United States Court of Appeals
For the First Circuit
No. 10-2087
HENRY ROSCITI, DONNA ROSCITI,
AND HENRY ROSCITI, JR.,
Plaintiffs, Appellants,
v.
THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. William E. Smith, U.S. District Judge]
Before
Torruella, Boudin, and Lipez,
Circuit Judges.
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.
October 7, 2011
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.
1
The Roscitis never specified a precise dollar amount for their
claim against Monaco. However, they maintain that it is greater
than $500,000. See Section I, infra.
-2-
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,
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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
2
The annual policy limit was $1.5 million from March 4, 2004,
until March 4, 2006, after which the limit increased to $2.5
million.
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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.
3
On June 29, 2009, the Bankruptcy Court for the District of
Delaware converted Monaco's bankruptcy from Chapter 11 to Chapter
7.
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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
4
The Roscitis, Monaco and the insurers are all citizens of
different states, and the amount in controversy is at least
$262,515, the purchase price of the mobile home.
5
ICSOP also argued that the Roscitis' breach of contract, breach
of warranty, and negligence claims were excluded from coverage to
the extent they seek damages for injury to the mobile home itself.
-6-
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'
The Roscitis conceded this point based on other provisions of the
Excess Policies. The district court did not reach these issues and
they are not present in this appeal. We take no position on the
validity of these arguments.
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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
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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
sitting in diversity must apply the substantive law of the forum
state.") (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78
(1938)). Rhode Island's direct action statue, § 27-7-2.4, only
allows the Roscitis to recover "insurance coverage available" for
their claim from ICSOP. Therefore, the central question for this
court is whether there can be any coverage available under the
Excess Policies in light of Monaco's inability to exhaust its
retained limit.
ICSOP urges us to affirm the district court's ruling that
there is no coverage available because the Retained Limit Provision
has not been satisfied. The Roscitis raise two arguments against
the application of the Retained Limit Provision. First, they argue
that the Retained Limit Provision and the Bankruptcy Provision
create a conflict in the Excess Policies that must be resolved in
their favor. Second, they argue that the direct action statute
renders the Retained Limit Provision inapplicable. We address
these points in turn.
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A. Ambiguity in the Excess Policies
Ordinarily, when interpreting an insurance policy, a
court "look[s] at the four corners of [the] policy, viewing it in
its entirety, affording its terms their plain, ordinary and usual
meaning." Town of Cumberland v. R.I. Interlocal Risk Mgmt. Trust,
Inc., 860 A.2d 1210, 1215 (R.I. 2004) (internal quotation marks
omitted). However, "[i]n situations in which ambiguity does exist
in an insurance policy or the terms are subject to more than one
reasonable interpretation, the contract will be strictly construed
against the insurer." Amica Mut. Ins. Co., 583 A.2d at 552.
The Roscitis argue that there is a clash between the
Retained Limit Provision and the Bankruptcy Provision. The
Bankruptcy Provision says that Monaco's "bankruptcy, insolvency or
inability to pay . . . shall not relieve [ICSOP] from the payment
of any claim covered by" the Excess Policies. However, the
Roscitis argue, if the Retained Limit Provision remains in force,
then its net effect in this case is to "relieve [ICSOP] from the
payment of [a] claim covered by" the Excess Policies. Since this
reading would nullify the Bankruptcy Provision, the Roscitis urge
us to read an exception to the Retained Limit Provision for
situations where, as here, it cannot be satisfied due to
insolvency.
ICSOP, in contrast, argues that the Roscitis are asking
us to impermissibly read ambiguity into the contract where none
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exists. See Town of Cumberland, 860 A.2d at 1215 (court should not
"indulge in mental gymnastics to read ambiguity where none is
present") (internal omission and quotation marks omitted). ICSOP
notes that the Bankruptcy Provision applies only to claims "covered
by" the Excess Policies. This, ICSOP argues, is a clear reference
to limitation provisions elsewhere in the Excess Policies,
including the Retained Limit Provision. Thus, according to ICSOP,
the meaning of the Excess Policies is clear: ICSOP is liable if
Monaco is bankrupt, but only if the Retained Limit Provision is
somehow satisfied.
We agree with ICSOP that the policy is not ambiguous. We
see no inherent conflict between the Retained Limit Provision and
the Bankruptcy Provision; rather, we agree with ICSOP that the
latter is plainly subject to the limitations in the former. We
disagree with the Roscitis that the reverse reading of the Excess
Policies -- under which the Bankruptcy Provision is a limit on the
Retained Limit Provision -- is also plausible. The Bankruptcy
Provision, by referring to claims "covered by this Policy," clearly
alerts the reader to examine the rest of the contract for possible
limits on ICSOP's liability. The Retained Limit Provision, in
contrast, contains no such cautionary language; ICSOP is liable
"only after there has been a complete expenditure of [Monaco's]
retained limit" (emphasis added).
