Source: http://www.lexology.com, May 1, 2014
By: Carl J. Pernicone, Wilson Elser
Can an asbestos bodily injury plaintiff directly sue the liability insurer of a dissolved corporate defendant? Yes, said New York’s Appellate Division, First Department – under certain circumstances. The court’s decision came in cases under In Re New York City Asbestos Litigation, et al., 2014 NY Slip Op.2686 (1st Dept., Apr. 17, 2014).
Background
The insured, a dissolved corporation organized under New Jersey law, manufactured valves allegedly containing asbestos. The insured had been named as a defendant in numerous asbestos bodily injury suits. It subsequently sought bankruptcy protection from its asbestos liabilities. It was later liquidated and then involuntarily dissolved by the New Jersey Department of State.
Thereafter, certain underlying asbestos plaintiffs brought suit in New York directly against one of the dissolved company’s liability insurers. The plaintiffs argued the insurer was amenable to suit because it had limits of liability remaining on certain historic, 1970s policies sold to the dissolved company. Hence, in the plaintiffs’ view, the insurer was the real party-in-interest. In response, the insurer moved to dismiss, objecting to service and arguing that because the insured was a dissolved corporation, there was no corporate entity that could be properly served in New York. The record reflected that plaintiffs had attempted unsuccessfully to effect service on the dissolved company’s former treasurer and its former registered agent for service of process. The former treasurer repeatedly refused to accept process mailings or default notices. The registered agent had resigned that position some years before, after the dissolved company went out of business.
Lower Court Decision
At the outset of its decision, the trial court addressed the issue of whether the dissolved corporation was amenable to suit. The court ruled that it was, noting that under the controlling section of New Jersey’s corporation law as interpreted by the New Jersey Supreme Court, corporations are “suable in tort” – even after their dissolution. Applying those authorities here, the trial court “[found] that New Jersey law permits suits against [the dissolved corporation].” Continuing, the court held that “In turn, the plaintiff may seek to obtain a judgment against [a dissolved corporation] and consequently commence a direct action against [the insurer] under New York [law].”
Turning to the service of process question, the court noted that New York law “vests this court with discretion to direct an alternative method for service of process should it determine that the [available] methods are ‘impracticable.’” On the facts here, the court held that “Here, plaintiffs’ counsel has clearly satisfied this standard in light of their efforts.”
The trial court denied the insurer’s dismissal motion and ordered “substituted service” on the insurer, stating that “substituted service may be effectuated on a defendant’s liability insurer, if it is the real party-in-interest and is contractually bound to defend and indemnify the defendant.”
Appeals Court Ruling
On appeal, the First Department affirmed the trial court decision ordering substituted service on the dissolved corporation’s insurer. The court noted that the record confirmed that alternate forms of service proved unavailing. Hence, “substituted service on the insurer is proper and does not violate due process.”
The court also stated: “[The insurer] accepted premiums from [the dissolved corporation] and agreed to defend and indemnify [the dissolved corporation] for tortious conduct committed during the coverage periods. This coverage includes liability for conduct that may have led to injuries such as asbestos disease which carries a long latency period between exposure and manifestation of disease.” In conclusion, the court declared: “[The insurer’s] contractual coverage obligation should not be nullified on the mere happenstance that the corporation was dissolved at the time these latent injures manifested.” (Emphasis supplied.)
Practice Points
Given the importance of this issue to insurers, an appeal to the New York Court of Appeals may well be sought. In Re New York City is not the first case in the country to reach this result. In November 2013, in In the Matter of Krafft-Murphy, 82 A.2d 696 (2013), the Delaware Supreme Court, on somewhat different facts, similarly concluded that the unexhausted limits of liability policies sold to a dissolved corporation could be targeted by asbestos plaintiffs.
Moreover, while the In Re New York City ruling arose in an asbestos context, one can imagine its possible application in other types of long-tail injury claims, such as those involving lead paint, chemical exposure and pollution.
That said, however, the First Department decision cannot be viewed as a license for asbestos plaintiffs to now start filing suits directly against the insurers of defunct corporations. For one thing, the court made clear that before doing so plaintiffs must first demonstrate that they attempted to effect service through more traditional routes (e.g., service of corporate officer or registered agent). Only if those efforts fail can plaintiffs resort to the substituted insurer service permitted here.
More fundamentally, the result in In Re New York City turned on the propriety of a suit against a dissolved corporation. The First Department ruled that under New Jersey corporation law such suits are permissible. This may not be the case in other jurisdictions that may impose a statute of limitations on suits against dissolved corporations or bar them altogether.
Consequently, insurers with unexhausted limits under policies sold to dissolved entities may want to check whether the substantive corporate law in the state where the dissolved corporation was organized permits suits against dissolved corporations. If it does, and if the In Re New York Citydecision withstands the potential appeal, plaintiffs in long-tail injury claims may seek to target those policies.