Release of Insured in Bankruptcy Bars Coverage for Later Judgment
In a declaratory judgment action, the U.S. District Court for the Middle District of Georgia held that an insurer had no obligation to indemnify an insured for a post-bankruptcy state court judgment where the claimants had previously executed a general release extinguishing the insured’s tort liability because the policy covered only amounts the insured was “legally obligated to pay.” Ironshore Specialty Ins. Co. v. Logan, 2026 WL 401195 (M.D. Ga. Feb. 12, 2026).
The insured, a long-term care facility, faced a personal injury claim in state court that was stayed during its Chapter 11 bankruptcy proceedings. Under a confirmed liquidation plan, the personal injury claimants accepted payment from a “Tort Claimants Trust” in exchange for a general release of the insured, though the release purported to preserve claims against the insured’s insurers. The claimants subsequently proceeded to trial in state court against the insured facility, obtaining a $2.1 million judgment, which they sought to recover from the facility’s insurer.
The insurer filed a declaratory judgment action seeking a declaration that it had no obligation to pay the state court judgment because the claimants fully released and discharged the insured from any liability, and the policy covered only losses that the insured is “legally obligated to pay.” The claimants argued that, although the release discharged the insured’s tort liability, it preserved the claimant’s ability to recover the state court judgment against the insurer.
The court held that the judgment was not a covered Loss that the Insured was “legally obligated to pay” because, upon execution of the release, the tort liability of the insured was extinguished. According to the court, although the release carved out the debtor’s insurers, the plan’s non-impairment provision specified that the plan did not “alter the rights and obligations” under applicable insurance policies. Accordingly, the court reasoned, it would be inconsistent with the policy’s terms (and, hence, the plan’s non-impairment provision) to hold that the insured was entitled to coverage after its legal obligations to the claimants were extinguished.
The Court also rejected both of the waiver arguments raised by claimants: (1) that the insurer waived its coverage defense by failing to object to the bankruptcy plan; and (2) by virtue of the insured’s waiver of its right to assert the release as a defense in the state court action against it, the insurer also effectively waived its right to assert that defense in the declaratory judgment action. On the second point, the court noted the lack of authority limiting an insurer’s claims in a declaratory judgment action to defenses raised by its insured in an underlying action.
