Counterpoint: Who Makes the Law?

Thomas W. Lyons, ESQ.

Thomas W. Lyons is Editor-in Chief of the Rhode Island Bar Journal and is a partner at Strauss, Factor and Lopes in Providence.

In Asermely v. Allstate Insurance Co.1 the Rhode Island Supreme Court announced that, regardless of their good faith, insurers who reject settlement demands within the insured's policy limits will be completely responsible for a subsequent judgment which exceeds the limits unless they can show the insured objected to the settlement. The Court based this rule on the insurer's fiduciary obligation to the insured.

The real issue in Asermely is who makes the laws and how are they made. However well-intentioned, I believe that the manner in which the so-called "Asermely rule" came about hurts representative democracy and the adversarial process. The elected branches of our state government had already woven a broad blanket of insurance regulation which specifically covers an insurer's obligations in these circumstances. Moreover, there are plausible arguments that most, if not all, of the rule's benefits will not go to the insureds it attempts to protect, but, rather, to plaintiffs who paid nothing for the benefits, and, most likely, at the insureds' expense in the form of higher premiums. None of the parties raised and argued those points before the Court announced its new rule.

Our elected branches of government, the legislative and executive, heavily regulate the insurance industry. The General Assembly has passed over 1200 statutes dealing with insurance. These fill nearly an entire volume of the annotated General Laws and cover over 1000 pages including the pocket part. The Department of Business Regulation has a division devoted entirely to the supervision of the insurance industry. The Department has promulgated dozens of insurance regulations taking hundreds of pages in the state's compiled regulations. No other single industry or profession is so heavily regulated.

Two statutes address precisely the circumstances presented in Asermely, i.e., when an insurance company must pay more than its policy limits to satisfy a judgment against its insured. Section 27-7-2.2 provides that an insurer can be liable for interest on a judgment which exceeds its policy limits if the insurer had rejected a settlement demand within the policy limits.2 Section 9-1-33 provides an insured may bring a claim against a insurer when the insurer has refused in bad faith to settle a claim within the policy limits.3 Until the General Assembly passed these statutes, the insured had no right to recover more than the policy limits from the insurer.4 The Legislature could have enacted laws as broad as the Asermely rule and it implicitly chose not to do so. Moreover, a third statute requires insurers to provide underinsured motorist coverage in the event an insured fails to recover the full amount of her damages from an alleged tortfeasor.5

The General Assembly has also passed the Unfair Claims Settlement Practice Act.6 It authorizes the Director of the Department of Business Regulation to enjoin insurers from engaging in unfair settlement practices which are defined as including:

  • Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims in which liability has become reasonably clear;
  • Compelling insureds, beneficiaries, or claimants to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits by them;
  • Refusing to pay claims without conducting a reasonable investigation7

Notably, the "Purpose" of the Act states, in part: "Nothing herein shall be construed to create or imply a private right of action for violation of this chapter."8

In response to the Act, the Department of Business Regulation promulgated Regulation 73 which addresses "Unfair Property/Casualty Claims Settlement Practices." Nevertheless, the Asermely rule completely subsumes the first two statutes within its scope and partially subsumes the latter two.9 Our elected branches of government should set state policy respecting insurance. They can hold public hearings during which members of the public can express their views. Insurance experts can testify as to the likely affect and costs of any proposed law. Citizens can directly and privately contact their state senators and representatives and give them an earful. Lobbyists can use their persuasive skills to sway the General Assembly one way or the other. Legislative debates are public. Legislators vote in public. And, if the citizens do not like how their legislators vote on an insurance bill, they can express their displeasure at the ballot box.

Conversely, none of us can call up the Supreme Court justices and urge them to vote a particular way on a matter before the Court. If we are parties to the case, we can file briefs and present oral argument on the record. If we are not parties, we must seek permission to appear as amicus curiae. In particularly important cases, the Court may invite amicus briefs to get a panoply of views. Nonetheless, public participation in a Supreme Court decision is much more restricted than in the legislative or administrative rule-making processes. This is because appellate decisions are usually limited to resolving the parties' dispute on discrete issues for which they created an ample record in the lower court.

