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Law Pro
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Category: Business Law
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Experience:  20 years experience in business law - sole proprietor, partnership, and corporations
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I was a principal in a small florida construction corp.that

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I was a principal in a small florida construction corp.that was dissolved a year ago. The corporation has no assests and the distribution at dissolution was about $3,000 to 2 principals. The corporation is named as a defendant in a class action suit filed on behalf of "chinese drywall"homeowners. The insurance company for liability coverage has not confirmed their decision on defending the claim. The deadline for response is May 5 or a default judgement will be entered, as we have no money to defend the claim. What are the best option ? Can the principals become liable? Should we ask for a time extension in hope that the insurance will defend the case? or just allow for the judgement?
Submitted: 4 years ago.
Category: Business Law
Expert:  Law Pro replied 4 years ago.
Yes, very possibly the principals can become liable.

Has the insurance company filed an action in the matter - a suit to determine whether or not there is insurance coverage for the matter?
Customer: replied 4 years ago.
Please elaborate as to how the principals can become liable. The insurance company responded to us that we had coverage during the construction period-but they needed to detemine if coverage was applicable. They have not responded to the suit nor will they commit to defend or deny claim. They have not communicated with the plaintiff's attorney. They are aware of the deadline for response but will only say that they will review the claim as soon as they can, Verbally they have "suggested" that we "may want to consider hiring an attorney" which we cannot afford.
Expert:  Law Pro replied 4 years ago.
They can become secondarily liable if the company is determined to be liable - the court can allow the piercing of the corporate veil because the company was undercapitalized if uninsured.

Usually, if there is a question about the insurance company's policy - they file a declaratory judgment action to get the court's decision as to whether the policy covered the insureds or not. If the insurance company doesn't defend the action and it's determined that the policy was effective and covered the type of matter involved - you as the insured have a "bad faith" action against them.


Insurance bad faith is a legal term of art that describes a tort claim that an insured person may have against an insurance company for its bad acts. Insurance companies owe a duty of good faith and fair dealing to the persons they insure. This duty is often referred to as the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract. If an insurance company violates that covenant, the insured person (or "policyholder") may sue the company on a tort claim in addition to a standard breach of contract claim. The contract-tort distinction is significant because as a matter of public policy, punitive or exemplary damages are unavailable for contract claims, but are available for tort claims. The end result is that a plaintiff in an insurance bad faith case may be able to recover an amount larger than the original face value of the policy, if the insurance company's conduct was particularly egregious.


The insurance company takes a big risk in not defending you without first obtaining a declaratory judgment in the matter. What usually happens if there is any question about coverage the insurance company defends you in the action but simultaneously files a "declaratory judgment" action to get out of the action as between you and whomever is suing you.

So, I would at the very least file a responsive pleading to the complaint immediately so that they don't get a default judgment against you. Also, I would immediately begin pursuing a "bad faith" claim against your insurance company.
Customer: replied 4 years ago.

Thank you so much for your prompt response. In order to buy some time, I am thinking of calling the plaintiff's attorney and asking for a 60 day extension in hope of getting an answer from the insurance company. Is it OK to do this or will there be any negative effect with the insurance company. The best case scenario is for them to defend the claim, if they deny it at the end of that period then we have no choice other than to accept the default judgement. Can we file a bad faith claim if we get a default judgement or do we need to file it before the judgement. The whole legal situation is a bit overwhelming and something I would rather avoid, if possible

 

Thanks again

Expert:  Law Pro replied 4 years ago.
I'm sure the matter is overwhelming for you. I would immediately contact opposing counsel to request an extension of time to respond to the complaint. However, be prepared that the attorney won't give an extension of time or that he will only grant an extension for 10 or 20 days - certainly not 60 days.

So be prepared to file some type of response to the complaint - something is better than nothing certainly.

No, that doesn't or won't have a negative impact with the insurance company. With them, I would immediately send them a certified letter informing them that they are acting in "bad faith" and have a duty to defend the action. That usually gets them moving immediately.

The best situation is that the insurance company defend you in the action. Then if your found liable - that the insurance company also pay pursuant to the insurance policy that was in effect.

Yes, potentially you can file a bad faith claim if they get a default judgment against you - but that would only be if the insurance company had a duty to defend you in the action pursuant to the insurance policy AND didn't.

An insurance company has many duties to its policyholders. The kinds of applicable duties vary depending upon whether the claim is considered to be "first party" or "third party." A common first party context is when an insurance company writes insurance on property that becomes damaged, such as a house or an automobile. In that case, the company is required to investigate the damage, determine whether the damage is covered, and pay the proper value for the damaged property. Bad faith in first party contexts often involves the insurance carrier's improper investigation and valuation of the damaged property (or its refusal to even acknowledge the claim at all). Bad faith can also arise in the context of first party coverage for personal injury such as health insurance or life insurance, but those cases tend to be rare. Most of them are preempted by ERISA.[3]

Third party situations break down into at least two distinct duties, both of which must be fulfilled in good faith. First, the insurance carrier usually has a duty to defend a claim (or lawsuit) even if some or most of the lawsuit is not covered by the insurance policy. Unless the policy is expressly structured so that defense costs "eat away" at the policy limits, the default rule is that the insurer must cover all defense costs regardless of the actual limit of coverage.

Second, the insurer has a duty of indemnification, which is the duty to pay a judgment against the policyholder, up to the limit of coverage, but only if the judgment is for a covered act or omission. As a result, most insurance companies exercise a great deal of control over litigation.

Bad faith can occur in either situation—by improperly refusing to defend a lawsuit or by improperly refusing to pay a judgment or settlement of a covered lawsuit.

In some jurisdictions, like California, third party coverage also contains a third duty, the duty to settle a reasonably clear claim against the policyholder within policy limits, in order to avoid the risk that the policyholder may be hit with a judgment in excess of the value of the policy (which a plaintiff might then attempt to satisfy by writ of execution on the policyholder's assets). If the insurer breaches in bad faith its duties to defend, indemnify, and settle, it may be liable for the entire amount of any judgment obtained by a plaintiff against the policyholder, even if that amount is in excess of policy limits. This was the holding of the landmark Comunale case.

Bad faith is a fluid concept and is defined primarily by court decisions in case law. Examples of bad faith include undue delay in handling claims, inadequate investigation, refusal to defend a lawsuit, threats against an insured, refusing to make a reasonable settlement offer, or making unreasonable interpretations of an insurance policy.

In some cases, the tort or the governing state statute allows punitive damages against insurance companies as a mechanism to prevent future behavior.

In California, the plaintiff in a bad faith action may be able to recover some of its attorneys' fees separately and in addition to the judgment for damages against a defendant insurer, but only up to the extent that those fees were incurred in recovering tort damages (for breach of the implied covenant) as opposed to contractual damages (for breach of the terms of the insurance policy). The allocation of attorneys' fees between those two categories is usually a question of fact (meaning it usually goes to the jury).

Law Pro, Attorney
Category: Business Law
Satisfied Customers: 23464
Experience: 20 years experience in business law - sole proprietor, partnership, and corporations
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