Monday, July 25, 2011

Insurance Coverage – The Duty to Defend and The Duty to Indemnify

Because insurance is nothing more than a contract, certain terms can be negotiated away, and certain terms may not exist in a particular insurance policy. Because insurance policies are contracts, and can be very complicated, an attorney should be used to review the policy to make sure it provides adequate coverage. Insurance policies typically come with contractual obligations in the form of a duty to defend, a duty to indemnify, and a duty to pay claims in good faith; failure to do the latter can make an insurance company subject to a bad faith claim. Many attorneys recognize that often the value of the duty to defend is greater than the value of the duty to indemnify. Courts are typically liberal in finding coverage for the duty to defend. With regard to the duty to defend, New Mexico has adopted the following law:

“If the allegations of the injured third party's complaint show that an accident or occurrence comes within the coverage of the policy, the insurer is obligated to defend, regardless of the ultimate liability of the insured. The question presented to the insurer in each case is whether the injured party's complaint states facts which bring the case within the coverage of the policy, not whether he can prove an action against the insured for damages. The insurer must also fulfill its promise to defend even though the complaint fails to state facts with sufficient clarity so that it may be determined from its face whether or not the action is within the coverage of the policy, provided the alleged facts tend to show an occurrence within the coverage.” America Employers' Ins. Co. v. Continental Casualty Co., 85 N.M. 346, 348, 512 P.2d 674, 676 (1973) (quoting 1 Long, The Law of Liability Insurance § 5.02 (1973))

Because an insurance policy is a contract, a duty to defend is found by comparing the four corners of the complaint against the four corners (this is a contract law term meaning all aspects of the document) of the insurance policy. It must be noted that the duty to defend is distinct from the duty to indemnify; because while the duty to indemnify may not apply in a given case, the duty to defend may be applicable in the same case. The duty to indemnify applies if the event causing damage was covered under the terms of the insurance policy. Like the above case law indicates, the duty to defend can be triggered if there is a question about whether the insurance policy covers the event; meaning that while the duty to indemnify may not actually be triggered, the duty to defend is triggered.

As a business attorney I can appreciate the value of the duty to defend. Litigation can be very expensive and having legal defense included in the insurance contract can save a business or individual from having to pay legal fees out of pocket. The duty to defend is also triggered if the complaint for damages seeks compensation for covered and non-covered injuries. Some states allow insurance companies to stop defense if amended pleadings or discovery indicates facts that show that the harm is not covered within the insurance policy.

Thursday, July 7, 2011

Limited Liability - Business Law

The following is an article I recently published on my law firm website (BFDLawyers). I plan to make several counterpart pieces in my Albuquerque Business Lawyer and Albuquerque Bankruptcy Attorney series. Feel free to visit our website for more information.

Business Attorneys are often asked how limited liability works, because this is often one of the greatest advantages to forming a limited liability business entity (limited liability partnership, limited liability company, corporation, etc). Limited liability basically protects the business owner for the negligence of his or her employees. In other words, the limited liability status of a company does not protect the business owner from liabilities that are a result of his or her personal negligence. Business owners that actually take part in the daily activities of a business should be aware of this fact; because this makes almost as though the business is a sole proprietorship.

Limited liability, on the other hand, is one of the biggest advantages of forming a corporation, or LLC, even if it only protects the business owner from his or her employee’s negligence. While any employee’s misconduct is likely outside the scope of employment, and would not make the business owner liable, the limited liability status is important for protecting the business owner’s personal assets. Failure to form the business properly might result in the business being recognized as a partnership, where the business owners would be joint and severally liable for the business’ debts (including judgments against the business); A Business law expert is useful for ensuring that your business is formed and operated properly.

Clients often wonder what causes court not to recognize limited liability; this is known as piercing the corporate veil. Traditionally piercing the corporate veil is a remedy the court uses after considering certain factors. To avoid the risk of having your company’s limited liability status go unrecognized it is important that the business adhere to corporate formalities. Corporate formalities are those things which are usually done when conducting a legitimate business. This includes adequate record keeping, keeping the business owner’s personal funds separate from the operating funds of the business, acting in accordance with bylaws (for a corporation) or an operating agreement (for a limited liability company) for the business in question, and treating the business’ assets as though they were your own. A Business Lawyer prepares these documents for record keeping purposes and can help ensure that the business is staying compliant. The other thing to avoid is what is called undercapitalization, and is often found where businesses fail to properly maintain adequate insurance coverage in the case of any possible misfortune. The main point here is that the business was not formed as a limited liability entity to avoid potential business debts arising from judgments against the business.