The nearly $3 million settlement Freedom Industries has reached with its insurance company has hit a potential snag, as former officers of the bankrupt company try to force that insurer, AIG Specialty, to pay their personal legal costs in any civil litigation filed over Freedom’s January chemical leak.
Former Freedom officers Dennis Farrell, Charles Herzing and William Tis filed formal objections to the insurance settlement that lawyers for area residents and businesses are hoping will fund a separate proposed settlement that could help perform additional water testing, health impacts studies or other projects to benefit those harmed by the leak.
The three men argue that Freedom’s settlement with AIG would wrongly allow the insurance company to avoid paying the costs of a reasonable legal defense, while Freedom and AIG say the leak wasn’t covered by the section of Freedom’s policy that provides company officers with insurer-funded attorneys.
At the request of Freedom lawyer Mark Freedlander, U.S. Bankruptcy Judge Ronald Pearson gave the various sides 10 days to work out an arrangement, but said if that doesn’t happen he wanted more legal briefs on the matter to help him make a decision.
“We are going to have to get much deeper into insurance law” if the issue can’t be resolved by the parties, Pearson said near the end of a hearing that lasted more than three hours on Tuesday.
Pearson is overseeing the liquidation of Freedom following the Jan. 9 leak of MCHM, which contaminated the drinking water supply that serves 300,000 people in Charleston and surrounding counties. The leak has prompted multiple lawsuits against Freedom, some of the company’s former officers, and against West Virginia American Water Co.
Late last week, lawyers for Kanawha Valley residents and businesses revealed in court papers that they had reached a deal with Freedom to use the company’s remaining $2.9 million for as-yet-undetermined projects to benefit water contamination victims, rather than distributing checks for as little as $10 to each of those affected by the incident.
That settlement, though, is dependent on Pearson approving an earlier deal, made public in late June, in which AIG agreed to pay Freedom the $2.9 million, avoiding a potential legal fight between Freedom and the insurer over coverage for the leak.
Pearson said that the biggest reason to approve the Freedom-AIG settlement is to help move the bankruptcy case forward, following “enormous chaos” at the site and growing cleanup expenses.
“The wind-down has been very expensive,” the judge said. “There’s not going to be a huge pot in the case left. The real urgency in this case is to bring it to closure.”
During Tuesday’s hearing, Freedom’s chief restructuring officer, Mark Welch, said that a key part of the settlement with AIG will continue to provide Freedom with insurance as the firm completes the ongoing demolition of chemical storage tanks at its Elk River facility and, eventually, remediation of the site.
Welch said tank demolition contractors from Independence Excavating had hoped to complete their work by Friday, but he believes it will continue into next week. Demolition of Tank 396 — the one that leaked on Jan. 9 — could take place later this week, Welch said.
“I’m not rushing it,” Welch said. “We’re going to do this cautiously. We’re trying not to disturb any of the soils.”
Pearson scheduled Tuesday’s hearing to consider a motion from Freedom lawyers to approve the settlement with AIG, and to give anyone who objected to that deal an opportunity to make their case against it.
Initially, the judge said that any personal legal costs for the three former Freedom executives were just like any other financial claim against Freedom: The executives could file a claim and if it was legitimate the court would distribute them some share of whatever money Freedom ends up having left.
But Mike Carey, a lawyer for Farrell, said the leak should have been covered by a different part of Freedom’s insurance policy that would have required AIG to provide the executives with defense lawyers in civil cases like one filed in U.S. District Court naming Farrell personally as partly responsible for the leak. That duty to defend, Carey said, is not subject to the company’s $3 million insurance policy limit.
“There’s no limit — just the reasonableness of the defense,” Carey said.
Lawyers for Freedom and for AIG disagreed. They said that the portion of the insurance policy Carey was citing did not cover the leak, and was instead intended to cover legal defense for any lawsuits brought over injuries that occur after any of Freedom’s chemical products were shipped to customers.
Reach Ken Ward Jr. at firstname.lastname@example.org, 304-348-1702 or follow @kenwardjr on Twitter.