How Does Bankruptcy Affect Business Insurance Policies?

 Bankruptcy can have significant implications for a business’s insurance policies, including the cost, coverage, and ability to secure future insurance. Whether your business is filing for Chapter 7, Chapter 11, or another form of bankruptcy, it’s important to understand how the bankruptcy process can impact your insurance policies and what steps you may need to take to protect your business’s coverage.

Here’s a breakdown of how bankruptcy can affect business insurance policies:

1. Impact on Existing Insurance Policies

When a business files for bankruptcy, the impact on existing insurance policies will largely depend on the type of bankruptcy filed and the financial situation of the company.

Chapter 7 Bankruptcy (Liquidation)

• Canceling Policies: In Chapter 7 bankruptcy, where the business is being liquidated, the bankruptcy trustee will typically liquidate the company’s assets, including any insurance policies. The company may be required to cancel policies if the business is no longer operational. If the business ceases operations completely, it may no longer have a legitimate need for insurance, and the policies could be canceled.
• Claims Handling: If there are outstanding claims against the business at the time of bankruptcy, the bankruptcy process may involve the liquidation of assets to pay off creditors. In this case, any insurance payouts for claims may be used to settle outstanding debts or cover legal liabilities.

Chapter 11 Bankruptcy (Reorganization)

• Continued Coverage: In a Chapter 11 filing, where the business intends to restructure its debts and continue operations, the business may choose to maintain its insurance policies. The goal is to continue functioning as a going concern while the debts are reorganized. As a result, the business will likely need to keep certain insurance policies active, especially those required by law or to protect the business’s assets and liabilities during the reorganization process.
• Premium Adjustments: Bankruptcy may cause the business’s premiums to increase. Insurers may view the business as a higher risk, which can lead to higher costs for continued coverage. Some insurance companies may require a larger deductible or impose other conditions to continue coverage after bankruptcy.

2. Changes in Coverage and Premiums

Bankruptcy may affect both the scope of coverage and the cost of insurance premiums. Here’s how:

Higher Premiums

• Insurance companies view businesses in bankruptcy as higher risk, which can lead to increased premiums. Since businesses in bankruptcy may have a more volatile financial situation, insurers may adjust pricing to account for this increased risk. The longer the bankruptcy proceedings, the more likely it is that your premiums will rise, especially as insurers may want to protect themselves from potential claims resulting from your financial instability.

Reduced Coverage

• In some cases, your insurance coverage may be limited or reduced as part of the bankruptcy process. Insurers may reduce coverage limits or impose additional exclusions on certain policies to protect themselves from higher claims exposure. For example, general liability or workers' compensation coverage may be impacted, depending on the financial health of the business and its ability to continue operating during bankruptcy proceedings.

Increased Risk of Non-Renewal

• Once a business files for bankruptcy, insurers may be less willing to renew policies, especially if the business is not in a position to meet its financial obligations. In some cases, businesses may struggle to find affordable coverage, particularly for specific types of insurance like workers’ compensation or professional liability.

3. Business Insurance Claims and Bankruptcy

When a business files for bankruptcy, it’s essential to understand how insurance claims may be affected:

Filing Insurance Claims During Bankruptcy

• If your business has insurance policies in place and needs to file a claim during bankruptcy proceedings, the outcome will depend on the type of insurance and the details of the claim. For example, if your business experiences a fire or theft during the bankruptcy process, your property insurance may cover the losses, but any proceeds from insurance claims may be used to pay off creditors, particularly if the business is in Chapter 7 liquidation.

• Priority of Claims: Bankruptcy proceedings prioritize claims based on the type of creditor (secured creditors, unsecured creditors, etc.). If the business receives an insurance payout during the bankruptcy, these funds may be distributed to creditors in accordance with bankruptcy law. In certain cases, the court may decide how insurance proceeds are handled, particularly if the insurance claim is tied to business assets or property being liquidated.

Workers’ Compensation Claims

• If an employee files a workers' compensation claim while the business is in bankruptcy, the claim will likely still be covered under the business’s workers' compensation insurance, assuming the business has the required policy in place. However, the business may face difficulties in paying premiums during the bankruptcy process. Unpaid premiums could lead to a lapse in coverage, or the policy may be canceled if the company cannot meet its obligations.

4. The Need for Specialized Insurance in Bankruptcy

As businesses navigate bankruptcy, specialized insurance may be necessary to cover risks associated with the bankruptcy process itself:

Directors and Officers (D&O) Insurance

• D&O Insurance: For companies undergoing Chapter 11 bankruptcy, Directors and Officers (D&O) insurance is particularly important. D&O insurance helps protect the company’s executives from personal liability related to decisions made during the bankruptcy process. However, D&O insurers may consider the bankruptcy as a factor that increases their risk, potentially raising premiums or restricting coverage.

Professional Liability Insurance

• If the business is involved in professional services, such as consulting or legal work, professional liability insurance is essential. It covers risks related to errors and omissions, which can become especially important if the business is restructuring or continuing to operate during Chapter 11 bankruptcy.

Key Person Insurance

• If your business relies heavily on certain individuals, such as key executives or founders, key person insurance can help safeguard against potential losses associated with their departure or death. This type of insurance may be useful if the business is undergoing major restructuring or operational changes during bankruptcy proceedings.

5. Can You Get New Insurance After Bankruptcy?

Once the bankruptcy process is complete, especially in Chapter 7 liquidation, businesses may face difficulties obtaining new insurance policies. However, businesses that successfully reorganize through Chapter 11 may be able to secure new coverage, albeit at potentially higher premiums due to the financial history associated with the bankruptcy filing.

The ability to get new insurance after bankruptcy depends on:

• The type of bankruptcy filed (Chapter 7 or Chapter 11)
• The business's recovery plan and ability to return to financial stability
• The business’s past history of claims and risks involved
• The insurer’s policies and willingness to work with a business that has a bankruptcy history

6. Steps to Take to Protect Insurance Coverage During Bankruptcy

If your business is filing for bankruptcy, here are some steps you can take to protect your insurance policies:

• Communicate with Your Insurer: Inform your insurance company about the bankruptcy filing and discuss your options for maintaining coverage during the process. Insurers may be willing to work with businesses undergoing Chapter 11 reorganization to keep coverage intact.
• Review Your Policies: Examine your existing policies to ensure they are aligned with your needs during bankruptcy. If you are restructuring your debts, you may need specific types of coverage to protect key assets or operations.
• Explore Other Insurers: If your current insurer is unwilling to renew your policy or increase your premiums to unaffordable levels, shop around for other insurance providers who may be willing to offer coverage based on your new business circumstances.

Conclusion

Bankruptcy can have a significant impact on a business’s insurance policies. The nature of the bankruptcy, whether it is a Chapter 7 liquidation or a Chapter 11 reorganization, will influence how the business manages its insurance coverage. Businesses may face higher premiums, reduced coverage, and challenges in renewing or obtaining new policies during and after bankruptcy. It’s crucial for business owners to understand these implications and work with both bankruptcy attorneys and insurance brokers to ensure that they maintain adequate coverage and protect the business’s assets throughout the bankruptcy process.