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Insurance And The Suspended Corporation

Section 23301 of the California Revenue and Taxation Code provides for the suspension of corporate powers, rights and privileges of a domestic taxpayer if it does not pay its taxes.  This means that a suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid.  Section 19719(a) of the Revenue and Taxation Code exposes persons purporting to exercise the powers, rights and privileges of a suspended corporation to civil, and even criminal, penalties.  These statutes raise challenging questions for insurers of suspended corporations.

In 1998, the legislature provided limited relief by amending Section 19719 to provide that the statute does not apply to "any insurer, or to counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation, and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.”  Cal. Stats. 1998, ch. 856, § 2.  However, the courts have found that this amendment simply relieves an insurer of the statutory penalty, it does not allow the insurer to exercise the suspended corporation's rights to prosecute or defend the action.  See Travelers Property Casualty Co. of America v. Engel Insulation, Inc., 29 Cal. App. 5th 830 (2018).  The only mechanism by which an insurer may exercise these powers is to intervene in the lawsuit pursuant to Section 387 of the Code of Civil Procedure, and asserting any defenses on behalf of its insured.  To make matters even more difficult, an insurer may not bring an own action based on the subrogated rights of a suspended corporation.  The court in Travelers did not reach the next question: whether an insurer who has intervened to protect its own rights could, in that context, essentiall prosecute the subrogated rights of its suspended insured. 

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...