What to do? (Long, and boring; for biz, finance, law and, I guess, ethics geeks.)

In My Humble Opinion
1

Let me ask y’alls’ opinion on a situation that’s come up.

Two subchapter S corporations in which I was a shareholder, officer and director have sold off most assets and ceased operations. I’ve been wholly bought out of one of them (although not paid in entirety, and I could reclaim my shares if payment doesn’t transpire as scheduled), and the other, while not operating, has some obscure remaining assets of value that are scheduled to be transferred to a private partnership.

When we decided to shut down we wanted to stop any ongoing expenditures. So we decided to terminate our insurance. My partner handled this and, unfortunately, her letter to our insurance broker said that we wanted to not renew, as opposed to saying we wanted to cancel. That was last year. We’d already paid the premium (this was for commercial liability insurance).

We thought we were done with that. Well, we got a letter telling us that their annual audit arrived at the conclusion we owe another couple of thousand dollars. The post-game audit I’m familiar with - no questions there.

So now this has been referred to a collection agency. One of my points of pride had been that we’d run two corporations at a profit (ultimately - definitely not every year) through a harrowing decade in the industry and got out without burning anybody. So, if this is a legitimate debt, I want to settle it.

As an aside, we never had any claims on any of our insurance, all handled through the same broker, and I perpetually wondered about the legal legitimacy of having two entirely separate corporations on the same policies. Our broker had advised, when I questioned this, that if the insurance companies involved had successfully squirmed out of a claim, we could probably successfully sue his brokerage company.

I asked my attorney and he said that being a subchapter S with zip assets, there’s nothing that they can garner via judgement and they can’t get to my partner or me personally. As I said, if it’s truly a legitimate debt of the business*, I’ll settle it. But I think we can choose our own pace at which to do that, so I’m advising my partner (who’s actually dealing with the collection agency) to stonewall the guy who’s calling her everyday and wanting her to sign an agreement. I think we should just forego any further agreements and tell him we’ll pay at the rate we decide and if you don’t like that, sue us. We then quit talking to you, and a year later you’ve got (shipped at your expense) our Pentium Pro and two 486s.

So, what do y’all think? One good buddy says fuck’em completely - walk and they will, too.

Sorry, I know, long.

*[sub]They did manage to cancel the commercial auto liability and the workers’ comp, and I know our broker knew we we’re shutting it down; and with almost zip revenue having passed through the company during the audit period, I have no idea how they came up with the premium addendum, but we did not respond to that in a timely fashion.[/sub]

2

My completely non-legal opinion:

Don’t Pay. As far as I’m concerned, once you enter into a contract (such as insurance) and both parties agree to the terms, the deal is done. Since you paid up front, in full, I don’t believe the Ins. Co. has any right to ask for more. If it is written in the contract that they can revise the price mid stream, then they do have such a right.

Given that, I’d go the route you are proposing, stonewall, and settle at a figure agreeable to both parties. Of course, that will be limited to whatever assets your corporations have today, your personal assets are out of the picture.

As far as legitimacy goes, in my mind, there is legit and legit but lousy. Changing prices mid contract is lousy, and I wouldn’t go the “extra” mile to get them their money, pay what you’re required and that’s it. If you hadn’t paid what you agreed to pay upu front, then I’d say give them their money.

3

This confuses me. You should read the actual wording of her letter to the broker (did she do separate letters for the various coverages?). How did the message get through for some but not all of the coverages? If the letter is clear enough to let you take the position that the coverage should have been cancelled, I would talk to the broker (put it in a letter to the broker and the carrier and the collection agency too). Explain that the S corps’ position is that the coverage was cancelled as of the date of the letter from your colleague, and that the S corps will pay any adjustments required by the policy terms occurring through the date of cancellation only, and should get any rebate arising from coverage ending on that date too. Ask what those amounts would be. That will give you competing dollar amounts, giving you a situation ripe for compromise should you want to compromise (split the difference in settlement of all claims).

This is mostly gonna depend on the specific policy terms re cancellation and the language in the letter of cancellation.

4

It confuses me a bit, as well. Nevertheless, we are well past the point where one might have prudently called the audit into question (my partner has handled any day-to-day residual business since my daily office presence ceased, and she has the habit of letting annoyances not be mentioned until they become, well, unignorable).

Cheesesteak, commercial insurance policies, particularly liability and workers’ comp, typically allow for retroactive adjustments of premiums, based on audit. While you can dodge the IRS for years, you can count on your insurance companies auditing a corporation just about every year.

So we’re probably weak on challenging the audit, although I can’t easily imagine how they arrived at their adjustment (they might well need some post-Enron receivables). As I said, I’ll settle legit debts, and this may well fall in the class of legit but lousy.

But my understanding is that we’re pretty much free to tell them when and how we’ll pay. And a negotiated settlement is the likely outcome.

I just don’t like them getting heavy on my partner.