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Bankruptcy Judge Sides with Insurance Companies Regarding Arbitration of Coverage Issues

On Behalf of | Aug 20, 2021 | Firm News

After opioid lawsuits ravaged large pharmaceutical companies, companies such as Purdue Pharma sought chapter 11 bankruptcy protections. In June, Judge Robert Drain in the Southern District of New York determined Purdue Pharma’s insurance coverage was not critical to the company’s proposed reorganization plan. Instead of litigating the issue, Judge Drain ordered arbitration, a move which calls into question when arbitration of insurance coverage disputes can be beneficial to insurance companies.

The insurers, which include companies such as AIG Specialty Insurance Co., Liberty Mutual Insurance Co., and Navigators Specialty Insurance Company, were brought into the bankruptcy action in January 2021. Purdue Pharma sought declaratory judgment finding it was entitled to more than $3.3 billion in coverage under 113 insurance policies for opioid-related claims. This coverage would greatly benefit Purdue Pharma, who, at the time of filing their declaratory judgment, had been named in over 2,760 opioid mass tort claims across the United States and its territories. These suits range from those brought by individuals to those brought by Native American tribal governments, hospitals, and even individual U.S. state governments. Such suits began plaguing Purdue Pharma in 2001, and there does not appear to be an end in sight for opioid-related litigation.

If Purdue Pharma’s plan to access these insurance proceeds is granted court approval, personal injury claimants would receive millions in recovery regardless of the outcome of the current insurance coverage dispute. Purdue Pharma’s restructuring plan includes a proposed settlement to resolve lawsuits brought by all types of plaintiffs. Trusts would be established to support opioid abatement programs across the country. Though the plan is supported by many, the plan is not without its critics. Many, including the governments of 24 States, think the company should have to pay more than the $10 billion estimated to resolve the present suits against Purdue Pharma.

To Purdue Pharma’s disappointment, the insurance coverage dispute is now at a standstill. The insurers moved to stay the lawsuit, alleging mandatory arbitration clauses in their insurance contracts barred Purdue Pharma from seeking declaratory judgment. The insurers argued the reorganization plan in no way hinged on whether the insurers offered coverage to Purdue Pharma. Further, the insurers argued coverage disputes were not “core” proceedings in the bankruptcy context, and as such, there was no reason for the Court to override the FAA and strong federal policy favoring arbitration agreements.

In his ruling, Judge Drain agreed with the insurers. He held arbitration was appropriate because the reorganization plan proposed by Purdue Pharma was not contingent on the company’s ability to access insurance proceeds. Purdue Pharma’s own restructuring plan, which was developed to succeed without insurance coverage taken into account, stalled its own coverage dispute.

Judge Drain’s decision is an affirmation the strong federal policy favoring arbitration agreements. Arbitration moves sometimes messy, complicated coverage disputes out of the courts, freeing up docket space for other matters. Where 113 policies are at issue, it is not a surprise Judge Drain sought to remove the dispute from his bankruptcy dockets. As opioid litigation continues and other pharmaceutical companies seek indemnity from insurers, we expect to see more insurance companies seeking arbitration of coverage disputes instead of litigating such issues. Time will tell if Purdue Pharma’s coverage arbitration is successful, or if the issue ends up back on the docket.

See In Re Purdue Pharma LP, U.S. Bankruptcy Court, Southern District of New York, Case No. 7:2019bk23649