Rosciti v. Liberty Mut. Ins. Co.

• Decision Date: 30 August 2010
• Docket Number: No. C.A. 09-338 S,C.A. 09-338 S
• Citation: 734 F.Supp.2d 248
• Parties: Henry ROSCITI, Donna Rosciti, Henry Rosciti, Jr., Plaintiffs, v. LIBERTY MUTUAL INSURANCE COMPANY, Liberty Northwest Insurance Corp., John Doe Insurance Company, and The Insurance Company of the State of Pennsylvania as Insurers of Monaco Coach Corporation, Defendants.
• Court: U.S. District Court — District of Rhode Island

734 F.Supp.2d 248

Henry ROSCITI, Donna Rosciti, Henry Rosciti, Jr., Plaintiffs,

v.LIBERTY MUTUAL INSURANCE COMPANY, Liberty Northwest Insurance Corp., John Doe Insurance Company, and The Insurance Company of the State of Pennsylvania as Insurers of Monaco Coach Corporation, Defendants.

No. C.A. 09-338 S.

United States District Court, D. Rhode Island.

Aug. 30, 2010.

Robert D. Fine, Esq., Seth H. Handy, Esq., Chace, Ruttenberg & Freedman, LLP, Paul S. Cantor, Esq., Providence, RI, for Plaintiffs.

Raymond M. Ripple, Esq., Stephen M. Prignano, Esq., Edwards Angell Palmer & Dodge LLP, Providence, RI, for Defendants.

OPINION AND ORDER

WILLIAM E. SMITH, District Judge.

This diversity action arises out of negligence and products liability claims that Plaintiffs assert against Monaco Coach Corporation ("Monaco"), which is currently in Chapter 7 bankruptcy. Plaintiffs proceed pursuant to Rhode Island's so-called "direct action" statute, R.I. Gen. Laws 1956, § 27-7-2.4 (2010), which allows tort victims to recover damages directly from liability insurers of a bankrupt tortfeasor. Defendant Insurance Company of the State of Pennsylvania ("ICSOP"), which provided Monaco with excess insurance at relevant times, has moved for summary judgment. ICSOP contends that Monaco has not met a prerequisite to coverage under its excess insurance policies, and therefore that Plaintiffs cannot recover from retained limit, and, according to ICSOP, must exhaust that limit before ICSOP becomes liable. The parties agree that will not happen, because Monaco is insolvent.

At the heart of the dispute is this question: does § 27-7-2.4 effectively nullify the retained limit exhaustion requirement in ICSOP's policies because Monaco is bankrupt? For the reasons explained below, the Court concludes that it does not, and that Defendant's motion must therefore be granted.

I. Background

Plaintiffs allege that Monaco sold them a defective mobile home and then failed to repair it. As a result, the vehicle leaked, allegedly causing one of the Plaintiffs to suffer health problems because of toxic mold. ( See Am. Compl. ¶¶ 7-16.) Plaintiffs assert claims of negligence, breach of warranty, and strict products liability against Monaco. ( See id. ¶¶ 21-39.)

Because Monaco is now bankrupt, Plaintiffs have named as Defendants Monaco's insurers, including ICSOP. Plaintiffs argue ICSOP is liable to them pursuant to § 27-7-2.4, which provides:

Any person, having a claim because of damages of any kind caused by the tort of any other person, may file a complaint directly against the liability insurer of the alleged tortfeasor seeking compensation by way of a judgment for money damages whenever the alleged tortfeasor files for bankruptcy, involving a chapter 7 liquidation, a chapter 11 reorganization for the benefit of creditors or a chapter 13 wage earner plan, provided that the complaining party shall not recover an amount in excess of the insurance coverage available for the tort complained of.

R.I. Gen. Laws § 27-7-2.4.

The conflict here springs from the fact that ICSOP is not Monaco's primary insurer. Instead, it provided excess insurance for Monaco, covering claims above $500,000 up to limits ranging from $1.5 to $2.5 million, depending on the policy. For the primary layer of liability coverage, up to $500,000, Monaco is self-insured. ( See Defendant's Statement of Undisputed Facts ¶ 14, ECF No. 13, May 20, 2010 (hereinafter "Def.'s Facts").) ICSOP asserts that each of the excess insurance policies issued to Monaco require it to pay out that full amount before it can obtain any coverage from ICSOP, even for claims above $500,000. Yet, Monaco has not paid any portion of Plaintiffs' claims, and is protected from liability under bankruptcy rules.

As a result of Monaco's failure to pay its retained limit, ICSOP insists that it can have no liability to Monaco. And that, in turn, means there is no "insurance coverage available" under the ICSOP policies against which Plaintiffs can recover pursuantto § 27-7-2.4, according to ICSOP. See R.I. Gen. Laws § 27-7-2.4. That is, because Monaco is not entitled to excess insurance from ICSOP, ICSOP concludes that § 27-7-2.4 allows no direct action against ICSOP based on Monaco's negligence.

Plaintiffs do not dispute any of ICSOP's alleged facts. Instead, they argue that the terms of the contracts, and of § 27-7-2.4, allow them to recover any damages above $500,000 directly from ICSOP, even though Monaco cannot pay that retained limit. Thus, the outcome of this controversy turns on what the terms of the excess policies mean, and whether the direct action statute overrides any of them.

