Armacost v. Amica Mut. Ins. Co., Civ. A. No. 91-0447 P.

• Decision Date: 14 May 1993
• Docket Number: Civ. A. No. 91-0447 P.
• Citation: 821 F. Supp. 75
• Parties: Melinda Ryan ARMACOST, Plaintiff, v. AMICA MUTUAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Rhode Island

821 F. Supp. 75

Melinda Ryan ARMACOST, Plaintiff, v. AMICA MUTUAL INSURANCE COMPANY, Defendant.

Civ. A. No. 91-0447 P.

United States District Court, D. Rhode Island.

May 14, 1993.

Mark S. Mandell, Mandell, Goodman, DeLuca & Schwartz, Providence, RI, for plaintiff.

David P. Whitman, Hanson, Curran, Parks & Whitman, Providence, RI, for defendant.

MEMORANDUM AND ORDER

PETTINE, Senior District Judge.

In this diversity action, plaintiff Melinda Ryan Armacost ("Armacost"), a resident of Massachusetts, sued for damages arising from a motor vehicle accident in Newport, Rhode Island. On September 23, 1988, Armacost was struck by an automobile owned and driven by Stephen B. Owen ("Owen"), a resident of New York, and insured by Defendant Amica Mutual Insurance Company ("Amica"), a Rhode Island company based in Providence, RI.

The original Complaint was filed against Owen, the insured, on September 12, 1991. On March 5, 1992, however, Magistrate Judge Boudewyns granted plaintiff's unopposed motion for leave to amend the Complaint in order to substitute Amica, Owen's insurer, as the defendant in the action. Such "direct actions" are authorized by statute in Rhode Island when an injured party, after good-faith efforts, is unable to serve process upon the insured party. See R.I.G.L. §§ 27-7-1; 27-7-2; see also Collier v. Travelers' Ins. Co., 97 R.I. 315, 197 A.2d 493 (1964).¹ On January 21, 1993, a jury returned a verdict in the amount of $750,000 against defendant Amica, and the clerk of the Court entered judgment in accordance with the jury verdict on January 22, 1993.²

Presently before the Court are the parties' cross-motions to amend the judgment. Defendant Amica requests entry of judgment in the amount of $495,000 — the remaining amount of coverage under the insurance policy.³ Plaintiff does not dispute that Amica's contractual liability under Rhode Island law is limited to the remaining coverage under its policy. She argues, however, that the judgment should be amended to include Amica's statutory obligation under R.I.G.L. § 27-7-2.2 to pay interest above and beyond that contractual liability, based on Amica's rejection of plaintiff's pretrial settlement offer.

For the reasons stated below, I hold that the judgment must be reduced to reflect the remaining contractual liability under the insurance policy — $495,000. I also find, however, that pursuant to R.I.G.L. § 27-7-2.2, plaintiff is entitled to statutory interest on the judgment.

I

The Rhode Island Supreme Court recently considered whether Rhode Island's direct action provisions could work to enlarge the liability of an insurer beyond the limits stated in the applicable insurance policy. In Barber v. Canela, 570 A.2d 670, 671 (R.I. 1990) (citing Factory Mutual Liability Insurance Co. of America v. Cooper, 106 R.I. 632, 262 A.2d 370 (1970)), the court stated:

It is clear that § 27-7-2, which allows a direct action against an insurer when service against the insured cannot be obtained, is designed only to provide a remedy to the injured party and not to enlarge the liability of the insurer beyond the limits stated in the policy.

The court then quoted the "general rule" as stated in 12A Couch on Insurance 2d § 45:833, at 486 (Rev. ed. 1981):

As a general rule, and in the absence of contrary provisions in the statutes or policies, provisions giving the injured person the right to sue the automobile liability insurer do not enlarge the insurer's liability, but merely enable the injured person to succeed to the insured's rights against the insurer. That is, the right of the claimant is merely derivative, being derived from that of the insured, and is therefore dependent upon the existence of liability of the insurer to the insured under the contract of insurance. Id.

Plaintiff concedes that, "in the absence of contrary provisions in the statutes or policies," Barber controls the issue whether defendant Amica may be held liable for contractual damages in excess of the remaining policy coverage — $495,000. I see no reason to belabor the point and, therefore, hold that the jury's damage award of $750,000 must be reduced to $495,000.

II

The real dispute in this case involves the interpretation of Rhode Island's rejected-settlement offer interest statute, R.I.G.L. § 27-7-2.2, which authorizes the award of interest on a judgment, even where the combined judgment and interest exceeds the applicable policy limits. Section 27-7-2.2 provides:

Interest on judgment — Payment by insurer. — In any civil action in which the defendant is covered by liability insurance and in which the plaintiff makes a written offer to the defendant's insurer to settle the action in an amount equal to or less than the coverage limits on the liability policy in force at the time the action accrues and the offer is rejected by the defendant's insurer then the defendant's insurer shall be liable for all interest due on the judgment entered by the court even if the payment of the judgment and interest thereon totals a sum in excess of the policy coverage limitation. This written offer shall be presumed to have been rejected if the insurer does not respond within a period of thirty (30) days. emphasis added.

