When personal injury attorneys face a defendant who files for bankruptcy, progress on the case suddenly halts as the automatic stay takes effect. While obtaining relief from the stay is the first challenge (as discussed in my previous article), understanding the insurance coverage landscape is equally critical. Most successful stay relief negotiations involve limiting recovery to available insurance proceeds, and in my experience, the details matter tremendously in these situations.
The Standard Insurance Proceeds Limitation
Courts typically grant stay relief when the claimant agrees to limit recovery to insurance proceeds. This arrangement protects the bankruptcy estate while allowing the injured party to pursue their claim—a compromise that courts generally favor because it balances the interests of all parties involved.
However, this seemingly straightforward limitation requires careful scrutiny of several important factors that can significantly impact the ultimate recovery.
1. Policy Limits and Adequacy of Coverage
Verifying the applicable policy limits is essential before agreeing to limit recovery to insurance proceeds. Careful practitioners often discover additional coverage that wasn’t initially disclosed, such as excess policies that could substantially increase the potential recovery. I’ve encountered several cases where a thorough investigation revealed umbrella policies that doubled or even tripled the available coverage.
When examining insurance documentation, focus on confirming the policy was in effect at the relevant time, identifying all applicable primary and excess coverage, and assessing whether the limits are sufficient for the client’s damages. Remember that agreeing to limit recovery to insurance proceeds effectively caps potential compensation regardless of the actual damages suffered—a significant concession that warrants thorough investigation.
2. Coverage Disputes and Reservation of Rights
Coverage disputes represent one of the most dangerous pitfalls in stay relief negotiations. Consider the frustrating scenario where a claimant obtains stay relief limited to insurance, only to have the insurer subsequently file a declaratory judgment action denying coverage entirely.
Prudent counsel will investigate whether the insurer has issued a reservation of rights, the specific coverage defenses asserted, the strength of those defenses, and the likelihood of coverage litigation. When coverage issues exist, negotiating language in the stay relief order that preserves the right to return to bankruptcy court if insurance coverage falls through offers essential protection. Most debtors’ counsel will accept this reasonable safeguard when properly presented.
3. Defense Costs and Erosion of Policy Limits
“Wasting” policies—where defense costs reduce the amount available for indemnity—present a particularly troublesome scenario that many attorneys overlook. In complex cases, defense costs can consume a substantial portion of the policy before reaching resolution.
The assessment should include determining whether the policy is a “defense-within-limits” policy, how much has already been spent on defense, and the likely future defense expenses given the case complexity. For particularly complex matters, requesting specific periodic disclosures about remaining policy limits as part of the stay relief order can provide valuable protection.
4. Multiple Claimants and Potential for Policy Limits Exhaustion
Multiple serious claims against the same policy create competition for limited resources. Being first to obtain stay relief can prove crucial to securing a recovery, as demonstrated in numerous cases where later claimants received little or nothing after the first judgment.
In these situations, consider:
- The number and severity of other claims against the same policy
- Their relative values and litigation status
- The possibility of an interpleader action
- The potential for negotiating a specific allocation
Bankruptcy judges can sometimes help facilitate global resolutions in multi-claimant scenarios, particularly when the issue is raised early in the proceedings.
5. Negotiating Beyond Standard Limitations
Sophisticated practitioners develop strategies for negotiating terms beyond the standard limitation to insurance proceeds. Depending on the case, valuable additions might include guaranteed access to the debtor for deposition testimony, agreement on the collateral estoppel effect of factual findings, freedom to pursue non-debtor co-defendants without restriction, and specific carve-outs for assets not critical to reorganization.
Most bankruptcy courts remain receptive to these provisions when they don’t materially impact the debtor’s fresh start or harm other creditors. The key is presenting these requests as reasonable accommodations that facilitate efficient resolution rather than attempts to circumvent bankruptcy protections.
Practical Strategies for Effective Negotiations
Successful negotiations for stay relief require strategic planning and execution. I’ve found that requesting insurance information early through a Rule 2004 examination specifically targeting insurance details provides substantial leverage in subsequent negotiations. Generic, boilerplate limitations should be avoided in favor of precise language addressing potential coverage issues and protecting the claimant’s interests.
Including specific deadlines for the debtor’s cooperation prevents cases from languishing indefinitely—a common problem when stay relief orders lack concrete timeframes. For complex cases with coverage questions, a staged approach focusing initially on coverage determinations often proves beneficial. Building in contingencies allowing return to bankruptcy court if insurance coverage is denied or if undisclosed information affects the agreement provides essential protection against unforeseen developments.
Conclusion
Limiting recovery to insurance proceeds is often necessary to obtain stay relief, but careful evaluation of all aspects of available coverage is essential. Through thorough due diligence and strategic negotiation, practitioners can help clients achieve meaningful recoveries despite bankruptcy complications.
Over the years, I’ve come to view the automatic stay not as an impenetrable barrier but rather as a procedural hurdle that can be overcome with the right approach. With proper analysis and negotiation, personal injury claimants can often achieve favorable results even when facing a defendant in bankruptcy.