An Empty Bank Account Does Not Answer the Coverage Question

A subcontractor causes substantial damage to your building. It has stopped operating, its equipment is financed, and its bank account is nearly empty. Then you learn that it carried a $5 million liability policy.

That information deserves attention, but it does not mean there is $5 million available to pay your claim. You still need to establish liability, identify covered damage, and follow the procedure for reaching any insurance proceeds. And if bankruptcy is involved, those steps become particularly important.

Find the Policy Before Valuing the Recovery

A certificate showing a large limit is only a starting point. The actual policy, relevant endorsements, and the insurer’s coverage correspondence show far more, including the policy period, the insured entity, and whether the alleged conduct falls within the coverage grant.

A commercial general liability policy might cover certain property damage while excluding the cost of correcting the subcontractor’s own defective work. A professional liability policy, by contrast, might address a different kind of loss. Moreover, an ordinary unpaid invoice is not automatically an insured claim simply because the debtor has insurance.

The advertised limit may also be reduced by other claims, defense expenses, or an applicable sublimit, so a $5 million declarations page cannot replace that analysis.

Insolvency Does Not Automatically Eliminate Insurance Obligations

Illinois law addresses part of this problem. Under 215 ILCS 5/388, certain liability policies must provide that the insured’s insolvency or bankruptcy does not release the insurer from its obligations. Whether and how that provision applies depends on the policy and the type of loss.

The provision also describes an action against the insurer after the specified conditions for an unpaid judgment are met. However, that route remains subject to the policy’s terms and conditions and its limit, though an insurer that unreasonably refuses to settle may owe more than the policy limit. In other words, it is not permission for every creditor to sue the insurer immediately or recover an uncovered debt.

For a business deciding whether to pursue litigation, then, the practical question is whether a legally available route leads from a supported liability claim to responsive insurance. The debtor’s balance sheet answers only part of that question, and in some cases an owner may be personally liable for the company’s debts.

A Bankruptcy Filing Changes What You Can Do Next

The automatic stay under 11 U.S.C. § 362 can stop litigation and collection activity against the debtor, and an intention to recover only insurance proceeds does not by itself allow a creditor to proceed without addressing the stay.

As a result, counsel may need to seek relief from the bankruptcy court before proceeding, and later discharge issues may require separate analysis. The available procedure depends on the bankruptcy orders, the stage of the underlying case, and the relief being requested.

Continuing the lawsuit first and sorting out bankruptcy later can therefore create avoidable problems, even when insurance appears likely to fund a recovery.

Your Own Insurance Rights May Be Separate

There may also be a different route. If the subcontract required additional insured coverage for your business, it is worth investigating whether your business has its own rights under the subcontractor’s policy.

Those rights differ from a damages claim against the subcontractor, because they depend on the endorsement, the allegations, and any conditions for coverage. In addition, a contractual promise to obtain insurance does not prove that the required coverage was actually issued.

Before spending more on collection, it helps to assemble the contract, policies, pleadings, coverage letters, and bankruptcy filings. That review can distinguish a worthwhile insured claim from litigation against a business with no realistic payment source.

We help businesses evaluate insurance recovery involving insolvent defendants, identify additional insured rights, and assess the procedure for pursuing covered losses. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our commercial litigation services. The available remedies and next steps depend on the governing agreements, facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.