II. Discussion

To decide ICSOP's motion, the Court must answer two questions. First, do the excess policies allow Plaintiffs to tap into ICSOP's excess coverage for Monaco, even though Monaco cannot pay its retained limit? And, second, if they do not, does § 27-7-2.4 supersede that result? Because, for the reasons explained below, the answer to both questions is no, ICSOP is entitled to summary judgment.

A. Terms of the excess policies

ICSOP points to two provisions in each of the excess policies that, it argues, rule out coverage for Monaco's liability to Plaintiffs. First, the policies state that ICSOP agreed as follows: "We shall pay you [Monaco], on your behalf, the ultimate net loss, in excess of your retained limit, that you become legally obligated to pay...." (Excess Policies, section I.A.1, Exs. 1-5 to Affidavit of Karen Spencer, ECF No. 14, Apr. 13, 2010 (hereinafter "Spencer Aff."); see Def.'s Facts ¶ 2.) The "retained limit" is an agreed-upon dollar amount that may be satisfied by "a self-insured retention, underlying insurance, or a combination thereof." (Excess Policies, section II.EE, Exs. 1-5 of Spencer Aff.) In this case, the "retained limit" refers to Monaco's $500,000 self-insured retention. ( See Def.'s Facts ¶ 14.)

Second, section III.C of the policies provides:

Our duty to pay any sums that you [Monaco] become legally obligated to pay arises only after there has been a complete expenditure of your retained limit(s) by means of payments for judgments, settlements, or defense costs.

(Excess Policies section III.C, Exs. 1-5 to Spencer Aff.) It is uncontested that Monaco has not exhausted its $500,000 limit, and that it will not be able to pay that amount.

Plaintiffs, however, say the policies actually drop the exhaustion requirement in the event of Monaco's bankruptcy. They cite section VI.D:

Your bankruptcy, insolvency or inability to pay, or the bankruptcy, insolvency or inability to pay of any of your underlying insurers shall not relieve us from the payment of any claim covered by this Policy.

But under no circumstances shall the bankruptcy, insolvency, or inability to pay require us to drop down or in any way replace your retained limit or assume any obligation associated with your retained limit.

(Excess Policies section VI.D, Exs. 1-5 to Spencer Aff.) Plaintiffs concede that they cannot ask ICSOP to "drop down" to pay the first $500,000 of Monaco's liability, or "replace" the retained limit. Yet, they highlight the instruction in section VI.D that Monaco's bankruptcy "shall not relieve" ICSOP from paying covered claims. Therefore, Plaintiffs assert, ICSOP must pay any damages above $500,000, because the reason Monaco cannot honor its retained limit is insolvency. In other words,Monaco's bankruptcy triggers section VI.D, which trumps the exhaustion prerequisite in section III.C.

B. Do the policies require exhaustion even if the insured is bankrupt?

Both sides agree the policies are governed by Rhode Island law, which provides that if the terms of an insurance policy are "clear and unambiguous, judicial construction is eclipsed and the contract must be applied as written." Aetna Cas. & Sur. Co. v. Sullivan, 633 A.2d 684, 686 (R.I.1993). In that event, the Court cannot "deviate from literal policy language." Town of Cumberland v. R.I. Interlocal Risk Mgmt. Trust, Inc., 860 A.2d 1210, 1215 (R.I.2004).

Alternatively, if the policies are ambiguous, they must be read in the light most favorable to Plaintiffs. The rule of contra proferentum, which means "against the drafter," requires a court to "construe ambiguous terms in an insurance contract in favor of the insured." Open Software Found., Inc. v. U.S. Fidelity & Guar. Co., 307 F.3d 11, 17 (1st Cir.2002); see Zifcak v. Monroe, 105 R.I. 155, 249 A.2d 893, 896 (1969) ("[I]f the terms of an agreement are doubtful and uncertain, they shall be construed most strongly against the author thereof."); accord Lifespan/Physicians Prof'l Servs. Org., Inc. v. Combined Ins. Co. of Am., 345 F.Supp.2d 214, 222 (D.R.I.2004) (denying summary judgment to insurer and applying contra proferentum where language was ambiguous). "An ambiguity occurs only when the contract term is reasonably and clearly susceptible of more than one interpretation." Merrimack Mut. Fire Ins. Co. v. Dufault, 958 A.2d 620, 625 (R.I.2008) (citation and internal quotation marks omitted).

According to Plaintiffs, the contracts are ambiguous, because Plaintiffs' interpretation is just as reasonable as ICSOP's contrasting view. Monaco cannot pay its first $500,000 of self-insured liability, because it is insolvent and protected by the rules of bankruptcy. Therefore, Plaintiffs declare, the "complete expenditure" requirement in section III.C cannot apply in this instance. (Excess Policies section III.C, Exs. 1-5 to Spencer Aff.) If it did, they reason, that would have the effect of allowing bankruptcy to "relieve" ICSOP from the coverage it promised, in violation of section VI.D.

Put differently, Plaintiffs believe sections III.C and VI.D clash with one another, leaving no conclusion but that the contracts are inherently ambiguous. Cf. Nat'l Fire & Marine Ins. Co. v. Adoreable Promotions, Inc., 451 F.Supp.2d 1301, 1307 (M.D.Fla.2006) ("A provision in a contract is ambiguous if it irreconcilably conflicts with another provision, or when...