Self-Insured Retention Poses Problem for Discrimination Plaintiff


 The intersection between bankruptcy and personal injury tort claims can be a difficult one, as shown by a new opinion from Judge Marvin Isgur in Case No. 20-33900, In re Tailored Brands, Inc. (Bankr. S.D. Tex. 5/20/21). The opinion can be found here. The case involves a man who filed an employment discrimination suit against the clothier, but found his claims discharged without any ability to collect from insurance proceeds. The case is a cautionary tale for attorneys dealing with tort claims when a bankruptcy is filed, as large companies increasingly include large self-retention amounts as part of their insurance policies.

What Happened

In 2018, Michael Hoffman filed suit against The Men’s Warehouse, a Tailored Brands affiliate, and a Men’s Warehouse employee, alleging employment discrimination and harassment. When Tailored Brands (TB) filed bankruptcy, the automatic stay prevented Mr. Hoffman’s suit from going forward. By the time the suit was filed, TB had already spent $321,000 in defense costs.

Mr. Hoffman filed a motion for relief from the automatic stay. TB opposed the motion claiming that it would have to pay to defend the suit because it had a large, self-insured retention under its insurance policy and that the effective date of its plan would occur soon.

TB’s employment insurance policy provides:

The Insurer shall be liable for only that part of Loss arising from a Claim which is excess of the Retention amount only set forth in Item IV. of the Declarations or Item V., if applicable. The Retention shall be uninsured and shall be paid only by an Insured, regardless of the number of claimants, Claims made, or Insureds against whom a Claim is made.

The “Retention amount” under Tailored Brands’ policy is $500,000, “inclusive of Defense Costs.” Tailored Brands’ policy also provides that, “[i]n the event [Tailored Brands] is unable to indemnify or advance costs on behalf of an [employee] due to its financial insolvency, no Retention will apply.”

After the plan was confirmed, Mr. Hoffman filed a motion to allow a late filed claim. The parties agreed that he could have an allowed claim of $250,000.

Mr. Hoffman then filed a motion to be relieved from the discharge injunction imposed by confirmation of the Debtor’s plan. TB objected arguing that because Mr. Hoffman already had an allowed claim, he could receive a double recovery if he received payment on his allowed claim and payment pursuant to the state court suit.

The Parties’ Contentions

Hoffman relied on 11 U.S.C. Sec. 524(e) which states that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity, for such debt.” Thus, Hoffman argued that he could proceed against TB as a nominal party for the purpose of seeking coverage under TB’s insurance policy. TB argued that it would have to pay the remainder of its self-retention amount ($179,000), before insurance would kick in and that this would be a substantial burden to the reorganized debtor.

The Court’s Ruling

Judge Isgur found that the discharge precluded Mr. Hoffman from continuing his suit against TB, but that he could continue to pursue his claim against the non-debtor employee. Judge Isgur found that “(i) In proceeding against a discharged debtor, a claimant may not recover damages from the debtor directly, nor force the debtor to incur ‘substantial’ defense costs.” Opinion, p. 6. Judge Isgur found that the remaining self-retention amount of $179,000 was in fact substantial.  Judge Isgur reached this conclusion by finding that the debtor was effectively uninsured for the first $500,000 of Hoffman’s claim. Opinion, p. 9.

Another reason to allow the claim to proceed would be to liquidate it. Under 28 U.S.C. Sec. 157(b)(5), the bankruptcy court may not hear a personal injury or wrongful death tort claim. As a result, such claims must be liquidated in another court of competent jurisdiction. However, because the parties had already agreed that Mr. Hoffman had a claim for $250,000, the claim was already liquidated, and no further proceedings were necessary.

The end result was that Mr. Hoffman had a claim against the reorganized debtor, which might be worth 5 cents on the dollar and the right to pursue the employee who harassed him. The claim against the non-debtor employee might give Hoffman an indirect claim against the debtor if the employee had a right to indemnification. However, based on the court’s reasoning, the non-debtor employee’s claim for indemnification may have been discharged as well.