Moreover, the members of the Supreme Court cannot be removed for rendering unpopular opinions. This is appropriate because we expect the judiciary to make such decisions without fear of reprisal. In this sense, the Court is fundamentally anti-democratic and, therefore, its authority to make policy must be very limited. Since at least the United States Supreme Court's decision in Luther v. Borden,10 our courts have recognized that "It is the province of the Court to expound the law, not to make it."11 When the legislature has enacted statutes addressing an area of law, the courts' role is to interpret them, not expand or rewrite them. For example, in Buffi v. Ferri,12 the Rhode Island Supreme Court said: "The remedy for a statute whose reach does not go far enough is not construction, but amendment, and that is a legislative, rather than a judicial function."13 The Court has long acknowledged the primacy of legislative enactments and its limited power even to interpret those enactments.14 It has specifically declined to rewrite insurance statutes15 or create new insurance causes of action.16 Courts should not be creating policy around statutes because doing so denies the citizens and their elected representatives their constitutional right to make the laws. This is true no matter how noble a court's goal.

These circumstances distinguish Asermely from the other decisions Bob and Cris cite in which the Court handed down "pro-consumer" decisions. In none of those cases had the legislature and the governor created such a comprehensive pattern of applicable law. In those other decisions, the Court was filling in the gaps between existing common law.17

Moreover, in every one of the cases which Cris and Bob cite, the parties raised the legal issue the Court addressed. Thus, the points were debated and decided based on arguments presented through the adversarial process. By contrast, in Asermely, no party raised or argued the proposition that Allstate should be required to pay the entire judgment even if it acted in good faith.18 To the contrary, the parties briefed only whether plaintiff could recover its prejudgment interest under Section 27-7-2.2 and whether plaintiff had a bad faith claim under Section 9-1-33. The Court decided the latter question in Allstate's favor and found an issue of fact in the former. The Court did not invite amicus briefs on the rule it subsequently announced. Thus, the Court acted without the assistance of a factual or legal record setting forth the costs and benefits to all concerned.

This is important because there are at least hypothetical arguments that the Asermely rule provides few actual benefits to insureds but may increase their insurance costs. To my (admittedly limited) knowledge,19 claims against insureds for judgments exceeding policy limits were virtually non-existent. Many insureds have enough insurance to cover their readily recoverable assets. The plaintiff who obtained an excess judgment usually did what Ms. Asermely did, i.e., take an assignment of the insured's prospective bad faith claim against the insurer in return for a release of the insured's excess liability or a promise not to execute on the excess judgment.20 Jointly or alternatively, a plaintiff might make a claim on her own policy for underinsured motorist benefits. As a practical matter, I think very few insureds faced genuine risks from an excess verdict.21

The principle affect of the Asermely rule is to save Ms. Asermely and other similar situated plaintiffs the burden of either proving the defendant's insurer breached a duty of bad faith to its insured or establishing in a U/M claim that their damages exceed the defendant's policy limits. Instead, they automatically recover the full amount of the excess judgment.

The secondary affect of the Asermely rule is to prod insurers to offer the policy limits more frequently which means some plaintiffs avoid the trouble of trial. Admittedly, the insureds in those cases also avoid the same trouble but they could often obtain the same result by demanding the insurer settle. Cases tend to settle when the insureds are reluctant witnesses. In my former, brief experience as an insurance defense counsel, I encountered a number of insureds who wanted the plaintiff's claims contested aggressively, in part, because they were concerned about the possible affect of a substantial settlement on their future premiums. Regardless, it seems likely that more policy limit settlements will increase the overall cost of insurance coverage and result in higher premiums. In the long run, it will be insureds who pay for Asermely settlements which may (or may not) provide them "benefits" they do not really need or want.

In general, the Asermely rule seems to open a legal can of worms. It offers insurers no guidance about how to resolve their conflicting obligations. Arguably, they are obliged to their insureds and shareholders to resolve cases as cheaply as possible so as to keep premiums low and dividends high, respectively.22 Mutual insurance companies owe both those duties to the same people who are both insureds and shareholders.23 This issue cuts to the core of rumors about a reputed motivation for the decision. One speaker at the recent Bar Association annual meeting specifically raised this issue in a discussion of the rule: It may be a judicial reaction to the settlement policies of some insurers, most notably Allstate. I have heard separately that many plaintiffs, their counsel and even some judges are upset at the amounts Allstate is offering to settle car accident cases. As a result, a relatively high percentage of those cases are going to trial. However, what I have also heard from both plaintiff's and insurance defense counsel is that Allstate and many other insurers are predicting fairly accurately what juries will award on these cases and are offering those amounts in settlement. Reportedly, most, but not all, verdicts vindicate the insurers' settlement offers. If, indeed, this is the situation, the insurers arguably would breach their duties to their insureds and shareholders if they offered more than juries are awarding, especially if the motivation is to appease plaintiffs, lawyers and judges to whom they owe no duty.

The Asermely rule also does not address whether the insurer must consult with the insured when it wants to settle a case within policy limits. What if the settlement will affect the insured's future premiums? If the cost of settlement is spread among all insureds, must they all be consulted? Potentially, the insurer who pays the policy limits more often to avoid the Asermely result could find itself defending class actions for not litigating those cases more aggressively.

Conversely, I have also heard that another reason Allstate's cases do not settle is that once its adjusters set a settlement value on a claim that value does not change no matter what develops during the subsequent litigation. Again, I do not know if this is wholly or partially true, but, if it is, the bad faith statute and the Unfair Claims Settlement Practices Act would seem to address the situation adequately.24 Moreover, it appears to be a practice unique to one insurer, whereas the Asermely rule is generally applicable. Accordingly, this indicates the rule is not a reaction to one insurer's litigation management techniques. I think we should be confident the Court would not make a decision on this basis, nevertheless, the rumors themselves are some indication of general concern about the rule.

Regardless of the gossip, I believe the Supreme Court thought the Asermely rule would help protect insureds. Unfortunately, I think it may actually provide insureds with little additional protection. Instead, it gives significantly greater insurance "coverage" to plaintiffs at the expense of the insureds who may have to pay increased premiums.

Another concern about the Asermely decision is that it seems to set forth a new standard of care for fiduciaries. Previously, our courts have held that fiduciaries must act prudently and in good faith toward the legal beneficiaries of their conduct.25 However, the fiduciary's decisions were not judged in hindsight or required to be flawless.26 This is a standard substantially similar to the "good faith" standard the General Assembly applied to insurers in Section 9-1-33.27

When a fiduciary has conflicting obligations among its beneficiaries, it must act impartially.28 This would seem to be the insurer's position when it must decide whether to settle a case within the insured's policy limits or to try the case and risk an excess verdict. On the one hand, the insured who is the defendant may not want to risk the excess verdict. On the other hand, the insurer's other insureds and shareholders may not want the insurer routinely paying out policy limits. Balancing the interests may depend on whether the insurer will apportion the cost of the settlement only to the insured or spread it among all its insureds. In all these circumstances, the insurer's duty arguably is to act prudently in the best interests of all its beneficiaries, a standard which certainly allows for consideration of the specific circumstances and for some degree of error.

This standard changes only when the fiduciary is shown to have acted in its own interests, i.e., "self-dealing."29 In these circumstances, the beneficiary may have the resulting transaction undone even without showing any actual harm.30 The Supreme Court does not say so in Asermely, but if it views the potentially adverse interests of the other insureds and shareholders as the insurer's own interest, then virtually every decision by an insurer involves self-dealing.

