March 21, 2008, Philadelphia - A bankruptcy judge has ruled that Federal-Mogul Corp. insurers may have to pay more than $500 million for asbestos damages under the Chapter 11 plan that allowed the company to emerge from bankruptcy in 2007.

Federal-Mogul Corp. is just one in a long list of companies-that includes industry giants such as W.R. Grace-that were forced to file for bankruptcy to manage vast numbers of asbestos liability lawsuits.

Judge Judith Fitzgerald of the US Bankruptcy Court in Pittsburgh ruled against more than two dozen insurance companies that had been fighting to avoid paying damages claims laid in connection with Federal-Mogul Corp.’s asbestos-containing products.

The insurance companies argued that they shouldn’t be forced to pay into a trust the company had set up while in Chapter 11, as they had bargained to cover damage claims that had been laid against the company.

There are five insurance companies involved in the dispute, including Ace Property & Casualty Insurance Co., AIG Casualty Co., Allianze Global Corporate & Specialty AG, Firstman’s Fund Insurance Co. and Hartford Accident and Indemnity Co.

Plaintiff attorney Peter Van N. Lockwood said that more than $500 million worth of insurance policies is at stake.

Judge Fitzgerald’s decision resolves an issue that was left wide open when Federal-Mogul Corp. exited from Chapter 11 bankruptcy in December 2007. The company was allowed to emerge even while asbestos claimants and insurers were waiting for the judge to make a ruling on the issue of insurance coverage.

The new ruling was made public on Thursday, when Judge Fitzgerald told insurance companies they would have to pay the claims that the Federal-Mogul asbestos trust was currently handling. Judge Fitzgerald pointed out that the insurance companies would have had to pay Federal-Mogul if the company had not filed for bankruptcy.

However, the insurance companies had made the challenge on the grounds that paying into the trust and paying Federal-Mogul isn’t the same thing. They believe the trust is not motivated to defend itself against claims that might be worthless, whereas the company itself had motivation to do so.

Fitzgerald’s ruling has preserved a strategy that is favored by corporations that have massive problems with tort liabilities. A company in this situation can divert damage claims away from itself by using their insurers to partially fund the trusts they create.

If the judge had ruled in favor of the insurance companies, it would have set a precedent that would deny other companies the ability to use insurance policies to fund Chapter 11 trusts.

Such a ruling would also have been an enormous blow to people with asbestos-related diseases hoping to claim compensation from the companies they believed to be responsible, as it may have become more difficult to do so-particularly in the current Federal-Mogul case.

This entry was posted on Friday, April 4th, 2008 at 4:36 pm and is filed under Asbestos Exposure, Asbestos Litigation, Jobsite Exposure, Pennsylvania. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.