Monday, November 9th, 2026 — When a business files for bankruptcy, pending lawsuits generally come to a halt. For insurance carriers, however, the obligation to defend claims or pay covered losses may continue long after the insured receives bankruptcy protection.
Under Section 362(a) of the U.S. Bankruptcy Code, an automatic stay generally suspends litigation against a debtor. While this provides temporary relief, insurers can face significant challenges when claims eventually resume.
Businesses undergoing liquidation may terminate employees, destroy records or transfer management responsibilities to trustees. Claims adjusters and defense attorneys can find themselves defending allegations without access to witnesses or documents needed to investigate a loss.
Bankruptcy also changes how claimants pursue compensation. Courts may permit litigation against a bankrupt business solely to establish liability and recover available insurance proceeds. Deductibles and self-insured retentions can further complicate settlements, particularly when insurers cannot recover deductible payments from financially distressed policyholders.
In larger bankruptcies, litigation trusts may evaluate claims and distribute funds through procedures that offer insurers limited opportunities to investigate allegations or challenge valuations.
The U.S. Supreme Court's 2024 decision in Truck Insurance Exchange v. Kaiser Gypsum affirmed that insurers with financial responsibility for bankruptcy claims may object to Chapter 11 reorganization plans.
For claims departments, early coordination with coverage counsel, preservation of evidence and close monitoring of bankruptcy proceedings can help protect insurers from unexpected exposure and costly coverage disputes.
