§ 46.10 — Insurance Policies and Proceeds
Revised: May 21, 2004
Insurance policies are a special form of the contract rights discussed immediately above. But there is an interesting twist on property of the estate and insurance policies in a Chapter 13 case because of the effect of confirmation on the rights of creditors with interests in the debtor’s insurance policies.
Debtors come into Chapter 13 cases with many different kinds of insurance, including life insurance, health insurance, car insurance (collision and liability), credit life insurance, credit disability insurance, mortgage insurance and fire insurance. It is generally recognized that whatever the kind of insurance, the contract becomes property of the Chapter 13 estate.1 The exception would be when the debtor is the beneficiary of an insurance contract that is owned by someone else—for example, a life insurance contract or annuity contract when the debtor is only the beneficiary. In this circumstance, the debtor’s rights as beneficiary, but not the contract itself, become property of the Chapter 13 estate.2
There is controversy whether and to what extent the proceeds of insurance become property of the estate when a covered event triggers payments. Though there is general agreement that insurance policies become property of the Chapter 13 estate, by contract the proceeds from an insurance policy are often payable to someone other than the debtor—to the loss payee under a car insurance policy, to the beneficiary of a life insurance policy or to a hospital or doctor that provides services covered by a health insurance policy. Property rights in the proceeds are further complicated in a Chapter 13 case because the rights of those third-party payees and beneficiaries are often affected by confirmation.
For example, the typical contract to finance a car requires the borrower to have collision insurance naming the car lender as a loss payee. The language of car insurance policies varies. Under some policies, the car lender is the beneficiary and is paid the proceeds upon an insurable event. Under other contracts, the car lender has a security interest in the proceeds of insurance. Most policies limit the lender’s interest in proceeds by reference to its interest in the car under the loan documents. At confirmation, the whole relationship may change. If the car lender’s interest in the debtor’s car is modified at confirmation under § 1322(b)(2),3 the car lender’s interest in insurance proceeds changes accordingly. As explained by the Eleventh Circuit in Ford Motor Credit Co. v. Stevens (In re Stevens):4
[T]hat the insurance policy is property of the bankruptcy estate, however, does not necessarily mean that the proceeds from that policy are also property of the estate. In some circumstances, a creditor or beneficiary other than the debtor may be entitled to proceeds distributed pursuant to an insurance policy that is property of a bankruptcy estate. . . . Where the debtor has an interest in the insurance proceeds, however, the proceeds are considered property of the bankruptcy estate and distribution of the proceeds is governed according to the terms of the bankruptcy plan.5
Based on policy language, state insurance law and the provisions of confirmed plans, a strong majority of courts have concluded that the proceeds of insurance are property of the Chapter 13 estate when an insurable event occurs after the petition.6 Several of these courts have recognized that insurance contracts are estate property that produce “proceeds”—a separate category of property that also becomes property of a bankruptcy estate under § 541(a)(6).7 It has been acknowledged that the Chapter 13 debtor is no better off than any other beneficiary of an insurance contract with respect to the responsibilities of the insured under the contract: when the debtor made misrepresentations during the insurance company’s investigation of the destruction of a car, the insurer was relieved of liability notwithstanding that the insurance proceeds were property of the Chapter 13 estate.8
The outcome of most of the reported cases is that insurance proceeds come into the Chapter 13 estate upon an insurable event, subject to whatever interest a lender has by contract. The Chapter 13 debtor can use insurance proceeds to purchase substitute collateral so long as the debtor respects any interest of the lender.9 The policy language is important—to the extent the contract describes the lender’s interest in insurance proceeds as a security interest, courts seem more inclined to find that proceeds are property of the Chapter 13 estate and can be used by the debtor; if the policy gives a third party greater rights than an ordinary security interest, the courts are more likely to limit or exclude the proceeds altogether from property of the Chapter 13 estate.
