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LJN NewslettersNewsSectionsThe Bankruptcy Strategist

First Circuit Raises Troubling Questions

By David A. Grossbaum, Charles M. Tatelbaum and Matthew R. Watson
April 26, 2012

The recently published First Circuit opinion in Rosciti v. Insurance Company of the State of Pennsylvania, 659 F 3d 92 (1st Cir. 2011) presents an increasingly common interplay between two somewhat different and often conflicting areas of law ' insurance coverage and bankruptcy. The conflict arises when the insured has a large self-insured retention or deductible that it is obligated to pay before the insurance coverage is triggered, but prior to the entry of a judgment or settlement the insured files bankruptcy and cannot pay that obligation. When the insured/debtor has a covered claim against it, the plaintiff and the insured want the insurer to provide coverage, and the insurer's position is that it has no duty to do so unless and until the insured satisfies its initial payment obligations.

Facts

In Rosciti, purchasers acquired a mobile home manufactured by the plaintiff insured. The purchasers later sued the insured, seeking to recover for alleged defects. Thereafter, the insured filed for Chapter 11 bankruptcy protection, which under Section 362 of the Bankruptcy Code stayed the purchasers' lawsuit. The purchasers added the carrier as a defendant to the suit based upon a Rhode Island statute, R.I. Gen. Laws ' 27-7'2.4, which allows a plaintiff to sue the defendant's insurer directly if the insured defendant files for bankruptcy relief. Nonetheless, the plaintiff can only recover the amount of applicable insurance coverage from the carrier.

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