Delaware Decision Makes It Increasingly Difficult for Insurers to Evade Coverage for Dissolved Corporations

February 03, 2014

Can an injured plaintiff obtain compensation from a dissolved company with unexhausted insurance policies and force the insurer to pay? The Delaware Supreme Court says yes—in certain circumstances.

On November 26, 2013, the Delaware Supreme Court issued a ruling with significant implications for insurers, policyholders, and creditors of dissolved corporations when it held that injured third-party plaintiffs can bring claims against dissolved corporations at any time. In the Matter of Krafft-Murphy Co., Inc., No. 85, 2013, 2013 WL 6174485 (Del. Nov. 26, 2013). This ruling exposes unexhausted insurance policies of long-dissolved corporations to liability to plaintiffs with long-tail claims, such as asbestos plaintiffs. The Delaware Supreme Court’s holding is aligned with statutory authority in other jurisdictions and may be especially important because of the large number of corporations incorporated in Delaware.

Krafft-Murphy was a plastering company that, among other activities, supplied and installed an asbestos-containing product for many decades. Id. at *1-2. Beginning in 1989, Krafft-Murphy was subject to hundreds of asbestos-related personal injury lawsuits. Id. Prior to its dissolution in 1999, the company’s insurers funded and directed the defense of the asbestos-related lawsuits. Id. Even after Krafft-Murphy’s dissolution, asbestos plaintiffs continued to name Krafft-Murphy, along with other entities, as a defendant in asbestos-related personal injury lawsuits. See id. In 2010, Krafft-Murphy began to file, in courts other than the Delaware Court of Chancery, motions to dismiss asbestos-related claims that claimants brought more than ten years after the company dissolved. Id. The dissolved corporation argued that it was no longer subject to suit under applicable Delaware law because it had been dissolved for longer than three years. Id. In response, the injured plaintiffs filed for the appointment of a receiver for the company under 8 Delaware Code § 279 in the Delaware Court of Chancery. Id. Both sides cross-moved for summary judgment. Id. At issue on summary judgment was whether: (1) there is a statute of limitations inherent in Delaware’s statutory corporate dissolution scheme that time-bars third-party claims against a dissolved corporation; (2) a dissolved company’s unexhausted policies are considered “property” under Delaware’s receivership statute; and (3) a dissolved corporation has the power to act without a court-appointed receiver after Delaware’s corporate dissolution statute’s three year “winding up” period. Id. at *1.

The Court of Chancery held that: (1) claims filed more than ten years after the corporation dissolved were time-barred and should be dismissed; (2) a dissolved company’s unexhausted policies are not considered “property”; and (3) a court-appointed receiver was unnecessary to defend the claims. Id. at *3. The Delaware Supreme Court reversed.

First, the Delaware Supreme Court held that, as a general matter, there is no time-bar for liability. Id. at *7. Dissolved corporations, and in turn their insurers, face the potential of liability for underlying claims whenever they are brought, and responsive insurance policies remain at risk unless and until the policies are settled, released, or exhausted by the payment of claims.

Second, the Court held that Delaware statutory authority considers unexhausted insurance policies to be a dissolved corporation’s property under Delaware’s receivership statute, 8 Delaware Code § 279. Id. at *6. That statute holds that a court-appointed receiver has an obligation to take charge of a corporation’s assets and “to collect the outstanding debts, claims, and property due and belonging to the corporation.” 8 Del. C. § 279. The policies require that the insurers pay “all sums which the insured shall become legally obligated to pay as damages” covered by the policies. Krafft-Murphy, 2013 WL 6174485, at *6. The court explained that because assets are available under the policies and the corporation held the policies before dissolving, the policies are considered property under 8 Delaware Code § 279. Id.

Finally, the court held that courts can and should appoint a receiver to defend lawsuits that claimants bring against the corporation after the corporation’s three-year winding-up period. Id.

Taken together, the holdings mean that claimants can bring claims against a dissolved corporation at any time — and, after the corporation’s three-year winding-up period, a court will approve a receiver to defend lawsuits on behalf of the corporation. Further, unexhausted insurance policies remain property of the dissolved corporation. Accordingly, Krafft-Murphyexposes unexhausted insurers of dissolved companies to liability arising from long-tail torts even years after the company dissolves.

The Krafft-Murphy decision is consistent with many states’ statutory authority, which facilitates injured claimants obtaining compensation. For example, numerous states permit claimants to bring direct actions against an insurer, in some cases even without joining the insured. Under Wisconsin’s direct action statute, an insurance policy covering negligence makes the insurer liable up to the policy limits, even without a final judgment against the insured. Wis. Stat. Ann. § 632.24. Louisiana’s direct action statue also allows a claimant to sue an insurer directly before obtaining a judgment against the insured if the insured is bankrupt or insolvent. La. Rev. Stat. Ann. § 22:1269. Similarly, under both New York and California statutory authority, after securing a judgment against the insured, third-party claimants are permitted to bring a direct action against the insurer on the policy. Ca. Ins. Code 11580(b)(2); N.Y. Ins. Law § 3420. Also, aPennsylvania statute permits a third-party beneficiary to bring a direct action against an insurer after securing judgment against an insolvent insured. 40 Pa. Stat. Ann. § 117.

Krafft-Murphy has broad implications on the coverage obligations of insurance carriers, as well as the settlement dynamics between insurers and corporate policyholders, because the decision confirms that insurance carriers with unexhausted insurance policies covering long-dissolved corporations face potential liability to injured plaintiffs with long-tail claims, such as asbestos plaintiffs.

Under Krafft-Murphy, a court may appoint a receiver to handle and resolve claims against a dissolved corporation more than three years after the corporation dissolved. Delaware’s receivership statute requires the receiver to act on the corporation’s behalf, take charge of the corporation’s assets, collect property due to it, and resolve the claims. 8 Del. C. § 279. Under Krafft-Murphy,a receiver will be required to act on behalf of a corporation to defend claims that third-parties bring against the corporation and to pursue all available, unexhausted insurance coverage necessary to respond to those claims. Insurance carriers that issued unexhausted policies to dissolved or non-operating entities are now open to greater risk than the carriers may have previously expected. An insurer cannot attempt to wait out third-party claims against a bankrupt insured, hoping that the claims will become time-barred before the insured incurs sufficient liability to implicate the insurer’s layer of coverage.

The Krafft-Murphy decision should encourage unexhausted insurance carriers to seek resolution of all insurance claims related to long-tail liabilities with their corporate policyholders and/or their estates. Such resolutions will benefit policyholders, claimants, and insurers. Policyholders will be able to liquidate insurance assets for the payment of injured claimants. Resolving open insurance claims related to long-tail liabilities with corporate policyholders will allow carriers to exhaust their obligations under the policies and provide carriers the certainty that comes with obtaining releases of otherwise exposed policies. Furthermore, court orders available only in the bankruptcy context will guarantee insurers final resolution of potential liability. For example, insurers can obtain injunctive protection under the Bankruptcy Code, as well as court approval of a policy buy-back. Finally, negotiated resolution with a corporate policyholder will allow insurers to avoid potential direct actions that individual tort victims, including potentially sympathetic plaintiffs, may bring in the future.

Published on The National Law Review.