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A Delaware chancery court ruled that a settlement agreement afforded insurers a broad right to audit payments made by a bankruptcy trust, rejecting the argument that the audit right was limited to the purpose of verifying that Trust payments were actually made.  AIU Ins. Co. v. Philips Elecs. N. Am. Corp., 2015 WL 3526976 (Del. Ch. June 4, 2015).

T H Agriculture & Nutrition (“THAN”), a company facing substantial asbestos liability, commenced Chapter 11 bankruptcy proceedings.  While the bankruptcy proceedings were pending, THAN reached a settlement with its insurers.  The Settlement Agreement gave the insurers the right to audit payments and distributions made by a post-bankruptcy Trust at their own expense, no more than once per year.  The audit provision further stated that the insurers were to keep all information confidential and prohibited use of “any information for anything other than to assess whether the Trust in fact made payments to the claimants.”

Several years later, the insurers sought to audit Trust payments in accordance with the Settlement Agreement.  THAN refused to provide the requested information, arguing that the insurers’ audit rights were limited solely to verifying that payments were actually made.  In support of its position, THAN cited to a Cooperation Agreement between THAN and the Trust, which contained a more restrictive audit provision.  The insurers countered that they were not party to the Cooperation Agreement, and that the Settlement Agreement contained no “limitation on what may constitute a proper purpose for inspection.”  The insurers filed suit, alleging breach of contract and tortious interference on the basis that the Cooperation Agreement impermissibly impaired their audit rights under the Settlement Agreement.

The court held that the insurers’ audit rights were governed solely by the Settlement Agreement and that the insurers’ audit rights were not limited to the verification of payments.  The court explained that the Settlement Agreement’s clause prohibiting the insurers from “utiliz[ing] any information for anything other than to assess whether the Trust in fact made payments to the claimants” restricted how the insurers could use the information obtained through an audit, but did not limit the insurers’ broad right to conduct audits.   Therefore, the court issued a declaratory judgment in the insurers’ favor.