At least once per week, I am contacted by a potential new client that has either been sued or receives a letter from an attorney threatening to sue their company for a variety of alleged injuries.  And almost every single time, during the initial consultation, when I bring up the subject of whether they may have available general liability insurance coverage the potential client says they hadn't thought about it.

What is interesting to me is that a person or company pays a good amount of money for coverage against claims of injury when they purchase a liability insurance policy but they don't understand how those policies work or what they must do after they receive notice of a potential claim that may be covered.

Universally, an insured has an affirmative duty to provide their insurer with notice as soon as possible after the insured receives notice of a claim or potential claim.  If the insured fails to provide notice in a timely manner, and if the insurer claims that the failure to provide notice has adversely affected the insurance company's rights, then it's possible that a claim that may have been covered by insurance may actually not be covered - simply because the insurer failed to or forgot to notify the insurance company.

One of the first things a person or company must do after they receive notice of a claim or potential claim is to determine the date of the alleged injury (if there is an occurrence-type liability insurance policy) and give notice of the claim to the insurance company by providing a copy of the demand letter or lawsuit papers.  Then the duty of the insurance company to defend the insured against the allegations begins and assuming there is the possibility of coverage the insurance company will hire an attorney to defend the insured against the allegations.  The insurance company has the right to control the defense against a claim so without notice they are prejudiced.  The insurance company will normally select an attorney themselves that they are comfortable with, although sometimes an insured can negotiate the right to keep using an attorney of their own choosing who will be paid at least in part by the insurance company.  Either way, having the insurer defend the lawsuit or claim will save the insured a lot of money in potential legal expenses.

Additionally, this notice from the insured to the insurance company will also trigger the insurer's duty to indemnify (pay any damages) assuming the claims actually fall under the coverage of the insurance policy.  If the claims are covered, then the insurance company has a duty to attempt to settle the claims within the policy limits or possibly risk being responsible for any judgment that exceeds the policy limits if they fail to act responsibly in refusing to settle.

Sometimes I am told by the potential client that they do not want to provide notice of the claim to the insurance company because they are afraid of their premiums going up or of being cancelled altogether.  Then I have to remind them that the insurer will find out about the claim or lawsuit during the next renewal because you are required to disclose the existence of any claims or threatened claims during that process.  And I also remind them that the entire purpose of buying insurance is to protect against losses caused by lawsuits or other claims.  It makes little business sense to pay for an insurance contract and then refuse to use it when circumstances arise that bring it into play.  Further, you will be required to disclose the existence of the insurance policy through the discovery process - so there is no way to hide its existence from the opposing party.

Not every claim or lawsuit is covered by liability insurance.  Most claims for breach of contract, for example, are not covered by liability insurance.  Claims by employees for discrimination or wrongful termination or workplace injuries are generally excluded from coverage in comprehensive general liability policies.  If you want coverage then you must normally pay for additional employer coverage and workers compensation coverage.  However, no matter the type of claim, it's important to discuss the issue of potential insurance coverage with an attorney if and when you are faced with a lawsuit or demand letter or other type of claim.  You need to ensure that you do not waive your rights to receive the benefits of any insurance contract that may be in effect for the relevant times.

If you have any questions about the possible applicability of insurance coverage to a claim you are facing, please contact the Jansen Law Firm, PLLC at (713) 388-6150 or email me directly at [email protected] and we will be glad to assist you.

I have found over the years that many people do not understand the importance of avoiding forfeiture of their company's right to do business in the State of Texas for failing to comply with their state tax obligations.  People do not understand how they can lose their charter or right to do business, or the significance of having lost their corporate privileges.  It's a big deal that is easy to avoid but which has tremendously bad consequences if one fails to keep their business entity in good standing.

Forfeiture of a corporation, limited liability company, limited partnership, or other filing entity’s corporate privileges in Texas occurs when (1) the filing entity does not file the report required by Chapter 171 of the Texas Tax Code; (2) the filing entity fails to pay its franchise taxes within 45 days after the notice of forfeiture is mailed to the filing entity; or (3) when the filing entity does not permit the Texas comptroller to examine the filing entity’s records pursuant to Section 171.211 of the Texas Tax Code.  Unfortunately, for business owners, forfeiture is extremely common in Texas.

What’s the Significance of a Business Entity Forfeiting its Right to do Business in Texas?

While forfeiture of corporate privileges is an all-too-common occurrence, few business people in Texas realize the significance of forfeiture and its potential impact on not only the business but a corporation’s officers and directors as well.  Tex. Tax Code § 171.152 states that if a corporation’s privileges are forfeited, the corporation is denied the right to sue or to defend a lawsuit in a Texas court (although courts have subsequently decided that the forfeited entity is entitled to defend a lawsuit; it just is not allowed to assert any claims it may have).  Additionally, and equally important, § 171.252 states that each officer and director of a forfeited corporation is liable for the debts and obligations of the forfeited corporation (subject to § 171.255).  Given that the liability shield and the shield from suits on company obligations are two very important primary purposes for forming a corporation or other limited liability entity, one would think that this would be enough to get people to pay attention.  Sadly, this is not the case.

Why Does Forfeiture of Corporate Privileges Occur So Frequently in Texas?

First, many businesses simply don’t keep up with their mail.  The Comptroller contacts businesses via mail to give them advance warning of forfeiture.  The Comptroller gives a number of notices prior to requiring the Secretary of State to forfeit the filing entity. Despite this, many of these notices are not seen or dealt with in a responsible or timely manner.

A second contributing factor to forfeiture in Texas is simply a lack of understanding of a business’ obligations.  The repeated modifications to the Texas Franchise Tax have caused confusion about when reports are due and who must report.  Generally, all taxable entities must now report except for some narrow exceptions.  Nevertheless, many businesses believe that if do not owe franchise taxes, they do not need to file anything.

The third contributing factor to forfeiture is a business simply failing to file the its annual information report along with its franchise tax return.  Many businesses fail to file a complete return (including the annual report) which prevents the Comptroller from accepting the filing.  Thus, despite filing its proper form for indicating whether or not it owes taxes, the business simply failed to attach the information report which the Comptroller requires.

Lastly, many business owners in Texas use forfeiture to “wind down” their business.  Rather than go through the process of winding down the business through filing a certificate of termination, the owners simply let the business go into forfeiture.  Given the potential liability issues inherent in forfeiture, this is obviously a terrible way to end a business, particularly given that if a business is properly wound up, it can keep its liability shield.  Further discussion of the forfeiture/termination issue as it relates to winding up a business will be reserved for future discussion.

Conclusion

Just as Texas grants the owners of filing entities a liability shield via the Texas Business Organizations Code (or predecessor statute), so can Texas remove that shield via the Tax Code.  The bottom line is that business owners in Texas rarely give forfeiture the consideration it merits.  More often than not, forfeiture of corporate privileges is discovered during some crucial moment (purchase/sale of a business, filing of a lawsuit, etc.), resulting in owners and attorneys scrambling to reinstate the business entity’s privileges.

Please contact us at 713-388-6150 or by email at [email protected] if you have any questions about forfeiture issues.