On the heels of last year’s Hurricane Irma, everyone is mindful about the upcoming 2018 hurricane season. Last year, Hurricane Irma hit Florida and left about 65% of the state without power. In the months following the storm, businesses in the affected areas often struggled to recover, and it was a more difficult process for some more than for others. Those companies that have relied too much on leverage and stretched their borrowing to the limit may find it difficult to get back on their feet.
In fact, unforeseen catastrophes of this magnitude can cause ripple effects throughout the economy, all of which can add up to lower revenue and reduced cash flow for affected companies. Any scenario like that could spell disaster for a firm that is over-leveraged and doesn’t have the flexibility to manage and deal with dramatic or unexpected change. If a company’s balance sheet is adversely affected, due to too excessive leverage, it could be positioned for potential distress. If the distressed situation lasts too long because the company can’t attract additional financing, or the insurance recoveries from the disaster take longer than expected, then the company may wind up in bankruptcy trying to negotiate with creditors.
With this is mind, debtors and trustees should review all insurance policies to assure that proper insurance is in place. A review of the applicable coverage exclusions, deductibles and post loss obligations should also be completed. Failure to comply with the policy’s post loss obligations, such as providing prompt notice of a loss, can prejudice the right to recover damages. These are prudent steps to take as trustees and debtors in possession (DIP) are statutorily “accountable for all property received” by 11 U.S.C. § 704, which sets out the rights, powers and duties of a Chapter 7 and Chapter 11 trustee as well as a DIP. § 704(a)(2); § 1106(a)(1); § 1107(a).
Additionally, questions often arise regarding whether a trustee may treat insurance proceeds in a bank account as nonexempt funds or whether those funds should be treated as part of the homestead exemption. Under Florida law, the homestead exemption is liberally construed in favor of the exemption. As a result, insurance proceeds derived from damage to an exempt homestead most likely retain and enjoy homestead character, and are therefore exempt in bankruptcy cases. In re Crooks, 351 B.R. 783 (Bankr. M.D. Fla. 2006); In re Gilley, 236 B.R. 441, 445 (Bankr. M.D. Fla. 1999). This view appears to be shared with other jurisdictions that regularly face hurricanes, namely Texas. In In re Okwonna–Felix, No. 10–31663–H4–13, 2011 WL 3421561 at *7 (Bankr. S.D. Tex. 2011), a Texas Bankruptcy Court held that the debtor could exempt insurance proceeds from his Hurricane Ike claim under the federal “wild card” exemption provided by 11 U.S.C. § 522(d)(5), even though the debtor did not disclose the lawsuit or seek to exempt any recovery therefrom in his initial schedules. In the case of In re Hill, No. 08–36267, 2011 WL 6936357 at *10 (Bankr. S.D. Tex. 2011), the same court held that a debtor had the right to exempt settlement proceeds from his Hurricane Ike claim under Texas Homestead Law even though the debtor did not seek court authority to file the suit, did not request permission to hire a law firm to pursue the claim, did not list the lawsuit in the schedules, and did not seek court authority to enter into the settlement agreement.