Clauson v. New England Ins. Co.

Decision Date01 February 2000
Docket NumberNo. 97-511-T.,97-511-T.
Citation83 F.Supp.2d 278
PartiesJohn CLAUSON v. NEW ENGLAND INSURANCE COMPANY.
CourtRhode Island Supreme Court

Marty C. Marran, Pawtucket, RI, for plaintiff.

Michael P. Duffy, Peabody & Arnold, LLP, Providence, RI, for defendant.

MEMORANDUM OF DECISION

TORRES, Chief Judge.

John Clauson brought this diversity action, pursuant to R.I.G.L. §§ 27-7-1 and 27-7-2, to recover the unsatisfied portion of a malpractice judgment obtained by Clauson against his former attorney who was insured by New England Insurance Company ("NEIC").

The issues presented are whether the insured's refusal to consent to a proposed settlement of Clauson's claim limits NEIC's liability under the policy to the amount of the proposed settlement; and, whether Clauson is entitled to interest that would cause any recovery from NEIC to exceed its policy limit.

I find that, because the insured's refusal was not unreasonable, Clauson is entitled to recover from NEIC the unpaid balance of the judgment against its insured. I also find that, under Rhode Island law, the amount that Clauson may recover cannot exceed the policy limit.

FACTS

The facts, as stipulated to by the parties, are as follows. In early 1991, attorney Sanford Kirshenbaum represented John Clauson in a divorce proceeding in the Providence County Family Court. During that proceeding, a commissioner was appointed to sell a fishing trawler owned by Clauson which was encumbered by a security interest in the amount of $158,000. The commissioner listed the vessel for sale at a price of $267,300 based upon a professional appraisal of its value.

Several months later, the commissioner received a bid of $160,000 and a hearing was scheduled for June 4, 1991, to determine whether the bid should be accepted. Kirshenbaum failed to attend that hearing and, on June 6, an order approving the sale was entered. That order was not appealed because new counsel retained by Clauson advised against an appeal.

Clauson, later, sued Kirshenbaum for malpractice alleging that, because of Kirshenbaum' s absence from the June 4 hearing, the trawler was sold for much less than its true value. NEIC, as Kirshenbaum's malpractice insurer, undertook defense of that action under a reservation of rights and hired attorney Michael Stone to represent Kirshenbaum.

During the course of settlement negotiations, Kirshenbaum consistently maintained that his alleged negligence in failing to attend the June 4 hearing did not cause any loss to Clauson because the sale price of $160,000 would have been approved even if Kirshenbaum had been present. Stone agreed that it was "not at all clear that Mr. Kirshenbaum's presence would have persuaded the judge to disapprove the sale" and he so advised NEIC. Nevertheless, because the sale was for $100,000 less than the vessel's appraised value; and, because Kirshenbaum's failure to appear put him at risk, Stone recommended that NEIC establish a $40,000 reserve for the case "despite the fact that the underlying claim is somewhat speculative."

In 1994, the parties agreed to submit Clauson's claim to non-binding arbitration and the arbitrator awarded Clauson $20,000 plus interest of $9,000, an amount well within Kirshenbaum's policy limit of $100,000.001. Stone recommended payment of that amount because a trial might result in a larger verdict against Kirshenbaum.

NEIC informed Kirshenbaum that it was willing to pay the award and that Clauson was willing to accept that payment in full settlement of his claim. When Kirshenbaum refused to authorize the settlement, NEIC informed him that it considered his refusal to be "unreasonable" and that, unless he consented, it would withdraw its defense and consider its liability, under the policy, to be limited to $20,000.00. However, Kirshenbaum's position remained unchanged and the arbitration award was appealed.

After a bench trial, a Superior Court justice found that the appraisal of $267,300.00 accurately reflected the vessel's value and determined that, if properly advised, Clauson could have purchased it for $179,167.50, the amount necessary to satisfy the outstanding security interest and the commissioner's fee. The judge calculated Clauson's damages as the value of the vessel (i.e., $267,300) less the amount Clauson would have had to pay for it (i.e., $179,167.50) plus Clauson's one-half share of the amount that had to be paid to satisfy the obligations remaining after the commissioner's sale (i.e., $9,583.50, being one half of $19,167). Accordingly, judgment was entered against Kirshenbaum in the amount of $97,716.30, plus interest at the statutory rate of 12% per annum.

Kirshenbaum moved for a new trial on the ground that Clauson never had asserted a claim based on Kirshenbaum's failure to advise him that he should offer to purchase the vessel himself and that no expert evidence was presented supporting a finding that such failure constituted malpractice. That motion was granted and the case was retried to permit the presentation of expert testimony regarding Kirshenbaum's alleged failure to properly advise Clauson.

