An Illinois appeals court recently considered the interplay between the corporate survival statute, 805 ILCS 5/12.80 (the “Survival Act”), which governs lawsuits against dissolved corporations) and when someone can bring a direct action against another person’s liability insurer.
The personal injury plaintiffs in Adams v. Employers Insurance Company of Wasau, 2016 IL App (3d) 150418 sued their former employer’s successor for asbestos-related injuries. Plaintiffs also sued the former company’s liability insurers for a declaratory ruling that their claims were covered by the policies.
The former employer dissolved in 2003 and plaintiffs filed suit in 2011. The plaintiffs alleged the dissolved company’s insurance policies transferred to the shareholders and the corporate successor. The insurers moved to dismiss on the basis that the plaintiff’s suit was untimely under the Survival Act’s five-year winding up (“survival”) period to sue dissolved companies and because Illinois law prohibits direct actions against insurers by non-policy holders.
Affirming dismissal of the suit against the insurers, the court considered the scope of the Survival Act and whether its five-year repose period (the time limit to sue a defunct company) can ever be relaxed.
The Survival Act allows a corporation to sue or be sued up to five years from the date of dissolution. The suit must be based on a pre-dissolution debt and the five-year limit applies equally to individual corporate shareholders. The statute tries to strike a balance between allowing lawsuits to be brought by or against a dissolved corporation and still setting a definite end date for a corporation’s liability. The five-year time limit for a corporation to sue or be sued represents the legislature’s determination that a corporation’s liability must come to and end at some point.
Exceptions to the Survival Act’s five-year repose period apply where a shareholder is a direct beneficiary of a contract and where the amount claimed is a “fixed, ascertainable sum.”
The Court held that since the plaintiffs didn’t file suit until long after the five-year repose period expired, and no shareholder direct actions were involved, the plaintiffs’ claims against the dissolved company (the plaintiffs’ former employer) were too late.
Illinois law also bans direct actions against insurance companies. The policy reason for this is to prevent a jury in a personal injury suit from learning that a defendant is insured and eliminate a jury’s temptation to award a larger verdict under the “deep pockets” theory (to paraphrase: “since defendant is protected by insurance, we may as well hit him with a hefty verdict.”)
The only time a direct action is allowed is where the question of coverage is entirely separate from the issue of the insured’s liability and damages. Where a plaintiff’s claim combines liability, damages and coverage, the direct action bar applies (the plaintiff cannot sue someone else’s insurer).
Here, the plaintiffs’ coverage claim was intertwined with the former employer’s (the dissolved entity) liability to the plaintiffs. As a result, the plaintiffs action was an impermissible direct action against the dissolved company’s insurers.
The Case starkly illustrates how unforgiving a statutory repose period is. While the plaintiff’s injuries here were substantial, the Court made it clear it had to follow the law and that where the legislature has spoken – as it had by enacting the Survival Act – the Court must defer to it. Otherwise, the court encroaches on the law-making function of the legislature.
Another case lesson is that plaintiffs who have claims against dissolved companies should do all they can to ensure their claims are filed within the five-year post-dissolution period. Otherwise, they risk having their claims time-barred.