-11-
Since we will not read ambiguity into the contract, see
Town of Cumberland, 860 A.2d at 1215, we will not automatically
construe the Excess Policies against ICSOP. Contra Amica Mut. Ins.
Co., 583 A.2d at 552. Rather, we will give the Excess Policies
their plain meaning: ICSOP is still liable above the retained
limit if Monaco is bankrupt, but only after Monaco exhausts the
retained limit. However, this does not end our inquiry, for we
must still consider whether this result is compatible with public
policy.
B. Public Policy
Under Rhode Island law, a contract term will not be
enforced if it violates public policy. Gorman v. St. Raphael
Acad., 853 A.2d 28, 39 (R.I. 2004). If a contract provision
frustrates a right created by statute, a court will void that
provision as against public policy. Cf. Pepin v. Am. Universal
Ins. Co., 540 A.2d 21, 22-23 (R.I. 1988) (voiding contract
provision that was found to frustrate statutory right to binding
arbitration).
The Roscitis argue that, as interpreted by the district
court, the Retained Limit Provision nullifies their rights under
§ 27-7-2.4. Because Monaco has not exhausted and is now incapable
of exhausting the $500,000 retained limit, the Roscitis cannot
recover anything above that amount from ICSOP. This frustrates the
Legislature's purpose in passing § 27-2-2.4, which was to "give an
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aggrieved and injured party the right to proceed directly against
an insurer in those circumstances in which the tortfeasor has
sought protection under the applicable provisions of the United
States Bankruptcy Code." D'Amico v. Johnston Partners, 866 A.2d
1222, 1229 (R.I. 2005).
ICSOP counters, however, by noting that the Rhode Island
Legislature limited recovery under § 27-7-2.4 to "insurance
coverage available for the tort complained of" (emphasis added).
Thus, ICSOP argues, it was clearly not the Legislature's intent to
expand the scope of coverage available under an insurance policy.
Cf. Barber v. Canela, 570 A.2d 670, 671 (R.I. 1990) (holding that
a related direct action statute, R.I. Gen. Laws § 27-7-2, "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") (emphasis added). Yet ICSOP contends that nullifying
the Retained Limit Provision would have precisely that effect, by
eliminating the critical threshold requirement for ICSOP's
obligations. ICSOP also contends that the Roscitis' position would
effectively require ICSOP to "drop down" below the $500,000
retained limit, since any recovery from ICSOP would represent the
first dollars the Roscitis recover on their claim.
In deciding what Rhode Island's public policy requires in
this case, we would ordinarily be bound by the teachings of the
Rhode Island Supreme Court. N. Am. Specialty Ins. Co. v. Lapalme,
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258 F.3d 35, 38 (1st Cir. 2001). However, the parties have not
identified, and we have not discovered, any ruling by the Rhode
Island Supreme Court that directly addresses the question of
whether a retained limit provision frustrates the purpose of § 27-
7-2.4. "'In the absence of a definitive ruling by the highest
state court, [we] may consider analogous decisions, considered
dicta, scholarly works, and any other reliable data tending
convincingly to show how the highest court in the state would
decide the issue at hand.'" Id. (quoting Gibson v. City of
Cranston, 37 F.3d 731, 736 (1st Cir. 1994)). We thus examine the
broader public policy context surrounding § 27-7-2.4 and explore
how other courts have resolved the policy question present here.
When we apply this analysis, we conclude that the Roscitis'
position is correct.
Faced with insurance companies arguing that their
policies were merely contracts of "indemnity" -- thus preventing
recovery against the insurer without the insured actually
discharging liability to the victim -- many states enacted
legislation
requiring that liability insurance contracts
include a provision to the effect that the
insolvency or bankruptcy of an insured shall
not release an insurer from liability. In
time, similar legislation almost certainly
would have been adopted in every state had not
insurers revised the standard policy forms
used for liability insurance to provide
coverage without regard to an insured's
insolvency.