For example, in First Fidelity Bank v. McAteer (In re McAteer),10 the debtor had a credit life insurance policy. The policy named a bank as primary beneficiary, with the debtor as a secondary beneficiary. The debtor died after the petition. The Third Circuit first found that the credit life insurance policy itself became property of the Chapter 13 estate. However, the court concluded that the proceeds of the policy were not property of the Chapter 13 estate because the bank’s right as primary beneficiary trumped the estate’s interest. The court stated, “Under the life insurance policy, . . . the insurance company was required to pay the amount remaining under the schedule of indebtedness to [the bank] . . . . The confirmation . . . did not work to erase or alter [the bank’s] right, as a third party beneficiary, to collect from the insurance company.”11 Another court reached a similar conclusion in the context of a fire insurance policy that required payment of proceeds to a mortgage holder.12
Life insurance proceeds produce complicated property of the estate questions when the insured dies after confirmation of a Chapter 13 plan. As mentioned above,13 under § 541(a)(5) property of the estate includes any interest the debtor acquires within 180 days of the petition “as a beneficiary of a life insurance policy or of a death benefit plan.”14 Section 1306(a)(1) then expands the Chapter 13 estate to include “all property of the kind specified in [§ 541] that the debtor acquires . . . before the case is closed, dismissed or converted.”15 Section 541(a)(5) thus drags into the Chapter 13 estate life insurance proceeds to which the debtor becomes entitled within 180 days of the petition.16 Arguably, § 1306(a)(1) extends this dragging effect to capture life insurance proceeds to which the debtor becomes entitled at any time during the Chapter 13 case.
Discussed in much detail elsewhere,17 at confirmation § 1327(b) “vests all of the property of the estate in the debtor” except as provided otherwise in the plan or order of confirmation. The courts disagree about what property remains in the Chapter 13 estate and what postpetition acquisitions become property of the Chapter 13 estate when a plan has been confirmed and § 1327(b) vested the estate in the debtor.18 Experienced Chapter 13 practitioners, including many standing Chapter 13 trustees, routinely include in plans or confirmation orders provisions limiting or overcoming the vesting of estate property in the debtor at confirmation under § 1327(b).19 Life insurance proceeds get tangled up in these difficult § 1327(b) issues when death occurs and proceeds become payable to the debtor after confirmation.
Absent a provision overcoming the vesting effect in § 1327(b), life insurance proceeds to which the debtor becomes entitled after confirmation vest in the debtor. However, this would not be the outcome in a jurisdiction that interprets § 1327(b) to vest in the debtor only property that was in the estate at confirmation. By this view, property acquired after confirmation refills the estate, and postconfirmation life insurance proceeds would become property of the (new) Chapter 13 estate. When the plan or confirmation order overcomes the vesting effect in § 1327(b), a strong case can be made that postconfirmation life insurance proceeds come into the (preserved) Chapter 13 estate and must be accounted for by exemption or otherwise.20 In one reported case, the bankruptcy court invalidated a plan provision that ambiguously overcame the vesting effect in § 1327(b) and then concluded that life insurance proceeds received after confirmation when the debtor’s son was killed in a car accident were not property of the Chapter 13 estate.21
Insurance proceeds that become property of the Chapter 13 estate and that are subject to a security interest are cash collateral as defined in § 363(a). Under § 363(c)(2), cash collateral cannot be used unless an entity with a security interest consents or the court authorizes use after notice and a hearing. A Chapter 13 debtor who desires to use insurance proceeds that are subject to a security interest must have either consent of the lender or court permission. The cost will almost assuredly be that the debtor provide adequate protection to any creditor with an interest in the proceeds.22
1 See Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027 (11th Cir. 1997) (Car insurance policy is property of the bankruptcy estate.); First Fidelity Bank v. McAteer (In re McAteer), 985 F.2d 114 (3d Cir. 1993) (Credit life insurance policy itself is property of the Chapter 13 estate.); In re Hoffmeister, 191 B.R. 875, 878 (D. Kan. 1996) (“[T]he Hoffmeisters’ insurance policies are property of the estate.”); Aetna Cas. & Sur. Co. v. Gamel, 45 B.R. 345 (N.D.N.Y. 1984) (Debtor’s prepetition interest in a health insurance policy is property of the Chapter 13 estate.); In re Gibson, 218 B.R. 900, 903 (Bankr. E.D. Ark. 1997) (“A debtor’s pre-petition insurance policy becomes property of the estate.”).