On December 29, 1992, before trial, plaintiff's counsel wrote to Amica's counsel and offered to settle plaintiff's claim for $500,000 — the amount of Amica's coverage limits. Plaintiff's offer to settle expressly referred to R.I.G.L. § 27-7-2.2. Amica did not accept the offer and went forward with the trial. Before and during the trial, Amica made a counter-offer of $175,000 to settle the claim.⁴ As noted above, the jury returned a $750,000 verdict in plaintiff's favor.

Plaintiff argues that, having complied with the rejected-settlement offer interest statute, she is entitled to "all interest due on the judgment entered by the court even if the payment of the judgment and interest thereon totals a sum in excess of the policy coverage limitation." R.I.G.L. § 27-7-2.2. In addition, she contends that prejudgment interest should be awarded from the date of the accident, and should be calculated using the full amount of the jury award — $750,000. Defendant disputes the applicability of § 277-2.2 to direct actions under R.I.G.L. § 277-2. In the alternative, it argues that principles of statutory construction and Rhode Island precedent require that the provision be interpreted to cover only the payment of post-judgment interest in excess of policy limits. These issues present questions of first impression in Rhode Island.

A

This diversity action is governed by the principles of Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and its progeny. In Roy v. Star Chopper Co., 584 F.2d 1124, 1135-36 (1st Cir.1978), cert. denied, 440 U.S. 916, 99 S.Ct. 1234, 59 L.Ed.2d 466 (1979), the First Circuit held that "a federal court should properly apply a forum state's pre-judgment interest statute when sitting in a diversity case." While the First Circuit considered the applicability of a general prejudgment interest provision, other federal courts, sitting in diversity, have applied forum state rejected-settlement offer interest statutes similar to the one involved in this case. See Murphy v. Marmon Group, Inc., 562 F.Supp. 856, 858 (D.Conn.1983) (state offer-of-judgment interest statute established "substantive statutory right" and Connecticut law applied, not federal law); Datapoint Corp. v. M & I Bank, 665 F.Supp. 722, 729 (W.D.Wis.1987) (court applied state rejected-offer interest statute rather than F.R.Civ.P. 68's offer-of-judgment provisions). These cases, and Amica's insistence that Rhode Island law control the extent of its liability under the cause of action created by R.I.G.L. § 27-7-2, lead me to conclude that R.I.G.L. § 27-7-2.2 should, if applicable by its own terms, be implemented in this case.

B

Prejudgment interest statutes are generally designed to encourage early settlement of claims and to compensate prevailing injured parties for the delay in payment necessitated by prosecuting the action. See Martin v. Lumberman's Mut. Cas. Co., 559 A.2d 1028, 1031 (R.I.1989); Di Meo v. Philbin, 502 A.2d 825, 826 (R.I.1986) (citing Isserlis v. Director of Public Works, 300 A.2d 273 (R.I.1973)). Plaintiff argues, and I agree, that Rhode Island's rejected-settlement offer interest statute serves the same compensatory and settlement goals as the state's more general interest statutes. E.g., R.I.G.L. § 9-21-8 (Interest on judgment for money); R.I.G.L. § 9-21-10 (Interest in civil action).

When a plaintiff's claim is serious enough to approach policy limits, an insurer's incentive to settle in order to avoid the effect of a general interest statute evaporates. The insurer can refuse to settle with impunity, because its total exposure is limited by the policy. Section 27-7-2.2 attempts to reinvigorate the normal balance in negotiating power by shifting to the non-settling insurer the risk that a plaintiff's judgment, when combined with interest, will exceed applicable policy limits. In addition, the policy of encouraging settlements would be entirely defeated if an insurance company could stall and delay litigation of a meritorious claim without any risk. In effect, by paying the policy limits immediately upon entry of judgment, the insurer could avoid paying any interest whatsoever. This result would appear to render § 27-7-2.2 entirely superfluous.

There are few cases in this area, and none in Rhode Island. Nevertheless, decisions in other jurisdictions support the above reasoning. For example, in Knoche v. Wisconsin Mutual Ins. Co., 151 Wis.2d 754, 445 N.W.2d 740 (Ct.App.1989), a Court of Appeals in Wisconsin interpreted that state's rejected settlement offer interest statute as authorizing statutory interest in excess of policy limits. The Wisconsin statute provides, in pertinent part:

If there is an offer of settlement by a party under this section which is

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