Rosciti v. the Ins. Co. of State

• Decision Date: 07 October 2011
• Docket Number: No. 10–2087.,10–2087.
• Citation: 659 F.3d 92
• Parties: Henry ROSCITI, Donna Rosciti, and Henry Rosciti, Jr., Plaintiffs, Appellants,v.The INSURANCE COMPANY OF the State of PENNSYLVANIA, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

659 F.3d 92

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

v.The INSURANCE COMPANY OF the State of PENNSYLVANIA, Defendant, Appellee.

No. 10–2087.

United States Court of Appeals, First Circuit.

Heard April 5, 2011.Decided Oct. 7, 2011.

Robert D. Fine, with whom Douglas J. Emanuel and Chace, Ruttenberg & Freedman, LLP, were on brief for appellants.Stephen M. Prignano, with whom Raymond M. Ripple and Edwards Angell Palmer & Dodge LLP, were on brief for appellee.Before TORRUELLA, BOUDIN, and LIPEZ, Circuit Judges.TORRUELLA, Circuit Judge.

Appellants Henry Rosciti, Donna Rosciti, and Henry Rosciti, Jr. (“the Roscitis”) sued Monaco Coach Corporation (“Monaco”) over alleged defects in a motor home Monaco manufactured. Monaco was self-insured for liability up to $500,000, and appellee Insurance Company of the State of Pennsylvania (“ICSOP”) provided excess insurance for liability above $500,000. Monaco went bankrupt shortly after the Roscitis filed their lawsuit. Therefore, the Roscitis added ICSOP as a defendant, invoking a Rhode Island statute allowing tort victims to recover damages directly from liability insurers of a bankrupt tortfeasor, but only within the limits of the insurance policy.

ICSOP moved for summary judgment, arguing that its coverage obligations had not been triggered. ICSOP pointed to a limiting provision in Monaco's policy stating that ICSOP's duty to pay arose only after Monaco had paid the initial $500,000, which Monaco had not done.¹ The Roscitis countered by pointing to other language in the policy providing that Monaco's bankruptcy would not relieve ICSOP of its payment obligations. The Roscitis also argued that if the provisions on which each side relied created a conflict in the policy, Rhode Island law required this conflict to be resolved in the Roscitis' favor.

The district court agreed with ICSOP and granted its summary judgment motion. See Rosciti v. Liberty Mut. Ins. Co., 734 F.Supp.2d 248 (D.R.I.2010). However, because we find that enforcing the limiting provision in the policy would violate the public policy of Rhode Island, we reverse and remand for further proceedings.

I. Background

Henry and Donna Rosciti purchased a mobile home manufactured by Monaco on January 17, 2004. The mobile home allegedly suffered from numerous defects that resulted in water leakage. Monaco attempted to fix the problems at various times between 2004 and 2007, but these attempts were allegedly unsuccessful. The Roscitis claim that the water leakage eventually led to the growth of toxic mold in the mobile home, rendering it uninhabitable. Henri Rosciti, Jr. occupied the mobile home, and the Roscitis allege that he developed a range of medical problems as a result of his exposure to the mold.

During the relevant time period, ICSOP provided “Special Excess Liability Policies” (the “Excess Policies”) to Monaco. The Excess Policies provided liability coverage for claims above $500,000, up to limits ranging from $1.5 million to $2.5 million, depending on the policy.² Monaco was self-insured for liability up to a “retained limit” of $500,000.

ICSOP's insurance policies with Monaco contain two provisions that are central to this appeal. The first of these is Section III(c) (the “Retained Limit Provision”), which provides:

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

The second is Section VI(D), entitled “Bankruptcy or Insolvency” (the “Bankruptcy Provision”), which provides:

[Monaco's] bankruptcy, insolvency or inability to pay, or the bankruptcy, insolvency or inability to pay of any of [Monaco's] underlying insurers shall not relieve [ICSOP] from the payment of any claim covered by this Policy. But under no circumstances shall such bankruptcy, insolvency, or inability to pay require [ICSOP] to drop down or in any way replace [Monaco's] retained limit or assume any obligation associated with [Monaco's] retained limit.

