by Michael Kelley
Avoiding Default Judgments Before a Lawsuit is Filed
While many claims are resolved prior to litigation, it is important for insurers to keep in mind the potential for a lawsuit should the claimant not accept an insurer’s most recent settlement offer. Most insurers have form letters which provide requisite notices to claimants, but the majority of those letters do not contain any information regarding the identify of defense counsel should a lawsuit be filed against their insured. This may seem unnecessary at first glance, but it is an important way for insurers to protect themselves and their insureds from a default judgment.
Rule 55 of the Arizona Rules of Civil Procedure contains a specific provision which requires a party who files an application for entry of default to identify “any attorney known to represent the party claimed to be in default in the action in which default is sought or in a related matter.” Moreover, this rule also requires the Plaintiff to mail a copy of the application for entry of default to the attorney whom the plaintiff knows represents the defendant in the matter or in a related matter. If a plaintiff fails to properly provide notice of the application for entry of default to the known attorney, then the entry of default is ineffective, and the defendant still has time to file an answer and avoid a default judgment.
Rule 55 was recently tested in Maclean v. Newgioco Group, Inc., CA-CV20-0164 (App. Div. I, March 16, 2021). This case involved a plaintiff who filed a wrongful termination lawsuit against her former employer and attempted to obtain a default judgment when the employer failed to file a timely answer. The plaintiff had properly served the summons and complaint upon the statutory agent and sent a copy of the application for entry of default to the statutory agent when her former employer did not respond to the complaint. The trial court entered a Default Judgment for $1,050,204.00, plus costs and interest, against the defendant, but the default judgment was set aside when the defendant was able to successfully argue that the plaintiff did not comply with the notice requirements of Rule 55 by failing to provide a copy of the application for entry of default to the defendant’s attorney. The company had not specifically retained any attorneys to represent it in the pending lawsuit, but the former employee had signed two employment agreements which required that all notice and other communications be provided to lawyers in Canada and New York. The Court ultimately held that mere service of the default filings on a statutory agent without serving the application for entry of default and the motion for default judgment on a defendant’s lawyer known to a plaintiff is not sufficient to perfect the default process. As a result, it was proper for the trial court to set aside the default judgment. To make matters worse for the plaintiff, the Court of Appeals also ordered that the plaintiff pay the defendant’s reasonable attorneys’ and costs fees on appeal.
If you have preferred defense counsel, it is recommended that you provide a notice in your letters to claimants which states that in the event a lawsuit is filed, all notices regarding the lawsuit and any subsequent pleadings must also be sent to your preferred defense counsel. If the plaintiff fails to comply with this request, then there is a good basis to set aside an entry of default which may be obtained against your insured. This will also provide advance notice of the lawsuit against your insured and allow defense counsel to make immediate efforts to notify the insured of the pending lawsuit and obtain their cooperation. Of course, in the event you do decide to retain different counsel to represent your insured you are free to do so, but this one small step could be the difference between a default judgment and the ability to defend the case on the merits.
Thomas Rubin & Kelley is happy to assist you in the defense of all claims. If you have any questions, please do not hesitate to contact Brian Rubin (602-604-7509 / brubin@trkfirm.com) or Michael Kelley (602-604-7505 / mkelley@trkfirm.com) for more details.