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Bankrupt Catholic Dioceses’ Victim Payout Deals Spurn Insurers

Nov. 17, 2022, 10:00 AM

Bankrupt Catholic dioceses are buckling to child sex abuse victims’ payout demands by offering them valuable rights to directly sue church insurers, riling up questions about the legality of such deals.

Catholic dioceses in the last 20 years have struck nearly two dozen victim settlements with their insurers’ cooperation in trying to exit bankruptcy proceedings. But growing disputes over the value and validity of many legacy sex abuse claims have created a rift among the parties.

The rift has forced some dioceses to negotiate with either victims or insurers instead of both, together. As a result, the dioceses’ insurers could be forced to shell out far more to sex abuse victims than they believe should be on the hook for.

In two large cases this year, Catholic bishops have abandoned settlements with insurance companies when abuse survivors rejected the financial terms. In stunning reversals, the dioceses in Rochester, New York and Camden, New Jersey cut new agreements with victim groups, offering cash and valuable insurance rights, instead of a lump sum payment that includes contributions from church coffers and insurers.

The dioceses “realized they’re better off making peace with the survivors than fighting them,” said abuse victims’ attorney Jeff Anderson of Jeff Anderson & Associates PA.

Insurers are waging fierce legal battles over what they say is a violation of their contract rights. But victims’ attorneys believe the settlement technique is supported by the law and could show other dioceses how to expedite bankruptcies when insurance companies refuse to budge.

“I wouldn’t be surprised if some of the other cases that have been pending or are stalled go down the same road,” said Jeffrey Prol of Lowenstein Sandler LLP, a lawyer for the Camden diocese claimants’ committee. “The diocese finally comes around because they want to get out of bankruptcy and get on with their lives.”

Diocese Pressure

Catholic churches and institutions like the Boy Scouts of America have come under increasing pressure to strike settlements with abuse victims to wrap up prolonged and costly bankruptcy cases.

Some states have passed laws allowing victims of child sex abuse from decades past to file previously time-barred lawsuits. A surge of abuse lawsuits has overwhelmed Catholic dioceses in those states, and many of them have sought bankruptcy protection.

The Camden diocese, which serves roughly 486,000 Catholics in the state, filed for Chapter 11 in October 2020. It faces more than 300 claims of sex abuse.

The Camden diocese’s first reorganization plan proposed paying survivors $90 million—including $30 million from insurers —and faced strong opposition from victims. In April, the diocese then announced a new deal with the victims committee whereby the diocese and parishes would pony up $87.5 million and allow the victims to sue insurers directly. The revised plan is currently being litigated in a bankruptcy court trial.

The Rochester diocese had a deal in which its insurers had agreed to contribute nearly $108 million to a victim payout trust. But the diocese similarly shifted strategy after the victims won approval to resume litigation against its parishes, which are not in bankruptcy. Under a new agreement, the diocese and its parishes will contribute $55 million and rights to sue insurers into a settlement fund.

The Rochester diocese, which serves about 300,000 Catholics and includes more than 80 parishes, filed for bankruptcy in September 2019.

The court’s decision to let victims pursue affiliated church entities squeezed the diocese, which is trying to secure liability releases for its affiliated entities in its bankruptcy case. Under existing law in New York and New Jersey’s bankruptcy courts, obtaining third-party liability releases is difficult without substantial support from creditors.

Bankruptcy-related costs to the dioceses and its non-bankrupt parishes have risen, increasing pressure to bring an end to prolonged cases. The Rochester diocese has spent more than $12 million in bankruptcy, while the Camden diocese says its costs are close to $20 million.

Victims Emboldened

In the past, survivors may have been more inclined to settle privately with Catholic entities to avoid exposure. But recognition of such claims has shifted, Prol said. The gap between insurers’ offers and victims’ demands also has widened.

The Rochester diocese’s previous deal with its insurers wasn’t “anywhere close” to acceptable, said Ilan Scharf of Pachulski Stang Ziehl & Jones LLP, an attorney representing claimants in the Rochester case.

“Frankly, the Diocese of Rochester has insurance that goes back to the 1950s. It’s good insurance,” Scharf said.

Insurance companies that are being pulled into the diocese bankruptcy proceedings have been hoping for a discount through bankruptcy “that is well below what they can pay,” said Alexandria MacMaster, an attorney with Laffey Bucci & Kent LLP who represents a victim and committee member in the Camden case.

But there has been a shift in the power dynamic, MacMaster said.

The dynamic puts insurers at risk while providing a “win-win” for the dioceses that get to end their bankruptcy and abuse survivors who retain their claims, said abuse victim attorney Adam D. Horowitz of Horowitz Law.

“It really puts pressure on the insurance companies now to come to the negotiating table or else they are on an island as the only remaining target for the abuse survivors,” Horowitz said. “It’s a signal to insurance companies that they better negotiate fairly or they will be left to fend for themselves.”

Insurers Fight Back

Insurers have pushed back against the Camden diocese’s pivot. Their objections mirror those made by insurers against a similar arrangement in the Boy Scouts of America’s recent bankruptcy case, which was also spurred by widespread sex abuse allegations.

Century Indemnity Co., a subsidiary of Chubb Ltd. that provided coverage to the Boy Scouts and the Camden diocese, said in an August filing that many of the 324 claims in the Camden case are “facially suspect” or “patently lack merit.”

Century and other insurers also raised complaints over a “staggering explosion” of claims in the Boy Scouts case. “Invalid and fraudulent claims” contributed to a 55-fold increase in abuse allegations after the case began in 2020, the insurers said.

Since the Camden diocese’s settlement with the victims, Century said the diocese has “walked away from its responsibility to defend against meritless claims.”

Century eventually agreed to pay $800 million into the Boy Scouts victim fund. Hartford Accident & Indemnity Co. agreed to pay $787 million.

“The claimants are asking the bankruptcy court to rewrite the insurance contracts,” Tancred Schiavoni of O’Melveny & Myers LLP, an attorney for Century, told Bloomberg Law.

Several Boy Scouts’ insurers are appealing the nonprofit organization’s $2.46 billion bankruptcy plan.

How the Camden confirmation trial and the Boy Scouts appeal shake out could give future guidance to victims, debtors, and insurers over whether such bypass-insurers strategies will hold up under scrutiny.

“I think this is a model the abuse survivors will be looking to replicate if the insurers do not make reasonable efforts to resolve the cases,” Horowitz said.

To contact the reporter on this story: James Nani in New York at jnani@bloombergindustry.com

To contact the editors responsible for this story: Maria Chutchian at mchutchian@bloombergindustry.com; Roger Yu at ryu@bloomberglaw.com