2 See, e.g., In re Constantino, 274 B.R. 580 (Bankr. N.D.N.Y. 2002) (Annuity contract that funds settlement of prebankruptcy wrongful death action is not property of Chapter 13 estate, but debtor’s right to receive periodic payments is.).
3 See § 104.1 [ The Power to Modify ] § 74.11 The Power to Modify.
4 130 F.3d 1027 (11th Cir. 1997).
5 130 F.3d at 1029.
6 Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027, 1029–30 (11th Cir. 1997) (Distinguishing First Fidelity Bank v. McAteer (In re McAteer), 985 F.2d 114 (3d Cir. 1993), and citing Bradt v. Woodlawn Auto Workers, F.C.U. (In re Bradt), 757 F.2d 512 (2d Cir. 1995), with approval, insurance proceeds are property of Chapter 13 estate at destruction of car after confirmation, and secured claim holder recovers only the balance of its allowed secured claim as defined by the plan. “In the context of the insurance policy on the truck, . . . the proceeds act as a substitute for the insured collateral. . . . Ford’s interest in the insurance proceeds flowing from the destruction of the secured collateral is only as great as its interest in the collateral itself. . . . That interest was defined at the time of the confirmation of the Chapter 13 plan as the remaining principal owed on the truck, with interest at a rate of 12%. . . . Ford is bound by the terms of its allowed claim and is therefore limited to recovering from the insurance proceeds the amount of its debt as determined under the Chapter 13 plan.”); Bradt v. Woodlawn Auto Workers, F.C.U. (In re Bradt), 757 F.2d 512, 515 (2d Cir. 1985) (Insurance proceeds for repairs to a car are property of the Chapter 13 estate because the conversion in form of property does not change its character as property of the estate. “Proceeds” in § 541(a)(6) is much broader than the same term under the Uniform Commercial Code.); In re Hoffmeister, 191 B.R. 875, 878 (D. Kan. 1996) (Insurance proceeds from postconfirmation hail damage to debtor’s car are property of the estate distributed first to pay the balance of the car lender’s allowed secured claim and then to unsecured claim holders under the plan. “The order that confirms the Hoffmeisters’ plan specifically provides that estate property does not revest in the debtors until an event subsequent to confirmation . . . . [T]he Hoffmeisters’ 1988 Beretta became property of their chapter 13 estate and it will not revest in them until the bankruptcy court approves the trustee’s final report and account. . . . [T]he Hoffmeisters’ insurance policies are property of the estate, and because the debtors have an apparent shared interest in the proceeds payable on the automobile insurance, the proceeds are also part of the estate. . . . [I]f the debtor’s property was part of the Chapter 13 estate, then the casualty or hazard insurance proceeds paid for damage to the same property are proceeds from that property and, thus, are also part of the estate.”); Olivieri v. Generali Ins. Co. (In re Olivieri), 238 B.R. 1, 3 (Bankr. D.R.I. 1999) (Debtor has standing to join lawsuit against insurance company to determine whether fire loss on building sold during the Chapter 13 case is covered by insurance. The property involved was property of the bankruptcy estate and thus “the proceeds of any recovery under the policy are property of the estate.”); In re Estrada, 224 B.R. 132 (Bankr. S.D. Cal. 1998) (At conversion from Chapter 7 to Chapter 13, surviving spouse’s estate includes life insurance proceeds payable on death of spouse within 180 days of the filing of the Chapter 7 petition. Separate estates of joint spouses were not consolidated under § 302(b) during the Chapter 7 case, and the surviving spouse’s Chapter 7 case is appropriately converted to Chapter 13 to manage her separate debts and the substantial life insurance proceeds that became assets of her separate estate upon the death of her spouse during the Chapter 7 case. Chapter 7 trustee ordered to transfer insurance proceeds to the debtor in her Chapter 13 case.); In re Gibson, 218 B.R. 900, 903–04 (Bankr. E.D. Ark. 1997) (At postconfirmation destruction of debtor’s truck, insurance proceeds are property of the estate subject to the lender’s interest as loss payee. “A debtor’s pre-petition insurance policy becomes property of the estate . . . . An insured loss generates proceeds that become property of the estate. . . . [P]roceeds that are estate property are subject to the rights of creditors who are listed as loss payees . . . . Pursuant to the policy at issue, the proceeds are to be paid ‘as interest may appear.’ . . . [U]pon post-petition destruction of collateral, an undersecured creditor’s interest in casualty insurance proceeds is limited by the confirmed Chapter 13 plan to the unpaid balance of its allowed secured claim.”); In re Coker, 216 B.R. 843, 854 (Bankr. N.D. Ala. 1997) (Distinguishing In re Suter, 181 B.R. 116 (Bankr. N.D. Ala. 1994), proceeds from insurance policy at postconfirmation destruction of debtor’s jeep were property of the bankruptcy estate and debtor can use proceeds by providing adequate protection in the form of payments provided in the confirmed plan and a substitute lien on the car purchased with the insurance proceeds. Car lender was not named as loss payee in the original contract of insurance but was granted a security interest in insurance policies and proceeds as additional collateral. Plan contained a provision overcoming the vesting effect of confirmation. “[T]he court finds that the Cokers had an ownership interest and SouthTrust had a security interest in the original wrecked Jeep. Ms. Coker’s ownership interest became property of her bankruptcy estate . . . . The Coker Jeep ownership, subject to SouthTrust’s secured claim, remained property of the estate after . . . confirmation by terms of the confirmation order. When the Jeep was wrecked, the insurance proceeds from the casualty also become property of the bankruptcy estate, though still subject to the bank’s security interest. . . . Since the Coker proceeds are property of the estate and cash collateral, the court may authorize the Cokers to use these funds in their financial reorganization . . . if the Cokers have proposed adequate protection of SouthTrust’s security interest in the meaning of 11 U.S.C. § 361.”); In re Guentert, 206 B.R. 958 (Bankr. W.D. Mo. 1997) (Proceeds of life insurance on debtor who died after confirmation are property of the Chapter 13 estate under Chicago v. Fisher (In re Fisher), 203 B.R. 958 (N.D. Ill. 1997), and must be included in the best-interests-of-creditors test at modification after confirmation.); Ford Motor Credit Co. v. Feher (In re Feher), 202 B.R. 966, 970–71 (Bankr. S.D. Ill. 1996) (At postconfirmation destruction of debtors’ car, insurance proceeds are property of the bankruptcy estate because debtor has a shared interest under contract with car lender. Car insurance provided that upon a collision loss “you and such creditor, as its interest may appear,” would be paid insurance proceeds. Confirmed plan provided that Ford had a secured claim of $100. At postconfirmation destruction of car, insurance carrier issued a check to the Chapter 13 trustee for $4,424.63. “Unlike the credit life benefits paid in [First Fidelity Bank v. McAteer (In re McAteer), 985 F.2d 114 (3d Cir. 1993)], the collision benefits here flow directly from the destruction of bankruptcy estate property and, arguably, are a replacement of that property. . . . [T]he policy at issue provides that collision loss benefits are payable jointly to Mr. Feher and to Ford, ‘as its interest may appear.’ Under the express terms of the contract of insurance, Ford is neither the primary nor the sole beneficiary of the proceeds. . . . Instead, the policy provisions give a shared interest in any proceeds to Mr. Feher and to Ford. . . . In view of the fact that Mr. Feher has a shared interest in any proceeds paid under the policy, the proceeds constitute property of Mr. Feher’s bankruptcy estate. . . . Ford’s interest in the car amounts to $100.00 and, under 11 U.S.C. §§ 506(a) and (d), Ford’s lien is void to the extent it purports to secure an amount in excess of this value.”); Carey v. GMAC (In re Carey), 202 B.R. 796 (Bankr. M.D. Ga. 1996) (Because