When the Insurer Goes Bankrupt: Why Nursing Home Victims Rarely Recover a Dollar—Even After Winning in Court

Most families believe that if they win a lawsuit against a negligent nursing home, justice will follow. They assume the facility’s insurer will pay the judgment, the family will receive compensation, and the nursing home will finally be held accountable.

But for thousands of families across New York and the United States, that’s not what happens.

In case after case, families win in court only to discover that the nursing home’s insurer has declared bankruptcy, disappeared, or never had the money to pay the claim in the first place. Their victory becomes symbolic. Their judgment becomes uncollectible. And the operators responsible for the harm walk away untouched—sometimes even continuing to run the same facility under a new corporate shell.

“Winning in court shouldn’t be the end of justice—but for too many nursing home families, it is. If an insurer can go bankrupt the moment accountability arrives, it was never real insurance to begin with.”

— Brett Leitner

This installment of our investigative series, The Paper Shield, exposes how nursing home operators use bankruptcy, shell companies, and captive insurance schemes to sidestep accountability when residents are injured or killed.

The Hidden Crisis: Winning a Lawsuit Doesn’t Mean Getting Paid

If a car accident victim wins a lawsuit, the insurer pays.

If a homeowner wins a fire claim, the insurer pays.

But in nursing home litigation—especially in cases involving catastrophic neglect—families frequently discover a devastating truth:

The insurance company they were relying on has no assets.

That’s because many nursing homes use captive insurers: companies the owners control themselves. These insurers exist on paper to satisfy regulatory requirements, yet they often lack the reserves to pay even a single major negligence claim.

When claims pile up, the solution is simple—and devastating:

The insurer files for bankruptcy.

The bankruptcy court then reorganizes, liquidates, or dissolves the captive. Victims become unsecured creditors and are typically left with:

• 0% recovery, or

• token “distributions” of pennies on the dollar

Meanwhile, the nursing home continues operating under a new name or entity.

How Strategic Bankruptcy Erases Liability

In the past decade, nursing home operators along with their attorneys and financial advisers have perfected a powerful playbook:

1. Create a captive insurer.

This company “insures” the nursing home but is underfunded from the start.

2. When negligence claims build up, declare the insurer insolvent.

The captive files Chapter 11 or Chapter 7 bankruptcy.

3. Shift the nursing home’s ownership to a new LLC.

The facility keeps operating. Residents remain. Revenues continue.

4. Leave victims behind as unsecured creditors.

Under bankruptcy law, tort claimants typically fall to the bottom of the payout hierarchy.

In one recent case, a nursing home’s captive insurer entered bankruptcy with $32.8 million in personal injury claims filed against it. The proposed recovery for victims?

Zero.

The only funds available would come from whatever—if anything—was left in the captive’s policy limits. In this case, as in many, the answer was “nothing.”

The Cold Math of Nursing Home Bankruptcy Abuse

Bankruptcy is supposed to provide relief for businesses in distress. But in the nursing home industry, bankruptcy has become a liability erasure tool.

Here’s why it works so effectively:

• Captive insurers aren’t backed by guaranty funds.

Unlike commercial insurers, there is no state guaranty fund to protect victims when a captive fails.

• Bankruptcy courts prioritize institutional creditors over victims.

Banks, bondholders, and secured lenders are paid first.

Families whose loved ones were harmed fall into the “unsecured” category.

• Corporate structures confuse the financial picture.

A web of LLCs makes it easy for owners to claim poverty on one hand while maintaining profitable operations on the other.

• Operators can walk away and start again.

After shedding liabilities, the same owners often reappear under a new corporate name.

A federal bankruptcy judge, frustrated with one such case, described the process as a “rinse-and-repeat liability machine.”

Case Example: A Bankruptcy With $1 Billion in Claims

One large nursing home operator facing more than a billion dollars in external claims attempted to channel all liability into a bankrupt insurer with approximately $15 million in assets.

The fallout was predictable:

• Thousands of tort victims

• Claims worth hundreds of millions

• A near-total wipeout of recovery

• The operator continuing business as usual

The facility’s executives admitted the bankruptcy was needed to “right-size” liability exposure.

For families, the message was clear:

No matter the harm, you will not be paid.

Why Judges and Regulators Struggle to Stop It

Nursing home bankruptcy cases expose a profound structural weakness in American law:

Corporate law siloed liability.

The nursing home, its management company, its real estate company, and its insurer are all different entities—even if they have the same owners.

Insurance regulators have limited reach.

Captive insurers domiciled in other states—or offshore—often operate beyond meaningful oversight.

Bankruptcy courts accept complex restructurings.

Even when designed to shield owners from negligence liabilities, courts often approve them because the captive is technically insolvent.

Healthcare oversight ends at the facility door.

Regulators focus on staffing, not financial architecture.

The result is a system where operators know the rules, exploit them, and face little risk.

The Human Cost of Paper Insurance

Families come into the legal system seeking the truth and accountability.

Instead, they meet:

• Delays

• Shell companies

• Insolvent insurers

• Empty payouts

• Court orders that cannot be enforced

A family in Brooklyn who lost their mother to untreated sepsis discovered the nursing home’s insurer had filed bankruptcy just weeks earlier. Their lawsuit became meaningless. They received no compensation.

Another family who sued over fatal bedsores was told:

“There is a judgment, but there is no money to collect.”

These are not isolated stories. They represent a growing national trend.

If Your Family Is Facing This Situation

If your loved one suffered neglect or abuse in a nursing home—and you’ve been told the facility’s insurer is “in bankruptcy,” “out of money,” or “not paying claims”—that does not mean the case is over.

What it means is that the fight has shifted.

These cases require attorneys who understand how nursing home operators use captive insurers, shell companies, and strategic bankruptcy filings to erase liability on paper while preserving profitable operations in reality. Successful recovery often depends on acting quickly to:

• Trace money flows before assets are stripped or moved

• Identify related entities that exercised real control over care

• Challenge sham insolvency claims

• Preserve evidence before bankruptcy courts lock the doors

• Expose insurance arrangements designed to fail from the start

For families, the most dangerous moment is often after they win—when delay allows the remaining assets to disappear.

Call to Action

If you believe a nursing home’s insurance coverage is being used as a shield rather than a safeguard, get informed—and act.

• Families affected by nursing home neglect should seek counsel immediately to evaluate whether the insurer is a captive, underfunded, or part of a broader liability-avoidance scheme.

• Policymakers and regulators must confront the growing use of bankruptcy and corporate restructuring to eliminate accountability while facilities continue operating unchanged.

• Journalists and advocates should continue pressing for transparency in ownership, insurance solvency, and related-party transactions.

For New York families confronting this reality now:

Consult experienced counsel before the paper trail goes cold. These cases are winnable—but only when the corporate and insurance architecture is exposed before it collapses into bankruptcy.

The courthouse door should not be the end of justice.

But without reform and vigilance, too often, it is.