It is a common refrain when it comes to the treatment of third-party insurance policies in bankruptcy cases that the insurance policy is property of the estate, but the policy proceeds are not. In Chartis Specialty Insurance v. Tri-Valley (In re Tri-Valley), Adv. No. 12-51243 (MFW) (Bankr. D. Del. Nov. 25, 2014), U.S. Bankruptcy Judge Mary Walrath of the District of Delaware addressed competing claims of a Chapter 7 trustee and the debtor's former defense counsel to third-party insurance proceeds. Distinguishing cases citing the common refrain, the court held the former defense counsel had no direct claim to the proceeds of an insurance policy, which were property of the debtor's estate.

The debtor, Tri-Valley Corp., had purchased a pollution legal liability select policy from Chartis Specialty Insurance Co. Tri-Valley, which was engaged in oil and gas exploration and production, leased a tract of land from Pleasant Valley Ranch LLC for that purpose. Pleasant Valley subsequently discovered that the soil on the leased property had been contaminated, and sued Tri-Valley and an affiliate in California state court for damages from the alleged pollution. Tri-Valley engaged the law firm of Luna & Glushon to defend the suit.

Under the Chartis policy, the definition of “loss” included defense costs. Tri-Valley submitted numerous Luna & Glushon invoices to Chartis, which Chartis paid with certain reductions.