Insurance Coverage in Bankruptcy

According to American Bankruptcy Institute, Quarterly Business Filings by Year (1994-2009), businesses seeking bankruptcy protection during the first three quarters of 2009 exceeded the annual filings in every year since 1997. In 2008, business filings rose to 43,000 across the United States; in 2009 the filings exceeded 60,000, nearly 38 percent increase over 2008.

With the rise of bankruptcy filings, companies should review insurance coverage. One concern is to ensure the independent contractors companies engage have insurance to cover liabilities in the event of accidents or professional errors. More and more businesses in New York are not hiring people as direct employees, but engaging workers as independent contractors to save on benefits costs. The average person who has turned from unemployment to consultant may not have insurance coverage.

Without insurance coverage, a business may not easily collect a judgment after a lawsuit if a service provider files for bankruptcy.

If the service provider does have insurance, the business should put into the consulting agreement provisions on which party’s insurance comes first when there is third party liability. Contributing insurance comes into the scene when the party engaging the service provider is not the tortfeasor, but also has insurance to cover the third party claim. Contributing insurance requires two insurance companies that insure the same risk to participate when a loss occurs. For instance, a distributor injures an end customer of a manufacturer. Both the manufacturer and the distributor have separate insurance which the end customer can go after.

In a New York business’ bankruptcy, another insurance issue is Side A in a Directors & Officers insurance contract. Side A indemnifies officers and directors when a business cannot indemnify, such as when business is insolvent. When an officer or director works in the interests of a company and gets personally sued, most corporate laws require the company to indemnify the officer or director.

In bankruptcy, the insurance coverage may be an asset. When getting insurance, a business should see if the coverage is non-rescindable. Non-rescindable insurance makes it hard for the insurance carrier to deny payment, or break an insurance contract. Claims under liability policies, like Errors & Omissions and Directors & Officers insurance, may be pursued by the bankruptcy trustee or bankruptcy debtor against third parties or by creditors against the debtor and insiders. To save one director or officer from the others, review whether insurance coverage has full severability. Full severability means intentional bad acts of one insured officer or director cannot cause an innocent officer or director to lose insurance coverage benefits.

Understanding what insurance coverage is available to liquidate a bankruptcy claim means the difference between a full recovery, or no recovery for creditors. Recover from debtors in bankruptcy by engaging an experienced New York bankruptcy attorney familiar with insurance coverage.