Insurance Law Client Alert: Supreme Court Limits Survival of Actions Against Dissolved Foreign Corporations and Their Liability Insurers

In Greb v. Diamond International Corp. (No. S183365, filed 2/21/13), the California Supreme Court held that California Corporations Code section 2010, which states that a dissolved corporation continues to exist for the purpose of prosecuting or defending lawsuits, does not apply to a foreign corporation dissolved under the laws of its home state.

In Greb, Diamond International was sued by California plaintiffs claiming injuries from asbestos exposure while Diamond was doing business in California. Diamond had been dissolved under Delaware law, and suit was brought seeking recovery from the corporation’s unexhausted liability insurance it had while doing business in California.

However, Diamond was a Delaware corporation, and had been dissolved years before pursuant to Delaware General Corporation Law section 278, which contains a three-year statute of limitations on suing dissolved corporations. By contrast, California’s equivalent “survival” statute, Corporations Code section 2010, has no time limitation. Based on the Delaware statute, Diamond successfully demurred to the complaint, and the lawsuit was dismissed. The dismissal was affirmed when the Court of Appeal sided with Diamond, despite a split in case law as to whether section 2010 applies to a foreign corporation. The Supreme Court granted review to resolve the conflict, and ultimately agreed with Diamond, holding that section 2010 does not apply to foreign corporations.

The Supreme Court said that under California law, a corporation’s dissolution is best understood “not as its death, but merely as its retirement from active business.” Among other things, the Court looked at California Corporations Code sections 102 and 2115, and considered whether there was a Constitutional dimension to treating a foreign corporation more favorably than a domestic corporation with respect to the capacity to be sued.

Ultimately, the Supreme Court said that “[t]he policy question concerning whether the provisions of California’s survival statute should apply to foreign as well as domestic corporations is properly a matter to be determined by the Legislature, not this court.”

The effect of the Supreme Court’s decision was to preclude recovery from the dissolved corporation’s liability insurers. In California, Insurance Code section 11580(b)(1) requires that most types of liability policies issued or delivered in the state contain a provision “that the insolvency or bankruptcy of the insured will not release the insurer from the payment of damages for injury sustained or loss occasioned during the life of such policy.” And subsection 11580(b)(2) provides the mechanism for a direct action against the insurer to recover for such injuries.

However, Insurance Code section 11580(b) only permits a direct action “whenever judgment is secured against the insured . . . in an action based upon bodily injury, death, or property damage,” which is consistent with the “no action” clause in most liability policies which bars suits against the insurer unless there is a “final judgment” against the insured and the typical insuring language which promises coverage only for sums that the insured “becomes legal obligated to pay as damages.”

Thus, whether by virtue of the insuring language, a “no action” clause, or the authorization for a direct action under Insurance Code section 11580(b), a judgment against the insured is a condition of liability coverage. But under the Supreme Court’s holding in Greb v. Diamond International Corp., a foreign corporation dissolved under the laws of its home state may be judgment-proof in the State of California, precluding any recovery under the dissolved corporation’s liability insurance.

This document is intended to provide you with general information about insurance law developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

February 22, 2013