On December 18, 2008, the Roscitis sued Monaco in the Superior Court of Rhode Island, asserting claims of negligence, breach of warranty, and strict products liability. On March 5, 2009, after filing its Answer but before responding to the Roscitis' discovery requests, Monaco filed for Chapter 11 bankruptcy protection in the Bankruptcy Court for the District of Delaware.³ On June 19, 2009, the Roscitis filed an Amended Complaint in the Rhode Island Superior Court adding Monaco's insurers, including ICSOP, as defendants. The Roscitis argued that Monaco's insurers were liable under Rhode Island's “direct action” statute, 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 Roscitis have never specified the amount of monetary damages they are seeking. However, they assert that the value of their claim is greater than the $500,000 retained limit because their claim includes at least the purchase price of the mobile home plus Henry Rosciti, Jr.'s medical expenses. Monaco has not paid any portion of the Roscitis' claims, and because it is currently in bankruptcy proceedings, all creditors' claims are stayed.

ICSOP removed the case to the U.S. District Court for the District of Rhode Island on July 29, 2009. The district court had diversity jurisdiction pursuant to 28 U.S.C. § 1332(a).⁴ The Roscitis voluntarily dismissed Monaco's other insurers, Liberty Mutual Insurance Company and Liberty Northwest Insurance Corp., on April 21, 2010.

ICSOP moved for summary judgment on May 20, 2010. ICSOP contended that the Roscitis' claim should be dismissed because there was no coverage available for it under the Excess Policies. ICSOP argued it was not liable for any portion of the Roscitis' claim under $500,000 because the Bankruptcy Provision explicitly stated that ICSOP would not have to “drop down” and pay anything under the retained limit. ICSOP also argued that it was not liable for the part of the Roscitis' claim above the $500,000 limit because its payment obligation had never been triggered. ICSOP noted that the Retained Limit Provision specified that ICSOP's obligation to pay arose “only after there ha [d] been a complete expenditure of [Monaco's] retained limit.” Because Monaco had not yet exhausted the retained limit, ICSOP argued that it had no obligation to pay anything above the limit.⁵

In response, the Roscitis conceded that ICSOP was not liable for any portion of their claim below $500,000. However, they argued that because the Bankruptcy Provision stated that Monaco's bankruptcy would not relieve ICSOP of any payment obligations, ICSOP was still liable above $500,000, despite the fact that Monaco had not yet exhausted the retained limit. The Roscitis also argued that to the extent the Retained Limit Provision conflicted with the Bankruptcy Provision, Rhode Island law required that the conflict be resolved in their favor. See Amica Mut. Ins. Co. v. Streicker, 583 A.2d 550, 552 (R.I.1990) (stating that ambiguities in insurance policies are strictly construed against the insurer).

The district court held that there was no conflict between the Retained Limit Provision and the Bankruptcy Provision. Rosciti, 734 F.Supp.2d at 251–52. The Bankruptcy Provision provides that ICSOP would still be liable for claims “covered by” the policies if Monaco went bankrupt. The court read this language to incorporate the exclusions that appeared elsewhere in the Excess Policies, including in the Retained Limit Provision. Id. at 252. Thus, because Monaco had not exhausted the retained limit, ICSOP's payment obligations could not be triggered even if the Roscitis' claim was over $500,000, and therefore the Roscitis' claim could never be “covered” under the Excess Policies. Id.

The court also held that the direct action statute did not void the Retained Limit Provision. The court reasoned that the Retained Limit Provision could not be read as a “grab for immunity” from the direct action statute because there were circumstances under which Monaco conceivably could have exhausted the retained limit. Id. at 254. The court also noted that the direct action statute, § 27–7–2.4, explicitly limited claims against insurers to “coverage available” under the plan, and concluded that exhaustion requirements such as the Retained Limit Provision were not prohibited by the statute. Id. at 254–55.

This appeal followed.

II. Discussion

We review a district court's grant of summary judgment de novo, resolving all evidentiary conflicts and drawing all reasonable inferences in favor of the nonmoving party-in this case, the Roscitis. Kuperman v. Wrenn, 645 F.3d 69, 73 (1st Cir.2011). “Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.” Robidoux v. Muholland, 642 F.3d 20, 22 (1st Cir.2011). “[The] party moving for summary judgment bears the burden of demonstrating the absence of a genuine issue of material fact and that it is entitled to judgment as a matter of law.” Carmona v. Toledo, 215 F.3d 124, 132 (1st Cir.2000).

Because this case was heard in the District of Rhode Island pursuant to the court's diversity jurisdiction, we apply the substantive law of the state of Rhode Island. See Artuso v. Vertex Pharm., Inc., 637 F.3d 1, 5 (1st Cir.2011) (“[A] federal court...