Don't Bet the Business

You might be able to get paid when your customer declares bankruptcy if you have the right language in your service contracts. 

If your business relies on insurance claim proceeds to pay for services, getting paid can be complicated. If you are not directly paid by the insurance company— this is especially dicey.  You may have suffered the disappointment of witnessing the insurance proceeds received as a result of your services paid to other creditors during a customer’s bankruptcy.

In a recent decision issued by the United States Bankruptcy Court for the Eastern District of Michigan, a provider of medical air-lift services facing such a situation was able to obtain all of the insurance proceeds because its service contract contained particular language assigning it the right to the proceeds. Michael Stevenson, Trustee v PHI Air Medical, LLC (In re Justin), 2014 WL 3373863 (July 9, 2014, Bank. E.D. Mich.) 

The medical air-lift company flew an ill woman from Michigan to the Cleveland Clinic for a lung-transplant, and her husband signed a contract specifying that she assigned to the medical air-lift company all rights to the insurance benefits. However, the insurance company did not directly pay the medical air-lift company, and instead sent a $33,000 check to the customer/policyholder. While holding on to the check, the customer/policyholder filed for bankruptcy protection. 

A dispute ensued between the medical air-lift provider and the bankruptcy trustee over whether the insurance proceeds belonged in the bankruptcy estate to distribute among all the creditors or whether they should be paid only to the medical air-lift provider.  Ultimately, the bankruptcy court ordered that all of the insurance proceeds be paid to the medical air-lift company, and not distributed as part of the bankruptcy estate. 

When your customer fails to turn-over an insurance check or files a bankruptcy petition, your business is at risk of not getting paid. Bankruptcy is intended to give people a fresh start and if there is not enough money to pay all of the debts, creditors are only paid a portion of what they are owed -- a sum that is always reduced by the costs and fees related to the bankruptcy proceeding itself. 

While the medical air-lift case applied particular Michigan law, the lesson is the same – in order to maximize the likelihood that your businesses’ services are paid for, you should regularly review and evaluate your standard service contracts with an eye toward ensuring you are paid even when your customer faces financial distress or is neglectful.