John Feeley's recent article in the February 1996 California Insurance Law & Regulation Reporter ("Handling Liability Claims against Suspended Corporations") provided an excellent overview of some of the options available to an insurer when faced with the prospect of defending a suspended corporation. However, while the filing of a complaint-in-intervention is an appropriate response when an insurer is apprised of the suspended status of the insured at the commencement of litigation, intervention may not be the most effective approach in those cases where the insurer has learned of the suspended status of the insured corporation after litigation is well underway. In such circumstances, the insurer has already paid substantial defense costs and fees to the law firm it retained to represent the interests of the insured. In order to pursue a complaint in intervention at that point, the insurer would be forced to terminate the defense being afforded to the insured and hire new counsel for the complaint-in-intervention. Such a procedure would be unnecessarily costly since it would require the insurer to pay its new attorneys substantial fees to "get up to speed" in the pending litigation.
A better approach under these circumstances would be for the insurer to contact the attorneys for the plaintiff and/or developer and reach an agreement whereby the suspended corporation's "lack of capacity" to defend itself would be waived. It is well settled that a plea that a corporation lacks capacity to defend itself by reason of a suspension of corporate powers for non-payment of its taxes is a plea in abatement, which is disfavored by the law. Such a plea is to be strictly construed and must be supported by facts warranting the abatement at the time of the plea. See, e.g., Benton v. County of Napa, 26 Cal.App.3d 641, Cal.Rptr. (1991). Under ordinary circumstances, counsel for the plaintiff and/or developer would have very little incentive to raise this plea since it would merely result in a withdrawal from the defense by insurance defense counsel and a default judgment against the insured which would be very difficult to enforce against the insurer.
An alternative approach was approved by the court of appeal in Biggs v. California Insurance Guaranty Association, 126 Cal.App.3d 641, 179 Cal.Rptr. 16 (1981). In that case, the plaintiff (Biggs) sued the Follies Theater following a slip-and-fall on its premises. The Follies was insured by Westgate-California Insurance Company but Westgate was declared insolvent and the claim was handled by the California Insurance Guaranty Association (CIGA). Prior to trial, the Follies' corporate powers were suspended for failure to pay corporate franchise taxes and plaintiff's counsel notified CIGA that he intended to strike the defendant's answer on this basis. CIGA made a request to appear as Amicus Curiae on behalf of the Follies but this was rejected and the trial court struck the defendant's answer and entered a default judgment. When CIGA refused to pay the judgment, the plaintiff sued CIGA for declaratory relief and money damages, and CIGA prevailed.
On appeal, the court discussed the options available to CIGA when faced with the proposed default of the insured. The court noted that CIGA "could have revived the corporation in advanced of the trial" but that this "would have required investment of a substantial sum of money, a sum which could not later be recovered regardless of the outcome of the trial, simply to gain the right to defend in the action. Nothing in the statutes authorizes or requires CIGA to make such an expenditure." (Biggs, at 646.) Importantly, the court also noted that CIGA had the following option:
Plaintiff could have waived the incapacity of the Follies by not raising the issue and permitting CIGA to defend the Follies against her personal injury claims. (Traub Co. v. Coffee Break Service, Inc. 66 Cal.2d 368 (1967).) If she had obtained a judgment under those circumstances, CIGA would be obligated to honor it to the limits of Westgate's policy. If judgment had been for the Follies, the issue would be moot.
(Biggs v. CIGA, supra, at 646.) (Emphasis supplied.)
The court then went on to state that plaintiff should have waived the incapacity issue and that permitting CIGA to defend under those circumstances would not violate the purpose of the Revenue and Taxation Code:
We conclude that plaintiff having, as she did, the burden of pressing her claim, should have waived the incapacity issue and permitted CIGA to defend. CIGA was under no obligation to advance money in order to "purchase" its right to defend the action.
Revenue and Taxation Code section 23301, which provides for suspension of corporate powers for failure to pay taxes, is designed to pressure corporations to pay their taxes. That purpose would not be served by penalizing an innocent person or entity such as CIGA under these circumstances.
(Biggs v. CIGA, supra at 647.) (Emphasis supplied.)
Likewise, the purposes of the tax code are not served by penalizing an insurer for the failure of its insured to pay its taxes. Allowing the insurer to continue defending the insured serves the strong public policy in favor of settlement and in favor of trying lawsuits on their merits. It also allows the insurer to participate in discovery, destructive testing, site inspections, etc., at the same time as all other litigants, as opposed to hiring new counsel to intervene or postponing its discovery until after a default is entered against the insured and the plaintiff and/or developer brings a direct action to recover on the insurance policy pursuant to Insurance Code § 11580.