Author: VU Faculty
You have an insured who has declared bankruptcy. How does this affect any premiums the insured owes? How does it affect any return premiums due the insured? How does bankruptcy affect cancellation due to nonpayment of premium? Can the insurer cancel on the basis that the bankruptcy itself represents an increase in risk? While we aren't attorneys and can't give you legal opinions, we can provide some guidance on dealing with these issues.
Below is a series of Q&A related to insured bankruptcies.
"When a client goes bankrupt, how are claims handled? I know there are pre-petition and post petition claims, but I'm not sure what the difference is."
We're aware of some issues with bankruptcy and cancellation, along with premium due with cancellation, but we're not sure of the effect of bankruptcy on claims handling unless you're referring to some sort of pecking order of creditors for those claim payments.
Most of our faculty members felt this was more of a legal question than an insurance question, so they didn't feel comfortable offering an opinion and felt you'd need direction from someone knowledgeable about bankruptcy law. One of them did provide the following:
When a client goes bankrupt, first party claims are the property of the bankrupt estate and, therefore, go to the trustee and he or she distributes the proceeds to the creditors as is appropriate. In third party cases the bankruptcy stops the proceeding until a motion is made to the court with the plaintiff agreeing to take only from the insurance policy up to the limits and then the suit goes forward.
"One of our members insures a nonprofit organization that is going into bankruptcy. The company wants to cancel mid-term probably using the argument that a 'factor material to insurability has changed.' While the state statute may allow that (if that factor is interpreted as including a bankruptcy), we are wondering if bankruptcy laws may prevent this action by the company by forcing the insurer to stay on the risk and protect the assets at least for a certain period of time. In this specific circumstance, the premium has been paid. Your insight would be appreciated."
This came up several years ago and our response is shown below. I'd run this by an attorney, though, since this is a legal question, not a pure insurance question. I can't guarantee that the opinion below is legally accurate or if there may have been a change in the law. If the premium is fully paid, it makes it even less likely that the insurer can cancel. Some policies specifically address the payment of claims in the event of bankruptcy:
Bankruptcy Of An "Insured"
Bankruptcy or insolvency of an "insured" will not relieve us of our obligations under this policy.
When dealing with bankrupt insureds, the agents and underwriters must be aware that the filing of the petition does provide for an automatic stay of any cancellation opportunities an agent and/or company may have. If a cancellation notice has been issued, but not effected, it must be rescinded. If it has been effected, however, the filing will not enforce a reinstatement.
Dealing with payment of premiums can be a sticky matter. Premiums for installments due post-petition are considered an administrative priority expense. The agent/insurer should submit those invoices to the Trustee. If the trustee does not make payment, the billing must be sent to the Bankruptcy Judge for handling. If the trustee and the judge do not make timely payment, the policy is subject to cancellation.
Premiums that are delinquent and pre-petition are not subject to priority. These premiums are handled in the normal course of debt analysis and prioritization as a non-priority unsecured debt. If they are agency bill, the agent is generally not relieved from payment to the insurer. The agency contract normally holds the agent liable for premiums whether collected/collectible or not. There may be a specific period of time that the insurer allows for return of uncollectible audits, but generally normal installments are the credit risk of the agent.
The bankruptcy petition does not prevent an insurer from non-renewing an insured under its normal underwriting guidelines. There is one exception to this permission. The bankruptcy laws will supersede any underwriting guideline based solely on financial condition of the insured. This may be a sticky issue if the insurer has been on the risk for many years. It may be difficult to justify a non-renewal had nothing to do with bankruptcy.
It is always important and a contractual obligation to advise the insurer of the bankruptcy filing of one of its insureds. If the insured is not on a direct bill basis or have a delinquent billing from the insurer, they may not receive notice of the bankruptcy. An accidental violation of the automatic stay can be costly in fines. The insurer's legal department should be able to provide specific guidance.
"If an insured corporation files bankruptcy, can an agent go after the principal stockholders for unpaid premium? They are named insureds individually when acting on behalf of the corporation."
Unfortunately, this is a legal, not an insurance, question. It depends on whom you billed. If you billed the corporation you are probably out of luck. If you billed the individuals, you can try to collect from the individuals. In any event, you are most likely an unsecured creditor and will be WAY down the list. That is one of the dangers if you are fronting premium for an insured. Your best bet is to talk to an attorney well versed in bankruptcy law.
