United States: What's The Insured Value Of An Allowed Bankruptcy Claim? Pay-As-Allowed, Pay-As-Paid, And A Novel Variation

Bankruptcy of the insured does not relieve an insurer of its obligations under its insurance policy, including to pay covered liability claims held by creditors of the bankruptcy estate. Generally, for a creditor to obtain a distribution from the estate, the creditor must file a timely "proof of claim" in the bankruptcy proceeding, and the claim must be "allowed" by the bankruptcy court. Because a debtor's assets are typically insufficient to compensate all creditors for the full allowed value of their claims, creditors usually are paid only a fraction of the dollar value allowed. Disputes have, as a result, sometimes arisen between debtor insureds or their successors on the one hand, and their insurers on the other, over whether the insurer is obligated to pay the allowed value of an insured claim ("pay-as-allowed"), or instead only the fractional amount the creditor actually would receive from the estate if there were no insurance coverage ("pay-as-paid").

To date, only a few court decisions have addressed this issue. The leading case adopting the "pay-as-allowed" approach is the Seventh Circuit's 1991 decision applying Illinois law in UNR Industries, Inc. v. Continental Casualty Co. The policyholder UNR had petitioned for bankruptcy reorganization after becoming the target of thousands of asbestos-related claims. The bankruptcy court approved a plan that created a trust for the benefit of asbestos claimants, and which required UNR to transfer more than half of its stock to fund the trust. The asbestos claimants agreed that their claims would "be fully settled and satisfied" by the stock transfer. Following confirmation of the bankruptcy plan, UNR sued several of its insurers, including Continental Casualty Company (CNA), seeking a declaration that they were obligated to pay the full "allowed" value of the asbestos claims rather than the "paid" value that the asbestos claimants received from the trust. The Seventh Circuit agreed. The court reasoned that a contrary result threatened "to confer a windfall" on the insurer because, absent UNR's bankruptcy, CNA would have been liable to pay the full amount of the asbestos claimants' damages rather than the "arbitrarily discounted amount" received by the asbestos claimants. The court found support for its position in the CNA insurance policies, which included standard language that the bankruptcy of the insured does not relieve the insurer of its obligations. The UNR "pay-as-allowed" approach has been followed in the Northern District of Illinois' 2011 decision in ARTRA 524(g) Asbestos Trust v. Fairmont Premier Insurance Co. and in the District of Maryland's National Union Fire Insurance Co. v. Porter Hayden Co. decision in 2012.

Currently, the sole case adopting the "pay-as-paid" approach is the California Court of Appeals' 2006 decision in Fuller-Austin Insulation Co. v. Highlands Insurance Co. Similar to UNR, Fuller-Austin involved a post-bankruptcy trust funded with the company's stock and empowered to pay asbestos claims out of trust assets. The California court, however, rejected the UNR approach, resting its decision primarily on the ground that the "insurance policies indemnify Fuller-Austin for amounts it is 'obligated to pay' by law." The court reasoned that the transfer of stock to the trust was not the amount Fuller-Austin was "obligated to pay"; instead, it said the legal obligation was the amount eventually paid by the trust to individual asbestos claimants. The Fuller-Austin approach reduces the insurer's liability and therefore is the approach preferred by insurers.

A variation on the situation presented in UNR and Fuller-Austin arises when the debtor's plan provides that claimants will be paid directly in stock of the reorganized company. In such circumstances, the Fuller-Austin court's concern is not implicated because the entity to which the debtor becomes "legally obligated to pay" the allowed claim is the claimant, rather than an intermediary trust created to pay claimants. The "allowed" value is therefore even more clearly the appropriate measure of liability in such situations than it was in UNR. If the "pay-as-paid" approach were nevertheless adopted, however, a novel issue arises over how to calculate the "paid" value. Because the value of stock fluctuates relative to the value of currency, and therefore, the date on which such stock is valued will affect—potentially substantially—the insurer's obligation under the policy. Although no available case decision has yet addressed the issue, insurers have argued that the stock must be valued either at its market rate when transferred to the holder of the allowed claim or at the amount ultimately received by the holder upon sale of the stock, if any. The latter of these should be rejected because it makes determining the insurance value of the claim impossible before the claimant sells the stock and, additionally, because it is dependent on fortuity or the whim of the claimant. Moreover, both approaches potentially result in varying insurance values for similar claims of creditors within the same class, as different creditors may receive distributions at different times and sell their stock at different times, all while the market value of the stock fluctuates. This result would appear to be inconsistent with the fundamental bankruptcy principle that similarly-situated creditors must be treated similarly. A single stock value applicable to all claims would appear to be both more practical and more consistent with bankruptcy principles. This single value typically is determined through the bankruptcy proceeding before confirmation in order to allocate shares among allowed claims and fund a disputed claim reserve.

Although the case law remains sparse, the proper insurance valuation for claims allowed in bankruptcy is an important issue for debtor insureds, their successors, their insurers, and the debtor's creditors. These issues should therefore be taken into consideration with the advice of coverage counsel both before conclusion of the bankruptcy, when the debtor may have more options to address them proactively, and if a coverage dispute concerning an allowed bankruptcy claim arises after conclusion of the bankruptcy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions