Malpractice Defense Newsroom

NEIC Contends That The First Paragraph Gives A Reasonable Insured The Ability To Frustrate Settlement









NEIC contends that the first paragraph gives a reasonable insured the ability to frustrate settlement, while the second paragraph, with its reference to "any settlement," limits NEIC's liability to the amount of a rejected settlement offer that it recommends and is acceptable to the claimant, whether the rejection by the insured is reasonable or not. Clauson therefore received all he was due under the policy when NEIC paid him $29,000 after the entry of a final judgment against Kirshenbaum. In response, Clauson contends that these paragraphs must be read together to limit NEIC's liability only when its insured's refusal to settle is unreasonable. Because the district court found that Kirshenbaum had been reasonable when he rejected Clauson's settlement offers, a finding that NEIC does not challenge on appeal, NEIC's obligations extend to the full policy limits.

In its thoughtful decision finding for Clauson on the policy limit issue, the district court first noted that, under the settled Rhode Island rules of construction of insurance contracts, the "policy must be examined in its entirety, giving each word its plain, ordinary, and usual meaning. 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." (internal citations and quotations omitted). With these principles in mind, the court turned to the two paragraphs at issue and concluded that NEIC's interpretation was unreasonable because it failed to give effect to every term in the policy. We quote and adopt the court's impeccable reasoning:

NEIC contends that the reference in the first sentence [of the second paragraph] to "any" settlement means that coverage is limited to the amount of the proposed settlement in every case where the insured refuses to consent, without regard to whether the insured acted reasonably. However, that interpretation conflicts with the provision in the preceding paragraph requiring the insured's consent to settle.

By preventing the insurer from settling without the insured's consent and prohibiting the insured from unreasonably withholding consent, that provision, in effect, confers on the insured the right to reasonably withhold consent. Construing the policy in the manner suggested by NEIC would negate that right. The insured's refusal to consent to a settlement, however reasonable, would deprive the insured of the full indemnification protection for which he contracted. In addition, it would deprive the insured of the right to be defended by the insurer because the second sentence of the paragraph upon which NEIC relies would allow NEIC to withdraw from further defense.

At the very least, NEIC's reading of the policy would render meaningless the provision prohibiting consent from being unreasonably withheld. If coverage were reduced to the amount of a proposed settlement even where the insured reasonably refuses to consent, the prohibition against unreasonably withholding consent would be superfluous. Coverage would be reduced whether the insured acted reasonably or unreasonably.

Having rejected NEIC's interpretation as unreasonable, the court adopted the only interpretation that gave "effect to both provisions," and construed the policy "to limit NEIC's liability to the amount of the proposed settlement only if Kirshenbaum's refusal to consent was unreasonable."

On appeal, NEIC argues that the district court erred in concluding that its interpretation of its own insurance policy was unreasonable. Although the two paragraphs at issue are set forth consecutively in the policy exactly as set forth in the text above under a section of the policy entitled "Defense and Settlement," NEIC insists that these paragraphs address separate issues, requiring that each paragraph be read individually. As such, the second paragraph is not limited, as the district court found, by the first paragraph, but instead acts on its own to place a strong incentive upon the insured to settle because any refusal to consent brings with it the full risk of an adverse judgment.(5)

Interestingly, however, NEIC never argues that the interpretation of the two paragraphs adopted by the district court is unreasonable. Indeed, NEIC conceded at oral argument that the court's interpretation was reasonable. That acknowledgment demonstrates that, even if we accept NEIC's protestations about the reasonableness of its own reading of the policy, it has done nothing more than show that there are two reasonable interpretations of the contract language. In other words, NEIC's argument on appeal indicates only that the contract was ambiguous. Goldstein v. Occidental Ins. Co., 273 A.2d 318, 320 (R.I. 1971) (noting that a policy is ambiguous "if doubtful, uncertain or ambiguous terms are used, or [if its language is] reasonably susceptible of two interpretations") (internal citations omitted). Such a showing is not helpful to NEIC. Under settled Rhode Island law governing the resolution of ambiguities in insurance contracts, when "the policy terms are ambiguous or capable of more than one reasonable meaning, the policy will be strictly construed in favor of the insured and against the insurer." Mallane v. Holyoke Mut. Ins. Co., 658 A.2d 18, 20 (R.I. 1995) (citing Aetna Cas. & Sur. Co. v. Sullivan, 633 A.2d 684, 686 (R.I. 1993)); see also Nagy v. Lumbermens Mut. Casualty Co., 219 A.2d 396, 400 (R.I. 1966) (noting that when an insurance contract "admits to two reasonable constructions . . . we charge the fault to the insurer who selected the language and . . . accept the interpretation which favors the beneficiaries"); Factory Mut. Liability Ins. Co. v. Cooper, 262 A.2d 370, 372 (R.I. 1970). Of the two reasonable interpretations of the paragraphs at issue, the district court's interpretation is far more beneficial to the insured than NEIC's interpretation. Consequently, the recognition of these two reasonable interpretations does nothing more than return us to the interpretation of the policy language that the district court credited, and to the ultimate conclusion that the district court correctly held that NEIC was liable on the judgment against its insured up to its full policy limits.