Missouri Federal Court Denies Motion to Stay Coverage Action Pending Resolution of State Insolvency Proceedings Against Insured

In a win for Wiley Rein’s client, a Missouri federal court has denied a motion to stay a coverage action against an insolvent insurer pending the resolution of insolvency proceedings in state court, holding that the insolvent insurer had failed to demonstrate that the case presented one of the exceptional cases where abstention is appropriate.  Allied World Surplus Lines Ins. Co. v. Galen Ins. Co., 2017 WL 3503473 (E.D. Mo. Aug. 16, 2017).

The insurer sought rescission of two consecutive professional liability policies issued to related insurance companies, as well as declaratory relief as to coverage for a claim against the insurance companies.  After the rescission complaint was filed, a Missouri state court entered an order of liquidation in a separate proceeding against one of the defendants.  The defendants then moved to stay the coverage action, pending resolution of the state court insolvency proceeding.

In denying the motion to stay, the federal court considered established abstention doctrines, including Burford and Colorado River, and concluded that the defendants had failed to demonstrate that “any one of the extraordinary and narrow exception[s] to the duty of the District Court to adjudicate a controversy before it applies.”  Id. at *6 (internal quotations omitted).  In particular, the federal court found that the coverage action and the state liquidation proceeding were not parallel proceedings and that the contractual issues raised in the coverage action were not pivotal to the liquidation proceeding and, in fact, would not be resolved in the state liquidation proceeding.  Further, the court concluded that proceeding with the coverage action would not disrupt or interfere with the state liquidation proceeding.  In that regard, the court disagreed with defendants’ assertion that the policies were assets of the insolvent insurer’s estate, noting contrary authority holding that, while a debtor’s insurance policy may be property of the debtor’s estate, the proceeds of such policy are not.

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