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Robert Keeton & Alan Widiss, Insurance Law § 4.8(b), at 378
(practitioner's ed. 1988). Rhode Island does not have such a
statute, which we term a "bankruptcy provision law." Nevertheless,
it is clear that Rhode Island's public policy is to prevent
insurance companies from avoiding their obligations when an
insolvent insured cannot make an expenditure towards discharging
liability. As noted above, the passage of § 27-7-2.4 reflects the
Legislature's intent to preserve a tort victim's right of recovery
when the insured became insolvent. Additionally, the Rhode Island
Supreme Court has recognized the "generally agreed" rule that "the
debtor's discharge does not affect the liability of the debtor's
insurer for damages caused by the debtor." D'Amico, 866 A.2d at
1228 (quoting 4 Lawrence P. King, Collier on Bankruptcy, ¶ 524.05
& n.22, at 524-26 (15th rev. ed. 2000)). In light of this public
policy, we conclude that the Retained Limit Provision cannot be
enforced here. To do so would have the ultimate effect of allowing
ICSOP to avoid its obligations thanks to Monaco's bankruptcy, a
result which is contrary to the public policy of Rhode Island.
Our result is consistent with the result that many other
courts have reached when dealing with insurance policies in which
a bankruptcy provision in the policy is overridden by another
provision that conditions the insurer's liability on some payment
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by the insured.6 While courts considering the policy question at
issue here have reached mixed results, in cases governed by the law
of states with policy frameworks similar to Rhode Island's, courts
have generally held that the limiting provision must yield to
public policy. Compare In re Vanderveer Estates Holding, LLC, 328
B.R. 18, 24 (Bankr. E.D.N.Y. 2005) (stating that public policy
behind bankruptcy clause required under Illinois law "prevents
insurers from avoiding indemnity obligations where self-insured
retentions have not been paid by a bankrupt insured"), with Pak-Mor
Mfg. Co. v. Royal Lines Ins. Co., No. SA-05-CA-135-RF, 2005 WL
3487723, at *4-*6 (W.D. Tex. Nov. 3, 2005) (rejecting policy
argument).
For example, Albany Insurance Co. v. Bengal Marine, Inc.
involved a policy requiring the insured to pay a certain deductible
before the insurer became liable; the Fifth Circuit, applying
Louisiana law, held that, in light of Louisiana's direct action
statute, the insurer was liable for claims above the deductible up
to the policy limit when the insured could not pay the deductible
due to insolvency. 857 F.2d 250, 255-56 (5th Cir. 1988). Other
courts have reached a similar result by holding that enforcing
retained limit or deductible provisions in this situation would
6
At least one commentator described this result as the "majority
view" in this type of case. See Patricia Bronte, "'Pay First'
Provisions and the Insolvent Policyholder," Insurance Coverage Law
Bulletin, June 2004.
-16-
defeat state bankruptcy provision laws. See, e.g., Home Ins. Co.
of Ill. v. Hooper, 691 N.E.2d 65, 70 (Ill. App. Ct. 1998) (holding
that an insurer's reliance on a retained limit provision --
referred to as a "self-insured retention limit" -- to avoid payment
when the insured became insolvent was "directly contrary to the
public policy as declared by the legislative enactment of"
Illinois' bankruptcy provision law), cert. denied, 699 N.E.2d 1031
(Ill. 1998); Columbia Cas. Co. v. Fed. Press Co., 104 B.R. 56, 62-
63 (Bankr. N.D. Ind. 1989) (reaching similar result based on
Indiana bankruptcy provision law).
Conversely, in states without such a strong policy in
favor of a claimant's right to recover from an insurance company in
the event of the insured's insolvency, courts have reached the
opposite result. For example, in Pak-Mor, the court distinguished
Albany Insurance, Home Insurance, and Columbia Casualty by noting
that those cases were based on public policy concerns not
applicable to Texas. 2005 WL 3487723 at *5-*7. See also id. at *6
("Under Texas law, insurers are free to issue policies that relieve
them of liability in the bankruptcy context.").7 Since there was
no Texas public policy at issue, the court relied on what it found
7
Texas also does not have a direct action statute; a non-party to
an insurance contract may bring suit against an insurer to enforce
an insurance agreement only if the non-party is a legal beneficiary
of the contract or a judgment creditor of the insured. See Essex
Inc., Co. v. Bayou Concession Salvage, Inc., 942 F. Supp. 258, 260
(E.D. La. 1996) (applying Texas law).
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to be the plain meaning of the contract, which was that the
retained limit requirement applied even in the face of the
insured's bankruptcy. Id. at *5.
If, as in Pak-Mor, the language of the policy was the
only factor controlling the outcome of this case, we would affirm
the district court. See II(A), supra. However, we are dealing
here with a legal framework very similar to those at issue in
Albany Insurance, Home Insurance, and Columbia Casualty. We
therefore believe that the logic of those cases applies.
We largely agree with ICSOP that public policy in Rhode
Island does not require ICSOP to expand the scope of its coverage.
