Camp Mystic illustrates That Insurance Can Be Property of the Estate

A motion to lift the automatic stay to allow a tort claimant to proceed against the debtor's insurance coverage is one of the simpler pleadings to file in bankruptcy. Because insurance involves a third party's obligation to defend a suit or pay claims, property of the estate is not implicated. While the debtor remains a nominal party to the suit (thus requiring the stay to be lifted), the insurance company has the real economic interest. However, this is not always the case. As shown by Fifth Circuit precedent, where there are more claims against policy proceeds than proceeds, the insurance becomes a form of special property of the estate. Law Office of Rogelio Solis, PLLC v. Curtis, 83 F.4th 409 (5th Cir. 2023). 

 

I had started to write about this case several years ago and got distracted. However, the principle has new importance in the Camp Mystic case. In re Camp Mystic, LLC, Case No. 26-90621 (Bankr. S.D. Tex.). According to published reports, Camp Mystic only carried $6 million in liability coverage. Twenty-seven people died there during the catastrophic Fourth of July flooding last year The insurance coverage does not appear likely to cover the damages. As a result, the Bankruptcy Court will be unlikely to lift the stay to allow suits to proceed against the coverage. Instead, that coverage will be one asset that can be marshaled for the benefit of creditors.