Channeling Injunction Does Not Bar Claims Of Former W.R. Grace Employees Against Insurer.

A Delaware bankruptcy court held that the asbestos personal injury channeling injunction entered in W.R. Grace & Company’s (“W.R. Grace”) Chapter 11 proceedings does not bar two former employees from asserting claims in state court against Maryland Casualty Company (“MCC”), W.R. Grace’s workers’ compensation insurer from 1962 to 1973.

W.R. Grace operated a vermiculite mine in Libby, Montana, from 1963 to 1990.  The vermiculite was allegedly contaminated with asbestos.  In the 1970s, W.R. Grace began facing asbestos-related lawsuits.  In 2001, W.R. Grace filed a voluntary Chapter 11 petition.  The plan of reorganization created an asbestos trust whose purpose was to pay future asbestos-related claims.  The plan also included a channeling injunction which generally limited future claimants to recovery from the trust, and enjoined future claimants from pursuing recovery from W.R. Grace or certain other protected parties, including some of W.R. Grace’s insurers.

Two former employees brought an adversary action in the bankruptcy, seeking permission to sue MCC, W.R. Grace’s workers’ compensation carrier from 1962 to 1973, in Montana state court.  The former employees’ proposed complaint asserted claims against MCC for negligence and bad faith.  Specifically, the former employees alleged that, as part of its industrial hygiene services, MCC negligently failed to “design a program for control and prevention of asbestos dust and disease for the benefit of workers … and in failing to disclose … the nature and degree of the asbestos hazard….”  In failing to disclose these and other risks, MCC acted in bad faith, according to the former employees.

The former employees argued that the channeling injunction did not apply to their claims, because the workers’ compensation policies were not listed in an exhibit identifying policies protected by the injunction.  The bankruptcy court agreed:  “[T]he channeling injunction does not protect a Settled Asbestos Insurance Company from claims arising out of insurance policies that are not listed on Exhibit 5 to the Plan.  The Plaintiffs contend that, as employees, the Negligence Claim and the Bad Faith Claim must arise under MCC’s workers’ compensation policies.  To the extent the Plaintiffs can demonstrate that the Plaintiffs’ claims arise out of or are based on MCC’s workers’ compensation policies, the claims are not barred by the Asbestos PI Channeling Injunction and may be filed in state court.”  In re W.R. Grace & Co., No. 01-01139 (U.S. Bank. Del. Oct. 17, 2016).