The coronavirus pandemic has driven many companies into bankruptcy, including well-known names such as Brooks Brothers, Neiman Marcus, J.C. Penney, J. Crew and Hertz. In addition to raising bankruptcy-specific issues, the resultant bankruptcy proceedings are likely to raise complex issues of insurance, especially coverage and loss measurement for business interruption losses asserted to have resulted from COVID-19.
With courts currently closed or restricted to virtual hearings in an effort to limit COVID-19 exposures, mediation has taken on special importance in a wide range of cases. In the bankruptcy context, mediators have been working to help parties achieve economically sensible, value maximizing solutions to the kinds of issues that often separate debtors and creditors. But the pandemic has also raised unique challenges that call for the use of co-mediations involving the coordinated use of both mediators specialized in bankruptcy and mediators trained in insurance.
The intersection of insurance and bankruptcy law has long created challenges and opportunities for the creative resolution of complex issues. Before becoming a mediator, I spent years in private practice working on the insurance issues in the Dow Corning bankruptcy that was driven by breast implant claims as well as on many asbestos bankruptcies. In each of these cases, insurance was one of the most important assets at issue, which gave rise to numerous insurance coverage issues and difficult issues concerning the role of insurance in bankruptcy. Bankruptcy courts may have an ability to value and provide a structure for the resolution of pending and future claims, including tort and insurance claims, that permits creative solutions that are not typically available outside the bankruptcy context.
Co-mediation allows two coordinated mediators to focus on separate groups of parties and issues. The insurers are rarely significant creditors in a bankruptcy in which their policies are at issue, so there is no need for them to participate in unrelated discussions of technical bankruptcy matters. When the interests of the insurers and other creditors intersect, the two mediators and the relevant parties can be brought together for a joint session to negotiate issues such as the timing and extent to which insurers may cover some or all of a debtor's losses.
Another option involves the use of an insurance expert as a special master. This can be particularly useful in a bankruptcy proceeding involving mass torts or environmental liabilities, where there are issues concerning missing policies, allocation and various aspects of coverage or loss measurement.
A common objection to co-mediation or use of a special master is cost, but the cost of an additional neutral is relatively small in the context of a major commercial bankruptcy and will normally be spread among the parties in interest in any event.
In the context of the COVID-19 pandemic, insurance is likely to be an important bankruptcy asset and, in some cases, a significant source of value that can be distributed to creditors. For example, if a company facing bankruptcy has insurance for a COVID-19-related business interruption, civil authority or contingent business interruption loss, the valuation and collection of that insurance claim may be central to completing the bankruptcy process.
While most bankruptcy mediators have experience in resolving complex issues among bankruptcy case constituents, they often are not experienced in insurance and reinsurance. Coupling a mediator with expertise in insurance with a mediator skilled in bankruptcy allows both sets of issues to move forward efficiently, with each mediator and the relevant parties focusing on their respective areas of expertise.
Originally published August 28, 2020 .
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