ROSCITI v. Insurance Co. of Pennsylvania

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.

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 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.

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 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).

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 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).

-17-
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.

-20-
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

-21-
judgment and remand for further proceedings consistent with this

opinion.

Reversed and Remanded.

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