retail installment sale contract granted GMAC “a security interest in . . . any proceeds of insurance policies” insurance proceeds were property of the Chapter 13 estate that could be used by the debtor to purchase a substitute for car totaled after the petition but before confirmation. Court distinguishes In re Suter, 181 B.R. 116 (Bankr. N.D. Ala. 1994), on the ground that in Suter the car lender “was the loss payee of the insurance policy,” not just the holder of a security interest in insurance proceeds.); Ledford v. Fidelity Fin. Servs. (In re Hill), 174 B.R. 949, 952–53 (Bankr. S.D. Ohio 1994) (Proceeds of casualty insurance on car are property of the Chapter 13 estate and payable to the trustee to the extent proceeds exceed the allowed amount of loss payee’s allowed secured claim. “[T]he issue of whether proceeds are property of a debtor’s estate is not simple, but is dependent upon the nature of the policy and the specific provisions governing the parties’ interests in the payment of policy proceeds. . . . In this proceeding, the insurance policy provides that any loss as a result of damage to the car is ‘payable as interest may appear to named insured [the debtor] and above loss payee [Fidelity].’ . . . Fidelity is neither the primary nor the sole beneficiary of the proceeds. The provisions of the insurance contract give an interest in any proceeds to both the debtor and to Fidelity. Although these respective interests would ordinarily be governed by applicable nonbankruptcy law, as a result of the debtor filing bankruptcy these respective interests are governed by the order confirming the debtor’s chapter 13 plan.” By agreed order, Fidelity had an allowed claim in the amount of $19,729.07 to be paid 59% or $11,640.15. At the time the car was destroyed, Fidelity had been paid $7,070.81. The insurance company tendered $18,350. Fidelity’s “interest” was limited to the balance due of $4,569.34, and the trustee was entitled to turnover of the rest.); In re Arkell, 165 B.R. 432, 435 (Bankr. M.D. Tenn. 1994) (Casualty insurance proceeds from the destruction of the debtor’s car after confirmation are property of the Chapter 13 estate, and the rights of a creditor with a security interest in the car are limited by the confirmation order. The car was valued at confirmation at $4,500. The first car was destroyed and a second car was substituted after confirmation, but the order of substitution stated that Nissan Motor Acceptance Corporation would be paid in accordance with the terms and conditions of the original confirmed plan. Upon destruction of the second car, “NMAC’s interest in the [substitute car] was defined by the confirmation order. After confirmation, this debtor had no obligation to insure NMAC with respect to its unsecured claim. In [First Fidelity Bank v. McAteer (In re McAteer), 985 F.2d 114 (3d Cir. 1993)], the bank’s contract right against the life insurance company was not limited by the value of its security interest in the truck. Here, after confirmation, NMAC’s only right to payment with respect to the car was the present value of $4,500. If NMAC believed it had an interest in casualty insurance proceeds in excess of $4,500, it had to assert that right before confirmation.”); Woods v. John Fox Oldsmobile, Inc. (In re Woods), 97 B.R. 850 (Bankr. W.D. Va. 1989) (Insurance proceeds from destruction of debtor’s car are property of the Chapter 13 estate. Creditor with security interest in insurance proceeds is only entitled to adequate protection and is not entitled to possession of the insurance proceeds. Debtor can use insurance proceeds to purchase a substitute vehicle, and secured claim holder will be given a lien on the substitute collateral.).
7 See, e.g., Bradt v. Woodlawn Auto Workers, F.C.U. (In re Bradt), 757 F.2d 512 (2d Cir. 1985); In re Hoffmeister, 191 B.R. 875 (D. Kan. 1996).
8 Byrd v. Atlanta Cas. Co. (In re Byrd), 294 B.R. 808 (Bankr. M.D. Ga. 2003).
9 See § 238.1 [ Loss, Destruction or Surrender of Property after Confirmation ] § 122.3 Loss, Destruction or Surrender of Property after Confirmation.
10 985 F.2d 114 (3d Cir. 1993).
