Reed Smith LLP on Rosciti v. Liberty Mutual Insurance Company: An Analysis of Accessing Excess Coverage of a Bankrupt Entity

Reed Smith LLP on Rosciti v. Liberty Mutual Insurance Company: An Analysis of Accessing Excess Coverage of a Bankrupt Entity

By Ann V. Kramer and Jennifer D. Katz

In Rosciti v. Liberty Mutual Insurance Company, the District Court of Rhode Island concluded that an individual seeking damages from a bankrupt company cannot directly collect from that company’s excess insurer if the bankrupt company has not exhausted its self-insured retention.  That decision will have significant implications particularly in light of “direct action” statutes adopted by states like Rhode Island which allow tort victims to recover directly from the bankrupt tortfeasor’s liability insurer.  The Rosciti decision arguably nullifies those statutes.  This commentary examines that decision and its implications for policyholders.

Henry Rosciti, Donna Rosciti and Henry Rosciti, Jr. (collectively “Plaintiffs”) claimed that Monaco Coach Corporation (“Monaco”) sold them a defective mobile home which it did not repair.  The mobile home leaked, allegedly resulting in toxic mold and consequent injuries.  Due to Monaco’s insolvency, Plaintiffs, pursuant to Rhode Island’s “direct action” statute, R.I. Gen. Laws 1956 § 27-7-2.4 (2010), sued Monaco’s insurers directly, including The Insurance Company of the State of Pennsylvania (“ICSOP”).  ICSOP provided Monaco with excess insurance during the relevant time period.  Monaco did not have a primary insurer.  It was self-insured up to $500,000.  ICSOP covered claims above $500,000 up to $1.5 to $2.5 million (depending on the specific ICSOP policy).  The ICSOP policies provided that ICSOP would pay Monaco “on your behalf, the ultimate net loss, in excess of your retained limit, that you become legally obligated to pay …”  The excess policies also dealt with "complete expenditure" of retained limits, exhaustion and bankruptcy.

The Court was required to determine whether: (1) exhaustion of the retention was required if the policyholder is bankrupt and unable to pay; and (2) § 27-7-2.4 “nullif[ies]” or “supersedes” the exhaustion requirement.  The Court concluded that "Monaco must completely expend its retained limit before ICSOP can be liable to Plaintiffs.  Since Monaco has not done so, and will not be able to, the contracts do not allow Plaintiffs to recover from ICSOP."  The Court further concluded that § 27-7-2.4 does not “nullify” or “supersede” the exhaustion requirement in the policies.

The Rosciti decision has potentially far reaching implications for tort victims with claims against bankrupt entities.  The decision arguably nullifies the “direct action” statutes which are meant to “give an aggrieved and injury 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.”  The decision essentially leaves tort victims like Plaintiffs with no recourse when the tortfeasor is bankrupt and has no available primary insurance coverage.  That is arguably contrary to the purpose of the “direct action” statutes.

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Ann V. Kramer is a partner and Jennifer D. Katz is an associate at Reed Smith LLP.  Both are members of the firm’s Insurance Recovery Group.  Ms. Kramer and Ms. Katz represent policyholders in various disputes with their insurance companies.

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