However, we disagree that our holding results in any expansion of
ICSOP's coverage obligations. If the Roscitis were to eventually
win a judgment in an amount less than $500,000, ICSOP would not be
liable for any portion of that judgment. Likewise, if the Roscitis
were to win a judgment greater than $500,000, ICSOP would only be
liable for the amount of the judgment above $500,000. Furthermore,
any award against ICSOP would be capped by the limits of the Excess
Policies. Thus, ICSOP faces the same amount of potential exposure
it would have faced if Monaco had not gone bankrupt.
ICSOP contends that allowing the Roscitis' claim to
proceed would expand ICSOP's obligations in two additional ways.
First, ICSOP argues that it would be required to pay the "first
dollars" of the Roscitis' claim. However, this argument conflates
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two distinct senses of "first dollars." It is true that, if the
Roscitis prove damages greater than $500,000, ICSOP will pay the
"first" dollars to the Roscitis, insofar as nobody else will have
paid anything. However, ICSOP will not pay the "first dollars"
insofar as any recovery from ICSOP will be reduced by $500,000.
Second, ICSOP argues that its obligations would be
expanded because it would be forced to defend claims within the
self-insured layer. ICSOP contends that it did not factor this
obligation into the premiums it charged to Monaco. However, ICSOP
will not be defending a claim within the self-insured layer -- the
Roscitis have maintained throughout that their claim is above
$500,000, even though they have not specified a precise dollar
figure. Thus, ICSOP will be defending a claim above the self-
insured limit, with total exposure capped at the Excess Policy
limits. Moreover, there is insufficient evidence for us to
conclude at the summary judgment stage that ICSOP did not
contemplate assuming defense costs in this situation. The evidence
we do have regarding what ICSOP factored into the premiums is the
language of the Excess Policies. Section I(B)(1) of the Excess
Policies expressly gives ICSOP the right to "defend or participate
in the defense of any claim or suit"; it also provides that ICSOP
will bear its own costs for doing so. Thus, we cannot conclude
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that ICSOP did not contemplate having to pay defense costs in this
scenario.8
More importantly, even assuming arguendo that our
decision forces ICSOP to pay more in defense costs than it had
anticipated when calculating the premium, we cannot say that this
result violates Rhode Island public policy. The limit on claims
specified in the direct action statute is a limit based on
"coverage available." R.I. Gen. Laws. § 27-7-2.4. This clearly
means that an insurer cannot be required to pay more than the
policy limits -- or drop down below a retained limit -- if the
insured is bankrupt. However, nothing in the statute suggests that
an insurer cannot be put into a position that might require it to
spend more money than it had anticipated to defend against a claim.
Indeed, one would expect that in most cases under the direct action
statute, the insurer will be shouldering all of the defense costs
8
ICSOP also argues that because Monaco is no longer able to pay
claims within the self-insured layer, the Roscitis now have no
incentive to settle their case for any amount less than $500,000.
ICSOP suggests that this increases its defense and settlement costs
for this case. While this point has some merit, we do not think it
outweighs the strong policy considerations that favor the Roscitis.
Firstly, we have no evidence regarding the extent to which ICSOP
factored the probability of settlement into the premiums it charged
Monaco. Secondly, it is difficult to quantify exactly how much
this factor will increase ICSOP's costs; the risk that an opposing
party will not want to settle at all is inherent in any litigation.
Finally, we have no way of estimating how likely a settlement below
$500,000 would have been had Monaco still been in the picture; if
the probability of settlement below $500,000 would have been small
regardless, ICSOP is not seriously disadvantaged by having the
probability go from a small percentage to zero.
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without being able to share them with the insured; the Legislature
surely recognized this when it passed § 27-7-2.4.
As a fallback, ICSOP argues that the Retained Limit
Provision does not violate public policy because, as the district
court recognized, there are circumstances under which ICSOP could
have been liable if the insured became insolvent. For example, if
the policyholder were not self-insured, but had a primary insurance
policy, the primary insurance could pay the retained limit.
Rosciti, 734 F. Supp. 2d at 252. Alternately, where, as here,
there is no primary insurer, the policyholder might still reach the
retained limit before reaching insolvency; in fact, the
satisfaction of the retained limit might be what makes the
policyholder insolvent. Id. at 252-53. Finally, a bankrupt
policyholder might pay tort claims pursuant to a Chapter 11
reorganization. Id. at 253. However, while we agree with ICSOP
and with the district court that the above-mentioned scenarios are
possible, we think a far more likely fact pattern is what happened
in this case -- an insolvent policyholder will be unable to pay the
retained limit. Because in this scenario the Retained Limit
Provision effectively gives the insurer immunity from suit, the
Retained Limit Provision cannot be enforced.
III. Conclusion
Because we hold that the Retained Limit Provision cannot
be enforced, we reverse the district court's grant of summary
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judgment and remand for further proceedings consistent with this
opinion.
Reversed and Remanded.
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