## Facts

- A physician filed Chapter 11 and continued operating as debtor-in-possession.
- The debtor held a claims-made professional liability (medical malpractice) policy with an option to purchase extended reporting (“tail”) coverage after termination.
- During Chapter 11, the debtor unilaterally cancelled the policy without notice, a hearing, or court authorization, despite pending malpractice exposure.
- The debtor later became incapacitated; the case converted to Chapter 7, and a trustee was appointed.
- The trustee sought to reinstate coverage and/or exercise the tail option for the estate’s benefit; the insurer refused, asserting the option period had already expired under the policy and applicable law.
- The insurer filed an adversary proceeding for declaratory relief; the trustee cross-moved for summary judgment seeking the right to purchase tail coverage.

## Issues

1. Whether the debtor-in-possession’s unilateral cancellation of the malpractice policy was a non-ordinary-course use of estate property requiring notice and court authorization under 11 U.S.C. § 363(b)(1), and if so, whether the cancellation was ineffective.
2. If the policy remained in force at conversion, whether it was an executory contract deemed rejected under 11 U.S.C. § 365(d) when not assumed within 60 days, and what effect that rejection had on the estate’s ability to exercise the tail-coverage option.

## Decision

- The court denied the insurer’s summary judgment motion and granted the trustee’s cross-motion.
- The court held the malpractice policy was property of the estate and the debtor-in-possession’s cancellation was outside the ordinary course under § 363(b)(1).
- Because the debtor-in-possession cancelled the policy without notice and court approval, the cancellation was ineffective, and the policy remained in effect at the time of conversion to Chapter 7.
- The policy was treated as an executory contract; because the trustee did not assume it within 60 days after conversion, it was deemed rejected under § 365(d).
- The deemed rejection ended ongoing coverage and triggered the policy’s contractual 60-day window to elect tail coverage, which the trustee could exercise for the estate.

## Legal Principles

- A debtor’s liability insurance policy is property of the bankruptcy estate; actions affecting coverage can materially affect creditor recoveries.
- Cancellation of essential liability insurance by a debtor-in-possession may constitute a non-ordinary-course disposition or use of estate property requiring notice and court authorization under 11 U.S.C. § 363(b)(1); absent compliance, cancellation may be ineffective against the estate.
- An insurance policy in force at conversion to Chapter 7 may be treated as an executory contract subject to 11 U.S.C. § 365(d); failure to assume within the statutory period results in deemed rejection.
- Rejection under § 365 operates as a breach rather than rescission and does not necessarily eliminate contractual options; rejection may trigger post-termination option rights, including an extended reporting (tail) election period exercisable by the trustee.

## Conclusion

The bankruptcy court held that the debtor-in-possession’s unauthorized cancellation of a claims-made malpractice policy was ineffective under § 363(b)(1), leaving the policy in force at conversion; after the policy was deemed rejected under § 365(d), the trustee could exercise the resulting contractual tail-coverage option for the estate.


Med. Malpractice Ins. Ass'n v. Hirsch (In re Lavigne), 183 B.R. 65 (Bankr. S.D.N.Y. 1995)