Send this article to a Friend

Debt Relief, But No Free Ride -- Filing Bankruptcy Does Not Excuse An Insured From Failing To Comply With Duties Under The Policy

Volume 19, No. 113 September 2007

Benson Ward
bward@deflaw.com

Many first party insurers are reporting a rise in bankruptcy filings and adversary proceedings in bankruptcy among their insureds, and this trend is not likely to alter in the near future given the economic outlook of the real estate market.  In those situations in which an insured files a first party claim while in the midst of a bankruptcy proceeding, the question arises concerning the effect of the bankruptcy on the ongoing claim and the insurer’s investigation.  Ultimately, the insurance policy governs these issues; while bankruptcy proceedings may have an effect on the suit limitations provided in the insured’s policy, the insured must nonetheless continue to cooperate with the insurer’s investigation and comply with the duties provided in the policy.  Bankruptcy works as neither a justification nor excuse in these circumstances, and failure to comply with the policy can still lead to grounds for a denial of the claim.

The United States Constitution places bankruptcy law under Federal jurisdiction, and it is governed by Federal statutory law:  Title 11 of the United States Code, known as the Bankruptcy Code.  The Bankruptcy Code generally does not speak to the issue of the collateral effect in areas such as insurance contracts, though such omission alone may be seen as support that bankruptcy does not release the individual from the duties and provisions of his or her insurance policy.  For example, Section 108 of the Bankruptcy Code specifically provides the trustee in the bankruptcy matter an extension of up to two years on the deadline for filing suit on behalf of the insured.  This same code section also provides a sixty-day extension on certain duties provided for in agreements such as insurance contracts.  For example, 11 USCS § 109 (b) states that if an agreement  establishes a time period for the individual to file a document such as a proof of loss, the trustee may file the document within sixty days of the order for bankruptcy relief, so long as the petition for bankruptcy itself was not filed after time period had already expired.

Given the interplay of Federal bankruptcy law with state law and the facts of the claim, an insurer may well wonder what additional effects derive from an insured’s filing for bankruptcy, with respect to the handling and investigation of the claim.  Georgia case law shows that an insured may not permissibly refuse to comply with policy duties because an order for bankruptcy relief has been entered, and Section 108 of the Bankruptcy Code provides no indication to the contrary.  In other words, filing for bankruptcy may extend limitations and time deadlines but it does not allow for outright noncompliance with policy duties and the insurer’s investigatory requests pursuant to the policy.

The Georgia Supreme Court ruled on this issue in a case more than one hundred years old.  Firemen’s Fund Insurance Co. v. Sims, 115 Ga. 939, 42 S.E.269 (1902).  In Sims, the trustee for a bankrupt insured attempted to collect on the insured’s policy for a fire loss.  Shortly after the insured notified the insurance company of the loss, he skipped town and failed to submit to an examination under oath as requested by the insurer and provided for in the terms of the policy of insurance.  The insurer argued before the court that compliance with the policy, including the request for an examination under oath, was a condition precedent to recovery under the policy.  After discussing the historical significance and weight attributed to policy requirements for submitting to an examination under oath, and the insurer’s right to condition recovery upon compliance with such duties, the Court ruled that the insured’s bankruptcy did not alter or supersede the policy provisions; the trustee and creditors were in no better or more advantageous standing than the debtor himself.  Notwithstanding the bankruptcy, the Court stated that “a failure or refusal to comply with its requirements, without any fault on the part of the insurer, will operate as a forfeiture of the policy.”  Sims, 115 Ga. at 944, 42 S.E. at 271.

The trustee in Sims brought suit in the old Circuit Court of the Northern District of Georgia against another insurance company, the following year, under a similar set of circumstances.  Sims v. Union Assur. Soc., 129 F. 804 (1903).  Operating under the same facts, the bankruptcy trustee attempted to recover under a different policy from another carrier.  Again, the insurer requested an examination under oath, and again the policyholder was out of town and did not appear.  This time, the trustee attempted to submit to the examination in lieu of the insured, and the insurer refused.  The Court, citing the Georgia Supreme Court decision in the earlier Sims case, upheld the insurer’s denial based upon the insured’s failure to abide by the duties of the policy.  The insured’s bankruptcy had no effect or impact upon the obligations called for in the policy, and the failure to submit to an examination under oath barred recovery.

Georgia courts have confirmed that an insured’s bankruptcy does not negate the duties to cooperate under the policy in a third party setting as well.  In Bituminous Casualty Corporation v. J.B. Forrest & Sons, Inc., 132 Ga. App. 714, 209 S.E.2d 6 (1974), a complaint was filed against the insured after an automobile accident, and the following day the insured filed for bankruptcy.  The duty which the insured failed to abide by in this case was proper notice of an accident and a third party’s claim.  The Court of Appeals agreed with the insurer that the violation of a condition precedent, called for in the policy of insurance, would preclude recovery notwithstanding the insured’s bankruptcy.

Cases from other states show an agreement that bankruptcy is a non-issue so far as an insured’s cooperation and compliance with duties under the policy are concerned.  In In re U.S.A. Electronics, Inc., 120 B.R. 637 (B.Ct., E.D.NY 1990), a Federal Bankruptcy Court followed New York law in granting summary judgment for the insurer in light of insureds’ failure to cooperate with the investigation of the loss and failure to submit a sworn statement of proof of loss with respect to one of the claims.  While attempting to investigate two claim burglary losses by an insured who recently filed bankruptcy, the insurer encountered a reluctance to cooperate on the part of the insured; neither the company nor the appointed trustee responded to the insurer’s letters, no proof of loss for the second claim was submitted, material information relating to substantiation of inventory was not supplied, and the insured’s examination under oath testimony was “laced with informational and documentary gaps.”  Id. at 641-44.  See also, e.g., In re Nucentrix Broadband Networks, Inc., 309 B.R. 907 (Bankr. N.D. Tex. 2004) (granting summary judgment for insurer where bankrupt insured did not provide notice nor involve insurer  in choice of counsel and in incurring of legal expenses).

Georgia law is clear that failure by an insured to communicate and cooperate with the investigation can result in a breach of the policy.  See, e.g., KHD Deutz of Am. Corp. v. Utica Mut. Ins. Co., 469 S.E.2d 336 (Ga. Ct. App. 1996) (ruling that insured failed to cooperate “after many months of ignoring the policy conditions and refusing to respond to numerous efforts on the part of [the insurer] to communicate”).  Id. at 196.  This duty does not vanish should an insured file for bankruptcy.  Therefore, when handling claims in which the insured is simultaneously involved in bankruptcy proceedings, one should be mindful of statutory time extensions, but should not hesitate to rely upon and enforce provisions in the policy requiring cooperation during the investigation.  Bankruptcy does not excuse an insured’s failure to fulfill conditions precedent to recovery under a claim, and adjusters remain free in this sense to handle the claim without having to worry about additional hurdles imposed by the bankruptcy.