The plan will pay claims of people whose lungs look like this.

Today Blawgletter learned something we didn’t know before.  That happens quite often.  Sometimes we even learn things we did know but just can’t remember.  Some might in fact say that the frequency of the latter exceeds the oftenness of the former.

But back to our discovery.  It relates to insurance.  Insurance of a peculiar kind.  Indemnity insurance.

The revelation arrived courtesy of the Second Circuit, which upheld a cumbersome plan for paying claims for asbestosis and other ailments against Prudential Lines, a shipping company that dove into the bankruptcy tank in 1986.  Desirous of paying (and discharging) the claims, the trustee of Prudential called on the shipper’s insurance carrier to fork over the necessary funds.  But the insurer, which we’ll call American Steamship for short, balked.  It insisted that the trustee pay the claims himself first.

But why?  Because an indemnity policy has what those in the biz refer to as a "pay-first" provision.  That meant the trustee couldn’t call on American Steamship to satisfy a claim directly but instead had to pay and then request American Steamship for indemnity — what most people would think of as reimbursement.

We won’t go into the torturous details of the trustee’s efforts to short-circuit the process.  Suffice to say that the Second Circuit booted the first plan as a "sham" because the trustee wouldn’t actually part with money until after the insurer paid the trustee’s claim for indemnity. 

The new plan met the same fate in the bankruptcy and district courts, but the Second Circuit okayed it.  Yes, the trustee would pay a claim, get indemnity, and use the proceeds to pay the next claim — and so on until all claimants received their due — but that hardly amounted to a sham.  The trustee’s actual parting with the funds distinguished it from the earlier scheme.  That it would happen according to a plan didn’t matter.  And so the court told the bankruptcy court to implement the seriatim pay-indemnify-pay plan on remand.  Asbestosis Claimants v. Am. Steamship Owners Mut. Prot. & Indemn. Ass’n, Inc. (In re Prudential Lines, Inc.), No. 05-5925-bk (June 19, 2008).

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