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Policyholders (and the Courts) Continue to Ignore Section 1123 When Analyzing Insured v. Insured Exclusions

Policyholder Informer

Last month the United States Court of Appeals for the Sixth Circuit issued its anticipated decision in Indian Harbor Insurance v. Zucker, affirming a 2016 decision from a federal district court in Michigan that an Insured v. Insured (“IVI”) exclusion bars coverage for a claim brought by a post-bankruptcy litigation trustee for the benefit of the insured debtors’ creditors. The district court’s Indian Harbor decision was driven largely by the mistaken conclusion that a post-bankruptcy trustee is an ordinary assignee of the debtor company—an insured—and therefore purportedly stands in the shoes of the insured debtor for purposes of the IVI exclusion. As we described at the time, that decision, however, ignores the fundamentally different nature of transfers pursuant to Bankruptcy Code Section 1123 when compared to ordinary assignments pursuant to state contract law and the fact that a post-bankruptcy trustee assumes special powers as an estate representative. Unfortunately, after appeal, this issue still remains unresolved.

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