suit, and the mother filed a motion to dismiss, on which the state court reserved ruling until the coverage and duty to defend questions were resolved. Around the same time, the Survivors were in settlement discussions with the attorney the insurer had appointed to represent the mother. In the later appeal from the Bankruptcy Court opinion, the Survivors alleged that the insurer had rejected a settlement offer the mother wished to accept that would have allowed her to avoid subsequent liability.

The state court ruled in the insurer's favor in the declaratory judgment actions, holding that the insurer's policies didn't cover the incident and that the insurer had no duty to defend the mother. The insurer thereafter withdrew its defense of the mother in the wrongful death lawsuit. The Survivors filed an untimely fifth amended complaint in the wrongful death action. The mother, still imprisoned, didn't respond to the complaint resulting in the state court entering a default...