11 985 F.2d at 119. Accord In re Motto, 263 B.R. 187, 194 (Bankr. N.D.N.Y. 2001) (“[U]nder both the applicable New York State regulatory scheme and the terms of the credit disability insurance policy itself, the Debtors have no beneficial interest in the proceeds now being paid to BSB as creditor beneficiary under the policy. As such, those proceeds do not constitute property of the Debtors’ estate subject to distribution through the proposed plan.”).
12 In re Ivory, 32 B.R. 788 (Bankr. D. Or. 1983) (Fire insurance proceeds are not property of estate because debtor holds only bare legal title without any equitable interest in light of loss payable provision of policy favoring holder of mortgage.). Accord In re Denario, 267 B.R. 496 (Bankr. N.D.N.Y. 2001) (Insurance proceeds from prepetition fire could not be used by Chapter 13 debtor to cure arrearages through plan because New York law required that proceeds first be applied to reduce the principal balance of the mortgage.); In re Suter, 181 B.R. 116, 119–20 (Bankr. N.D. Ala. 1994) (Casualty insurance proceeds payable only to the creditor are not property of the estate except to the extent the proceeds exceed the loss payee’s insurable interest as defined by the confirmed plan. Confirmed plan treated AmSouth as secured by a truck in the amount of $6,425 and unsecured in the amount of $1,321. At destruction of the truck, AmSouth’s secured claim had been reduced to $2,395.71 by payments through the plan. State Farm paid AmSouth $3,245.95 as loss payee. The debtor moved to substitute a replacement car for the funds paid by State Farm to AmSouth. “Because AmSouth was the loss payee of the insurance policy, the proceeds of the policy are not property of the bankruptcy estate and are payable to AmSouth, at least to the extent of AmSouth’s interest in the property insured. . . . The provisions of a confirmed Chapter 13 plan bind all creditors. 11 U.S.C. § 1327. Under the provisions of the plan confirmed in this case, AmSouth was allowed a secured claim in the amount of $6,425.00 . . . . AmSouth’s lien on the insured vehicle was at that point, nullified, by operation of Section 506(d), to the extent that it might have otherwise secured an amount which exceeded $6,425.00. AmSouth’s secured claim has subsequently been reduced to the amount of $2,395.71 by payments made by the Debtor pursuant to the plan. Consequently, AmSouth’s lien on the insured vehicle has been extinguished to the extent that it secures any amount that exceeds $2,395.71. . . . A contract for property insurance is unenforceable except for the benefit of persons who have an ‘insurable interest’ . . . . Since AmSouth’s lien presently secures the sum of $2,395.71, AmSouth’s insurable interest in the Debtor’s truck cannot exceed that amount. The amount paid to AmSouth by State Farm which exceeds $2,395.71, therefore, must be paid by AmSouth to the Debtor, as owner of the insurance policy.”).
13 See § 45.1 [ What Is Property of the Chapter 13 Estate? ] § 46.1 What Is Property of the Chapter 13 Estate?.
14 11 U.S.C. § 541(a)(5)(C).
15 11 U.S.C. § 1306(a)(1).
16 See, e.g., In re Grogg, 295 B.R. 297 (Bankr. C.D. Ill. 2003) (Bankruptcy court applied § 541(a)(5) to conclude that the proceeds of life insurance on the debtor’s daughter became property of the Chapter 13 estate when the daughter died within 180 days of the Chapter 13 petition.).
17 See §§ 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate, 238.1 [ Loss, Destruction or Surrender of Property after Confirmation ] § 122.3 Loss, Destruction or Surrender of Property after Confirmation and 238.2 [ Effects of Confirmation on Postpetition Claims ] § 122.4 Effects of Confirmation on Postpetition Claims.
18 See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.
19 See § 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11 Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b).
20 See §§ 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate, 254.1 [ Application of Tests for Confirmation ] § 126.2 Application of Tests for Confirmation and 266.1 [ To Increase Payments to Creditors ] § 127.9 To Increase Payments to Creditors.
21 In re Richardson, 283 B.R. 783 (Bankr. D. Kan. 2002).
22 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation and 238.1 [ Loss, Destruction or Surrender of Property after Confirmation ] § 122.3 Loss, Destruction or Surrender of Property after Confirmation.