Following the retrial, the same judge, again, concluded that Kirshenbaum was negligent in not advising Clauson to purchase the vessel himself and re-entered judgment in Clauson's favor in the amount of $97,716.00, plus interest.

NEIC has paid Clauson the sum of $29,000, the amount that it was willing to pay in satisfaction of the arbitration award. However, NEIC maintains that, under the terms of Kirshenbaum's policy, it has no responsibility for the balance of the judgment against Kirshenbaum because Kirshenbaum refused to consent to the proposed settlement.

Discussion
I. The Statutes

Because a liability insurance policy is a contract between the insurer and the insured, third parties, ordinarily, lack standing to compel payment under the policy. See Skaling v. Aetna Insurance Co., 742 A.2d 282, 291 (R.I.1999) (a tortfeasor's insurer is "liable to the injured parties only because of the insurer's contract to indemnify its insured tortfeasor and ... the insurer owe[s] no duty to the injured parties"). However, R.I.Gen.Laws §§ 27-7-1 and 27-7-2 permit an injured party to sue a tortfeasor's liability insurer in order to obtain satisfaction of a judgment obtained against the tortfeasor.

Obviously, in such cases, the third party's rights against the insurer can be no greater than the rights possessed by the insured into whose shoes the third party steps. Thus, the insurer is not liable to the injured party for damages that exceed the limits of the insured's policy. See Factory Mutual Liability Ins. Co. of America v. Cooper, 106 R.I. 632, 262 A.2d 370 (1970).

Accordingly, the Court, first, must determine the amount of Kirshenbaum's coverage under the policy issued to him. More specifically, the issue to be decided is whether Kirshenbaum's refusal to authorize a settlement for the amount awarded by the arbitrator limits NEIC's indemnification obligation to that amount.

II. The Policy
A. Rules of Construction

Under Rhode Island law, an insurance policy is construed in the same manner as any other contract. See Mallane v. Holyoke Mutual Insurance Co. in Salem, 658 A.2d 18, 20 (R.I.1995). When the provisions are clear and unambiguous, they must be applied as written. On the other hand, where an ambiguity exists and the provisions are susceptible to more than one reasonable interpretation, they should be construed strictly against the insurer. Employers Mutual Casualty Co. v. Pires, 723 A.2d 295, 298 (R.I.1999), Amica Mutual Ins. Co. v. Streicker, 583 A.2d 550, 551 (R.I.1990).

In determining whether an ambiguity exists, the policy must be examined "in its entirety, giving each word its plain, ordinary, and usual meaning." Employers Mutual, 723 A.2d at 298. See also McGowan v. Connecticut Gen. Life Ins. Co., 110 R.I. 17, 289 A.2d 428, 429 (1972). Moreover, the policy should be construed in a manner that harmonizes and gives effect to all of its material terms and avoids rendering any of its provisions meaningless. See Psaty & Fuhrman, Inc. v. Housing Authority of City of Providence, 76 R.I. 87, 68 A.2d 32, 35 (1949). See also Cohen v. Steve's Franchise Co., Inc., 927 F.2d 26, 29 (1st Cir.1991) (applying Mass. law).

B. The Consent Provision

Like many malpractice policies, Kirshenbaum's policy prevents the company from settling claims against Kirshenbaum without Kirshenbaum's consent. It provides that:

The Company shall have the right to make any investigation it deems necessary and with the written consent of the insured, said consent not to be unreasonably withheld, any settlement of any claim covered by the terms of this policy.

(Emphasis added)

Clauses like this sometimes are referred to as "pride" provisions. They commonly are included in professional liability policies in recognition of the fact that settlement of claims may adversely and unjustifiably affect the insured's professional reputation. See R. Long, Law of Liability Insurance, § 12C.08[8] (1998).

This clause also prohibits Kirshenbaum from "unreasonably" withholding his consent to a proposed settlement. Prohibitions like that are directed at situations in which it is unlikely that any potential judgment will exceed the policy limit; and, therefore, the insured may have little incentive to consent to a settlement because the cost of defense and the risk of a larger judgment are borne, entirely, by the insurer. See Id.

C. Effect of Withholding Consent

There is no question that, if Kirshenbaum unreasonably withheld his consent, NEIC's indemnification obligation would be capped at the $29,000 awarded by the arbitrator. NEIC argues that this limitation would be equally applicable even if Kirshenbaum acted reasonably in withholding his consent. It relies on the following paragraph of the policy that immediately follows the aforementioned provision requiring consent to settle:

If the insured shall refuse to consent...

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