Bankruptcy Judge Rules Church Insurers Lack Standing to Contest Abuse Claims

Insurers that have not indicated they will pay claims from sexual abuse survivors currently have no standing to contest certain claims as they are being considered, a federal bankruptcy judge recently ruled in a case involving the Roman Catholic Diocese of Albany.

This summer as part of the bankruptcy proceedings that will determine how assets and insurance will be used to settle hundreds of lawsuits by survivors of clergy sexual abuse, insurers for the diocese moved to object to about 50 claims by survivors. The Official Committee of Tort Claimants challenged the objections, arguing that the insurers lack standing to object because they are not a party in interest in the Chapter 11 case. They are not a party in interest in the case because, having denied liability, they have no financial interest at stake, the committee maintained.

The insurers, London Market Insurers (LMI) and The Hartford companies, argued they have a statutory right to object to claims even if they have not agreed to waive all coverage defenses and to pay any and all claims that may be allowed.

U.S. Bankruptcy Judge Robert E. Littlefield, Jr. took up the question of whether the insurers currently have standing and found that at this time they do not. The judge left open the possibility that they could have standing in the future “if and when they assume financial responsibility in this case.”

The Albany diocese filed for Chapter 11 bankruptcy protection in 2023 as it, like other dioceses in the state, faced hundreds of lawsuits by survivors of sexual abuse by priests.

In his ruling against the insurers, Littlefield noted that a “party in interest” is broadly defined by statute, but an entity that does not hold a financial stake in the case is generally excluded from the definition.

The arguments on the question of the insurers’ standing revolved around the Supreme Court’s recent decision, Truck Insurance Exchange v. Kaiser Gypsum Co., and its holding regarding the standing of insurance companies in an insured’s bankruptcy proceeding. In Truck, the Supreme Court decided that insurers such as Truck with financial responsibility for claims are “not peripheral parties” and such an insurer with financial responsibility for bankruptcy claims is a “party in interest” that may object to a Chapter 11 plan of reorganization.

The Supreme Court’s analysis requires a showing of financial responsibility, Littlefield explained, quoting from the Truck ruling: “Where a proposed plan ‘allows a party to put its hands into other people’s pockets, the ones with the pockets are entitled to be fully heard and to have their legitimate objections address.'”

Yet, Littlefield noted, there is currently a clear distinction between the Albany diocese case and Truck in that there has been no proposed plan of rehabilitation filed in the Albany case. The Supreme Court’s analysis in Truck relied heavily on the fact that Truck Insurance Exchange “will have to pay the vast majority of the Trust’s liability” and “stand alone in carrying the financial burden.”

It’s that potential financial harm—attributable to Truck’s status as an insurer with financial responsibility for bankruptcy claims—that gives Truck an interest in bankruptcy proceedings and whatever reorganization plan is proposed and eventually adopted, Littlefield explained. Yet in the Albany case, no plan has been proposed, and the parties remain in mediation. “There is nothing before the court that shows the insurers’ rights are in the crosshairs. The insurers’ concerns that their rights will be affected by a plan filed in the future is premature; there is no plan before the court today that proposes to do so,” the judge wrote.

Littlefield said Tuck is also distinguishable from the Albany matter in that Truck had accepted responsibility for the bankruptcy claims. The diocese’s insurers, however, have not accepted financial responsibility for claims against the diocese. “Thus, it is difficult to argue that Truck can be relied upon as a basis for finding standing in this case as it exists today,” he wrote.

According to the judge, in the diocese’s case, the insurers’ pecuniary interest will not be directly affected by not permitting their motions to seal or to disallow claims. Whether the claims are allowed or disallowed will affect the diocese’s financial responsibility for them. But whether the insurers will thereafter become financially responsible for the claims is dependent on a finding that the claims in question fall under the relevant insurance policies “subject to the terms, conditions, and exclusions thereof,” the court reasoned.

Hartford argued that it has already been asked to fund the proofs of claim to which it objects and therefore has standing. However, Hartford has not formally accepted responsibility to pay claims nor has it been implicated to pay claims pursuant to a proposed plan of reorganization. According to the judge, any request from the diocese or the tort committee that the insurers pay these claims is merely that: a request. “Nothing at this time binds the insurers to funding these claims, and so it cannot be said that they have financial responsibility for them,” the judge concluded.

In a similar argument, LMI claimed that denial of the right to object to “facially invalid claims” threatens LMI’s right to “show that payment for such invalid claims is not covered” under LMI policies.” LMI also argued that once facially invalid claims are allowed, LMI could be precluded from relitigating the underlying liability in subsequent coverage actions. Littlefield rejected these arguments as well: “These arguments put the cart before the horse. Before the insurers can claim a potential injury due to the res judicata effects of a confirmed plan, there must be a confirmed plan. Here, a plan has not yet been proposed by the Diocese or any other party. Without a plan, the court cannot determine whether the insurers’ rights will be affected by same and thereby confer standing to them.

The issue of insurance coverage in relation to these claims has been raised in a pending court filings brought by the Diocese and various parishes. The insurers cannot claim to be obligated to pay for these claims while simultaneously maintaining that they may not be obligated under their policies, the court said.

Beyond the Supreme Court’s “financial responsibility” language, the insurers cited instead “the ‘potential financial harm’ that insurers face is sufficient to give them ‘an interest in bankruptcy proceedings and whatever reorganization plan is proposed and eventually adopted.'” The judge found that the insurers’ reliance on the potential for harm is misplaced, noting that in Tuck, the Supreme Court was addressing standing for insurance companies that already have financial responsibility for bankruptcy claims.

The judge said it is difficult to understand how the insurers can maintain they have standing when they have no skin in the game. “Such a stance by the insurers would seemingly be paradoxical: insurance companies could claim standing because they are likely to contribute to the bankruptcy distribution while simultaneously claiming they are under no obligation to make said contribution,” the judge stated.

While rejecting the insurers’ bid to object to claims at this time, the judge stressed that there is nothing in this decision that would prevent the insurers from filing new motions to seal and disallow claims “if and when they assume financial responsibility in this case.”

Topics Carriers Legislation Claims