Third-Party Bankruptcies: Preparation Equals Protection
by Chuck Lloyd
In the 17 years I have lived in Minnesota, Ive been through several storms of the century, where we experienced rain or snowfall in amounts that should occur only every 100 years. Ridiculous weather like that shows that what seems to be a once-in-a-lifetime catastrophe may not beno matter what the experts think. As a result, we need to learn from our past experiences, just in case.
The Safelite bankruptcy, like a 100-year storm, may be a once-in-a-lifetime occurrence. Then again, maybe not. While the event itself is old news, glass shops can and should learn some lessons from it in an effort to protect themselves if another third-party administratorlarge or smallseeks the protection of the bankruptcy courts. In this column, I want to discuss some thoughts about the preparation required for such a circumstance. As always, my comments are general in nature and should not be construed as legal advice. If you have a legal issue, you should consult with a competent attorney immediately to discuss your specific situation.
My comments are directed primarily to those shops that are not subcontractors or network vendors for a third-party administrator. Once you become a subcontractor, your die is usually cast. Your customer (i.e., the entity that is financially responsible to you for your work) is the entity with whom you have your subcontracting agreementnot the insurance company or the consumer. Although there may be technical and legal arguments to be made about the existence of equitable trusts, the most probable scenario is that subcontractors are unsecured creditors in the subcontracting arrangement. In a bankruptcy reorganization such as was filed by Safelite, the subcontractors may (or may not, depending on the circumstances) have some leverage in getting their bills paid because the bankrupt company must cure all breaches in any contracts it wishes to assume. In bankruptcy liquidation, where the company ceases to do business and the assets are sold, the unsecured creditors (such as subcontractors) are likely little more than beggars, depending on the size of the bankrupt estate. Obviously, the decision to join the network and sign a subcontracting agreement has significant ramifications if the contracting party files for bankruptcy.
Assume for the moment that a shop chooses not to become a subcontractor but instead has the bills it submits to insurers processed by an administrator/network. What can the shop do to protect itself from a bankruptcy filed by the administrator? Actually, there are several things. First, the assignment of insurance proceeds, which I discussed in earlier columns as being essential in addressing short payments, is of value here. You want to be able to make a claim under the insurance policy directly against the insurer, should the administrator/network go bankrupt. The best way to do that is to obtain an assignment from your customer that allows you to step into the shoes of the customer to pursue his or her insurance proceeds. Otherwise, your only remedy may be from the customer.
Second, regardless of whether you send your bill for your work to the administrator/network or the insurer directly, make sure that you bill in the name of the insurer. For example, if XYZ Insurance Company instructs you to submit glass claims directly to its Nearly-Broke Administrators, you can send your invoices to the address, as instructed, but be sure to show the billed party as XYZ Insurance or XYZ Insurance c/o Nearly-Broke Administrators, not simply Nearly-Broke. The address of where a bill is sent is not the determining factor as to whether or not it gets captured in the bankruptcy. The issue instead is, Who is responsible? A shop that is a subcontractor does not change that status by billing the insurer directly. Similarly, a non-network shop does not become a network shop by following the insurers directions and sending an invoice owed by the insurer to a third-party administrator. However, creating a paper trail showing the insurer as the responsible party helps reduce the chance that someone (i.e., the insurance company when you come looking to it for payment after Nearly-Broke files for bankruptcy) will claim that you are a subcontractor of Nearly-Broke when, in fact, you are not.
Third, make sure your own accounting records reflect that the insurer is the entity that owes money to you, not the administrator. Your accounts receivable reports should show XYZ as the debtor, not Nearly-Broke. Such reports will describe who is obligated to pay your invoice accurately. Again, setting up your accounts receivable in this fashion lessens the likelihood that there will be confusion about whether or not you are a subcontractor and subject to the bankruptcy.
Fourth, you need to be vigilant about your receivables. If the administrator processing your claims is slow to pay, you should contact the insurer with a list of past-due invoices, explaining that the insurer is responsible for the charges even if it has already paid the administrator. You also should consider assessing interest at the legal rate permitted in your state and, if it gets too delayed (90 or so days past due), making a complaint to your insurance regulator. Most states have adopted some form of the Unfair Claims Practices Act, which typically contains a provision for the timely processing of claims. The insurers are responsible under that statute, even if they outsource their claims processing. Given the Safelite bankruptcy, I suspect that both insurers and insurance regulators will be paying closer attention to issues involving delinquent third-party administrators.
Finally, consult with a competent bankruptcy counsel. My clients and I are in almost constant contact with one of my partners who practices extensively in the area of bankruptcy. It is very comforting to get the counsel of someone who is experienced in bankruptcy and who has seen just about everything imaginable. While Internet advice is cheaper on the front end, it may not always be appropriate for your particular circumstance and may, in the long run, end up costing you more than you would have imagined.
There is an old adage, History repeats itself, especially in matters that shouldnt have happened in the first place. Bankruptcies, like storms of the century, are typically beyond our control. Unfortunately, they are both quite capable of recurring more often than they should. You cant stop either from happening. But, you can be prepared to make the best of a bad situation.
Chuck Lloyd is a partner in the Minneapolis law firm of Lindquist & Vennum L.L.P. For more information, he can be reached at e-mail address email@example.com.
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