The restructurings of Chrysler and General Motors are moving through the bankruptcy court at a dizzying pace. These reorganizations are structured as asset sales to new entities "free and clear" of tort claims arising from vehicles manufactured and sold pre-bankruptcy. The sale of substantially all of Chrysler's assets to Fiat already has been approved. Approval of a sale of most of GM's assets to a new company, majority-owned by the federal government appears to be only days away.
Through this process, the automakers are eliminating thousands of dealers and leaving tort claimants to recover just pennies on the dollars through the bankruptcy court because Chrysler and GM for all intents and purposes were self-insured for products defect claims. These developments can be expected to impact the interests of insurers in several ways.
Insurers of car dealers may find themselves paying far more in defense and indemnity costs for claims against dealers whose franchise contracts are being rejected. The good news is that the automakers are assuming the contracts of dealers who will continue as such, including their obligations to indemnify the dealers from products liability claims. The bad news is that "new" Chrysler and GM are not assuming indemnity obligations for dealers whose franchises are being terminated.
With no manufacturer to recover from, tort claimants can be expected to redouble their efforts to maximize recoveries from the dealers, and terminated dealers will look to their own liability insurance to pay these claims. Depending on applicable law, dealers in some states might be held fully liable on theories of joint-and-several liability. Insurers of auto parts manufacturers should likewise expect tort claimants to refocus recovery attempts from the automakers to their insureds.
Further, insurers, like tort claimants, will find that many subrogation claims against Chrysler and GM will be relegated to the bankruptcy court to be processed as nearly-worthless, unsecured bankruptcy claims. Chrysler already has obtained bankruptcy court approval of its "free and clear" sale that purports to prohibit the assertion of all current and future claims involving a vehicle it sold pre-bankruptcy against "new" Chrysler.
GM's treatment of tort claims is somewhat different. Bowing to political pressure, "new" GM has agreed that it would accept liability for all claims involving GM cars that were sold pre-bankruptcy, so long as the accident occurred after the June 1 filing of GM's bankruptcy petition. As with Chrysler, however, claims arising from pre-bankruptcy accidents would still get paid in nearly-worthless "bankruptcy dollars."
On another front, both GM and Chrysler have faced asbestos claims in recent years arising from asbestos-containing brakes they formerly manufactured. Asbestos plaintiffs' counsel have appeared in both cases seeking the appointment of asbestos claimants' committees and future claims representatives. These motions have been denied and it is unlikely that asbestos trusts will be established in these cases. Asbestos claimants instead likely will be treated as general unsecured creditors in the bankruptcy. It remains to be seen, however, whether unknown future asbestos claimants would be bound by bankruptcy court orders preventing them from attempting to sue "new" Chrysler and GM.
As of this writing, the GM sale situation remains fluid. Assuming that the sale goes through on the current terms, however, a large group of tort claimants (and insurer subrogees) will be largely out of luck in pursuing claims against Chrysler and GM.
Many of these claimants will seek other sources of recovery, such as dealers and suppliers, potentially exposing their insurers to risks they did not foresee underwriting. Finally, we anticipate that future claimants will attempt to assert successor liability claims against "new" Chrysler" notwithstanding the bankruptcy court's orders barring such claims, and that future asbestos claimants likewise will challenge the ability of "new" Chrysler and GM to avoid successor liability claims.
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