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LAWSUITS, BANKRUPTCY, AND INSURANCE COVERAGE

Lawsuits and insurance coverage

One of the reasons many of our clients seek bankruptcy advice is to obtain relief from lawsuits. In many instances, an individual or business has some insurance coverage that may help pay for fighting the lawsuit. For example, all of us in California must carry automobile liability insurance. Many professionals – such as real estate agents, doctors, lawyers, contractors, plumbers, or structural engineers – carry insurance for their profession. Many businesses carry insurance to protect them against accidental injuries that may occur at work.

Why would anyone consider bankruptcy if they carry insurance?

1- Coverage issues: The insurance may not be enough to cover the potential liability. Or there may be a question as to whether the insurance policy covers the lawsuit claim. For example, a contractor may be sued for negligence and breach of contract. But most insurance policies only cover negligence, not breach of contract.

2- Peace of mind: a debtor may have insurance, but prefer not to go through the lawsuit. The lawsuit may seem difficult, time-consuming, and distracting. Unfortunately, as discussed below, bankruptcy may or may not give the debtor the peace of mind she wants.

3- Preventing dangerous judgments: Certain judgments are not dischargeable in bankruptcy. For example, if a debtor is being sued for damages arising from drunk driving, fraud, or willful misconduct, the entry of a judgment may prevent the debtor from ever discharging that debt in bankruptcy. If that is the case, the debtor may want to stop the lawsuit by seeking bankruptcy relief. But the debtor should be aware of certain important issues, as discussed below.

How will bankruptcy help?

Unless the debtor has filed one or more unsuccessful bankruptcy petitions within one year, filing of a bankruptcy will automatically stop the lawsuit. Furthermore, a successful bankruptcy generally means that any liability relating to negligence, breach of contract, or most other innocent errors will be discharged.

Can the lawsuit be stopped permanently?

Maybe. The party that filed the lawsuit (or “plaintiff”) may decide to simply abandon the lawsuit. However, the plaintiff may ask the bankruptcy court for permission to proceed with the lawsuit. For example, the plaintiff may ask for permission to proceed to collect only against insurance policies.

Whether the bankruptcy court will grant plaintiff’s request depends upon multiple factors, including whether the debtor seeks chapter 7, 11, or 13 relief, the nature of the lawsuit, whether insurance coverage exists, and several other factors.

If you live in the San Francisco Bay Area, and are facing a lawsuit for a driving accident, business or professional negligence, or other issues, call our office now for a free initial consultation to see how bankruptcy relief may help you.

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