A New Hampshire insurance company, Home Insurance Company (“Home”), was placed in liquidation in 2003. When its reinsurer Century Indemnity Company (“CIC”) tried to claim an $8 million setoff from amounts owed to Home, the liquidator balked and demanded the $8 million.

The Court of Appeals for the Sixth Circuit held that no exception exists to Tennessee’s general prohibition on direct actions against an insurer, even in cases where the insured has declared bankruptcy triggering an automatic stay before a judgment in the underlying action.  Mauriello v. Great American E&S Insurance Co., 2014 WL 321921 (6th Cir. Jan. 30, 2014).  In so holding, the Sixth Circuit reasoned that an adequate remedy remains notwithstanding the automatic stay for a claimant to obtain a judgment against a bankrupt insured.

As Delaware has often been selected as a preferred place of incorporation by U.S. businesses, and consequently the venue for dissolution and bankruptcies, the recent decision by the Delaware Supreme Court, In the Matter of Krafft-Murphy Co., Inc., No. 85, 2013 (Del. Nov. 26, 2013), holding that insurance contracts remained property of the dissolved corporation may have significant implications for “orphan shares” at co-disposal, environmental remediation sites, as well as for non-environmental liabilities.

Reliance Insurance Company was placed in liquidation on Oct. 3, 2001 by Order of the Commonwealth Court of Pennsylvania. The Reliance liquidation was, and still is, one of the largest insurance company liquidations in U.S. history. Reliance has been in the process of marshaling assets and paying its liabilities for the past 12 years through a court-appointed Liquidator, namely the Insurance Commissioner of Pennsylvania.

The Delaware Supreme Court recently offered new insight into a dissolved corporation’s exposure to liability for third party claims. InAnderson v. Krafft-Murphy Company, Inc.,1 the Court held as a matter of first impression in Delaware that the statutory scheme governing the dissolution and winding up of a Delaware corporation does not contain a general statute of limitations that would shield a dissolved corporation from liability.

I. Factual Background and Procedural History2

The Supreme Court of the State of Delaware recently reversed a Court of Chancery decision declining to appoint a receiver for a dissolved Delaware corporation, Krafft-Murphy Company, Inc. (Krafft). The Chancery Court determined that a receiver was inappropriate because Krafft had no property for the receiver to distribute to potential tort victims. The Supreme Court disagreed, holding that an unexhausted insurance policy is property of the dissolved company even after its three-year wind-up period under Delaware law.

In Anderson v Krafft-Murphy Co. Inc., 2013 Del. LEXIS 597 (Del. Nov. 26, 2013), the Delaware Supreme Court held that Sections 278 and 279 of the Delaware General Corporation Law, 8 Del. C.

On September 24, 2013, in Farmers Mut. Fire Ins. Co. v. NJPLIGA,      N.J. , 2013 WL5311272 (2013), the New Jersey Supreme Court ruled that policy limits of solvent insurers must be exhausted before the New Jersey Property‐ Liability Insurance Guaranty Association ("NJPLIGA") could be responsible  for long‐tail claims under policies issued by insolvent insurers. NJPLIGA is a statutory entity created to provide New Jersey policyholders with protection when insurers become insolvent.

A liability insurance company has the right to take over the defense of a policyholder and to control all settlement discussions.  What happens if the carrier fails to pursue settlement negotiations with sufficient zeal, knowing full well that it was leaving the insured exposed to liability above policy limits?  You may be at risk in California if your insurer does this to you.