What It Means

For many years, it was customary for motions to lift stay for the purpose of pursuing insurance to be granted as a matter of course. This was a win-win for both parties: the debtor would not have to deal with the claim in its plan and the plaintiff would be free to proceed with his suit. However, this assumes a traditional insurance policy with a deductible. Apparently, a self-insured retention functions differently. Since I am not an expert on insurance, I turned to the internet for an explanation. Here is what I found:

Self-Insured Retention (SIR) — a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance policy will respond to a loss. Thus, under a policy written with a SIR provision, the insured (rather than the insurer) would pay defense and/or indemnity costs associated with a claim until the SIR limit was reached. After that point, the insurer would make any additional payments for defense and indemnity that were covered by the policy.

In contrast, under a policy written with a deductible provision, the insurer would pay the defense and indemnity costs associated with a claim on the insured's behalf and then seek reimbursement of the deductible payment from the insured. For example, assume that two policies are identical, except for the fact that Policy A is written with a $25,000 deductible, while Policy B contains a $25,000 SIR. Also assume that defense and indemnity payments for a given claim total $100,000. In the event of a claim under Policy A, the insurer would pay the $100,000 in defense and indemnity costs that were incurred. After the claim is concluded, the insurer will bill the insured for the $25,000 in payments made on the insured's behalf. In the event of a claim under Policy B, the insured will pay the first $25,000 of defense/indemnity costs, after which, the insurer will make the additional $75,000 in defense and indemnity payments on the insured's behalf.

Self-Insured Retention (SIR) | Insurance Glossary Definition |

The thing to remember here is that insurance essentially is a contract. I do not have a lot of say in what insurance I purchase since my mortgage, my auto loans, and the State of Texas tell me what kind of a policy I must have on my home and cars. However, a company can negotiate for how much coverage it wants, as long as there are no loan covenants or state regulatory schemes requiring greater insurance. Thus, if a traditional insurance policy with a $25,000 deductible, covering losses up to $10 million per incident, costs $5 million and a policy with a $500,000 SIR, covering losses up to $10 million per incident, costs $2 million, it would make economic sense to go with the cheaper policy, so long as the company’s anticipated out-of-pocket expenses do not exceed the difference in premiums, which is $3 million in my example. (The numbers are completely made up for purposes of creating a hypothetical. I have no idea what large companies pay for insurance).

Outside of bankruptcy, the company would pay its own litigation and settlement costs on routine cases and look to insurance to cover larger losses. However, once bankruptcy is filed, all the claims that would be the company’s obligation become unsecured claims and are less valuable.

That still leaves the question of why the clause providing that the SIR would not apply if the company could not advance funds due to financial insolvency. It appears that TB was financially insolvent as shown by the fact that equity was wiped out and unsecured creditors received a small percentage of stock in the reorganized entity. However, the opinion does not appear to address this question. Practitioners dealing with similar issues should be aggressive in challenging whether the SIR applies in the bankruptcy context.

Practical Considerations

Insurance has gotten more complicated. As a result, personal injury attorneys (and the bankruptcy lawyers who assist them) should have an insurance expert on call to analyze the policy. Would this case have turned out differently if Mr. Hoffman and any other personal injury claimants in the same boat had filed an adversary proceeding against the insurance company to determine that the SIR did not apply? I do not know. Maybe they would have spent a lot of money litigating with the insurance company and still arrived at the same result. However, intuitively it seems like they might have obtained more bargaining power.

In filing a proof of claim, personal injury claimants should consider listing the claim as unliquidated so that they can assert their right to liquidate the claim in a non-bankruptcy forum.  On the other hand, if the claim is relatively small and most likely will not be covered by insurance, it might make sense to file for a liquidated amount and accept whatever payment is provided.

Personal injury claimants or their attorneys should take the time to read the plan before it is confirmed. A disclosure statement must address what will happen to pending litigation. If it does not, the claimant could object to the disclosure statement and confirmation of the plan and try to obtain a carveout from the discharge. One rule of bankruptcy is that people who object are listened to more than people who remain silent. Some plans will contain provisions releasing officers and directors. We do not know much about the employee who allegedly harassed Mr. Hoffman. However, if the harassing party was a high-level executive, the personal injury claimant should beware of third-party release provisions.