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Under Most Liability Policies, The Insurer Has The Authority To Settle A Claim Whether Or Not Its Insured Consents

In the usual case under Rhode Island law, the insurance policy governs the obligations the insurer owes to its insured, thus limiting an insurer's total liability on a judgment against its insured to the contractual limits contained in that policy. Factory Mut. Liability Ins. Co., 262 A.2d at 372. The fact that an insured may also be liable for interest on the judgment does not normally increase an insurer's liability beyond those limits. Skaling v. Aetna Ins. Co., 742 A.2d 282, 291 (R.I. 1999). Nonetheless, there are certain exceptions to this general rule. Rhode Island's rejected settlement statute, R.I. Gen. Laws § 27-7-2.2, outlines a set of circumstances under which an insurer will be liable above its policy limits for interest on a judgment against its insured.(6) Under this statute, if an insurer rejects a written offer to settle for an amount within the policy limits, the insurer becomes liable for "all interest due on the judgment entered by the court [against the insured] even if the payment of the judgment and interest totals a sum in excess of the policy coverage limitation." R.I. Gen. Laws § 27-7-2.2.

Clauson contends in his cross-appeal that the rejection of his various written settlement offers brings this case under this statute.(7) During the pendency of the superior court action, Clauson made two different written offers to NEIC and Kirshenbaum. The first, for $29,000 (the $29,000 offer), was made and rejected prior to the entry of the first judgment in Clauson's favor.(8) The second, "for the policy limit, which I understand to be $100,000" (the $100,000 offer), was made following the superior court's order vacating the first judgment and ordering a new trial. Despite the differences between these two offers, the district court addressed only the $29,000 offer when it evaluated Clauson's argument for interest. These two offers, however, raise separate issues under section 27-7-2.2, and therefore we address each in turn.

A. The $29,000 offer

When NEIC received the $29,000 offer, it transmitted it to Kirshenbaum along with a recommendation that he give his consent to settlement. Kirshenbaum, however, withheld consent, and the offer was accordingly rejected. Relying on these circumstances, the district court held that section 27-7-2.2 was inapplicable. Because Kirshenbaum, and not NEIC, rejected Clauson's settlement offer, the district court reasoned, Clauson had failed to make the required showing that "the offer [was] rejected by the defendant's insurer." Clauson challenges this ruling, arguing that when NEIC contracted away its unfettered authority to accept settlements, it tied itself to Kirshenbaum so that his rejection should be deemed NEIC's. Any other result, Clauson contends, undermines the purpose of the statute. We disagree.

This is the second time we have been called upon to construe Rhode Island's rejected settlement statute. Armacost v. Amica Mut. Ins. Co., 11 F.3d 267 (1st Cir. 1993). In Armacost, we noted that section 27-7-2.2 seeks to encourage the early settlement of meritorious tort claims. Id. at 270. This goal is advanced when all of the parties with authority over settlement have an incentive to settle. Under most liability policies, the insurer has the authority to settle a claim whether or not its insured consents. Prior to the enactment of section 27-7-2.2, an insurer had little incentive to settle a claim.(9) "It would be in an insurer's interest to dispute even the most meritorious claims because the maximum cost to the insurer in any protracted proceedings would be the policy limit, and during that time the insurer would enjoy full use of any funds owed the insured." Skaling, 742 A.2d at 292.

By making the insurer liable above its policy limits for pre- and post-judgment interest, section 27-7-2.2 changes this equation. An insurer now has an incentive to settle meritorious claims. The question presented here is how a consent to settlement clause in an insurance policy affects the statute and its allocation of incentives. Clauson correctly notes that, though section 27-7-2.2 extends liability to insurers for their own refusal to settle, it does nothing to remove an insured's legal liability for interest. It does not follow, however, that because the statute causes both insurer and insured to be liable for interest, we must treat Kirshenbaum and NEIC as a single entity so that the rejection of one becomes the rejection of another. To the contrary, treating the insurer and insured as a single entity in this case would actually frustrate the statutory scheme. Though Kirshenbaum remains ultimately responsible as a matter of law for the interest on the judgment, the risk from that liability and the consequent incentive for Kirshenbaum to settle is dulled considerably if the insurer is, through section 27-7-2.2, forced to cover that interest irrespective of its policy limits. Moreover, if an insured can reasonably reject a settlement offer and have that rejection imputed to the insurer, the insured would thereby be allowed to unilaterally increase the limits of liability contained in the policy. Such a result removes from the insured a considerable incentive to consent to settlement and as such would frustrate rather than serve the legislative design.

Furthermore, treating the insured and insurer as a single unit contradicts the language of the statute, which explicitly refers to "the defendant's insurer" rejecting the written offer. There is nothing in the record or in the case law that would justify ignoring the plain language of the statute and treating NEIC and Kirshenbaum as one. Despite the delegation of power in the policy, Kirshenbaum did not become an agent of NEIC with respect to settlement. As is amply demonstrated by this case, NEIC had no ability to control or direct Kirshenbaum, who acted in direct contradiction of NEIC's recommendations. Instead of treating the insurer as bound by its insured, we conclude that the approach most consistent with the statutory language and purpose is that adopted by the district court, which placed the risk of interest upon the party who resists the early settlement of a meritorious claim.(10) Because Kirshenbaum, rather than NEIC, rejected the $29,000 offer, that rejection may not form the basis of an interest judgment above the policy limits pursuant to section 27-7-2.2