One of our faculty members provides the following food for thought:
This reminds me of the days when I worked for an insurer doing premium collection work, among other lowly tasks. If the insured is a corporation and is just in Chapter 11 and still doing business, then the premium on an ongoing basis is normally an "administrative expense" that gets paid ahead of unsecured debts, with almost the same priority as court and legal fees. And you can usually get it paid without much trouble because the bankruptcy judges get quite annoyed if the debtor doesn't carry insurance.
If the company wants to cancel for nonpayment, if I recall correctly, they have to ask the court for permission. As you say, if it's just an old debt, it's unsecured and probably the shareholders are insulated from liability. (They're not "named insureds" automatically, just "insureds," and anyway the policy usually says that the first Named Insured is responsible for the payment of premium.)
"I am an Idaho agent dealing with a California incorporated company that has their home office in Washington and operations in WA, TN, and SC. They recently filed Chapter 11 Bankruptcy in California. They do hazardous waste processing for disposal so have complicated regulatory requirements relating to this industry I am dealing with as well as the bankruptcy laws.
"My question is do you know of any procedures I can follow, or a resource I can contact, that can help me set up a method to work with my client through this Chapter 11 until they can come out or go the other direction (Chapter 7)? I am concerned about premium payments on the policies (some policies are noncancellable such as the closure policies), as well as increased E&O possibilities. I recognize that this is not an easy question to answer.
"I have had numerous consultations with our agency's attorney and with the agency management but I am not getting any answers and solutions to these questions on how to go forward. However with the rash of bankruptcies in the US I am sure many insurance professionals are dealing with these same questions. I would also be interested in knowing if you have any knowledge on agencies that may specialize in these situations. I am hoping you can help."
I ran your question by our faculty and got the answers below. If you have further questions, let us know.
Dan Free, JD, CPCU is with the Insurance Audit & Inspection Company in Indianapolis. He is quite knowledgeable about bankruptcies. Email dfree@insuranceaudit.com. Their web page is www.insuranceaudit.com.
I don't have any suggestions other than to hire a bankruptcy attorney rather than the agency's attorney. The agency needs a specialist. This is a good example, though, of why the agency may need to change its procedures so that it has always collected more money than is earned. For noncancancellable policies, collect it all upfront or don't do the deal. This way, if a client goes bankrupt, the agency is not left holding bad debt.
In chapter 11, insurance is considered a necessary expense. You have to go to the courts and make sure you follow the procedures correctly. But the court will guarantee your payments so you are probably in better shape that you were when the client was in danger of not paying you. You have to do right...and I suspect right involves different rules in different states. I have been through it a few times and have not gotten hurt.
To repeat my response to a prior question, when dealing with bankrupt insureds, the agents and underwriters must be aware that the filing of the petition does provide for an automatic stay of any cancellation opportunities an agent and/or company may have. If a cancellation notice has been issued, but not effected, it must be rescinded. If it has been effected, however, the filing will not enforce a reinstatement.
Dealing with payment of premiums can be a sticky matter. Premiums for installments due post-petition are considered an administrative priority expense. The agent/insurer should submit those invoices to the Trustee. If the trustee does not make payment, the billing must be sent to the Bankruptcy Judge for handling. If the trustee and the judge does not make timely payment, the policy is subject to cancellation.
Premiums that are delinquent and pre-petition are not subject to priority. These premiums are handled in the normal course of debt analysis and prioritization as a non-priority unsecured debt. If they are agency bill, the agent is generally not relieved from payment to the insurer. The agency contract normally holds the agent liable for premiums whether collected/collectible or not. There may be a specific period of time that the insurer allows for return of uncollectible audits, but generally normal installments are the credit risk of the agent.
The bankruptcy petition does not prevent an insurer from non-renewing an insured under its' normal underwriting guidelines. There is one exception to this permission. The bankruptcy laws will supersede any underwriting guideline based solely on financial condition of the insured. This may be a sticky issue if the insurer has been on the risk for many years. It may be difficult to justify a non-renewal had nothing to do with bankruptcy.
It is always important and a contractual obligation to advise the insurer of the bankruptcy filing of one of its insureds. If the insured is not on a direct bill basis or have a delinquent billing from the insurer, they may not receive notice of the bankruptcy. An accidental violation of the automatic stay can be costly in fines. The insurer's legal department should be able to provide specific guidance.
"If you were to file Chapter 7 due to credit card debt, how does this affect your insurance premium even though you always pay them on time?"
Many companies incorporate credit scoring in their underwriting and rating of personal insurance like home and auto. If this adversely affects your credit score, then it could very well increase your insurance premiums. The amount would vary by company and some states have restrictions on the use of credit scoring. Your best bet would be to check with your insurance company, market your account through an independent insurance agent, and consult with your state department of insurance for guidance.