In any event, the Asermely rule seems to state as a general matter that fiduciaries are strictly liable to their beneficiaries for any misjudgment resulting in financial exposure or loss to the beneficiaries regardless of the fiduciaries' prudence and good faith. Does this new standard apply to others who often act in a fiduciary position, such as lawyers, stockbrokers and accountants? Is the defense counsel who recommends rejection of a settlement demand strictly liable if the subsequent judgment is higher? Is the plaintiff's counsel strictly liable if she recommends rejecting a settlement offer and the judgment turns out to be less? Is a trustee strictly liable if she purchases a stock which declines in value? The Asermely opinion says nothing to distinguish insurers from other fiduciaries.

Admittedly, I could be wrong about Asermely's affect on insureds and on fiduciaries. I could be right on some points and wrong on others. I do know that the elected members of the General Assembly addressed this specific situation and passed different rules of law. It appears none of these points were raised or argued by the parties in Asermely before the Supreme Court handed down its rule. The insurance and other legal issues should be debated openly and with a full record before any governmental branch renders a decision on them. Finally, under our constitutional system and the legislative history, it should be the General Assembly which determines when an insurer is required to pay more than its policy limits.

ENDNOTES

728 A.2d 461 (R.I. 1999).

R.I. Gen. Laws §27-7-2.2.

R.I. Gen. Laws §9-1-33.

See, Bitgood v. Allstate Insurance Co., 481 A.2d 1001(R.I. 1984); A.A.A. Pool Service & Supply, Inc. v. Aetna Casualty & Surety Co., 121 R.I. 96, 98-100, 395 A.2d 724, 725-26 (1978).

R.I. Gen. Laws §27-7-2.1.

R.I. Gen. Laws §27-9.1-1, et seq.

R.I. Gen. Laws §27-9.1-4(4), (5) and (6).

R.I. Gen. Laws §27-9.1-1; see, also, Solomon v. Progressive Casualty Insurance Co., 658 A.2d 1073 (R.I. 1996).

Section 27-7-2.1 survives to the extent a plaintiff settles, instead of trying her case, and then wishes to collect additional damages above the settlement amount.

48 U.S.1, 7 How.1, 12 L.Ed. 581 (1849).

Id.; see, also, Paradis v. Heritage Loan and Investment Co., 678 A.2d 440 (R.I. 1996)("The Supreme Court's role is to interpret legislation, not to rewrite it.").

106 R.I. 349, 259 A.2d 847, 35 A.L.R.3d 852 (1969).

Id.; see, also, In re Jamestown Caucus Law, 43 R.I. 421, 112 A. 900 (1921)("We cannot change or modify a statute, that is a legislative function we cannot assume.").

See, e.g., Gomes v. Rhode Island State Board of Elections, 120 R.I. 951, 393 A.2d 1088, 1091 (1978) ("Our legislating between the gaps [of statutes] has been reserved for instances in which the legislative intent is cloaked in obscurity. [citation omitted] Here, we fail to see the obscurity.").

See, Morrell v. Lalonde, 44 R.I. 20, 114 A.178 (1921)(Questions of the wisdom or expediency of an insurance statute are for the Legislature).

See, Levasseur v. Knights of Columbus, 96 R.I. 22, 188 A.2d 464 (1963) (Creation of a new cause of action for alleged negligence in acting on a life insurance application would be legislating and is not a proper function of the judicial department).

For example, in Buonanno v. Colmar Belting Co., 733 A.2d 712 (R.I. 1998), the Court adopted a section of the new Restatement Third, Torts: Products Liability. The Restatement constitutes the American Law Institutes' analysis of what is the prevailing common law across the country. Section 5 addresses manufacturers of component parts, a subject on which there was no existing statutory or common law in Rhode Island. In several other of the cited cases, the court similarly adopted provisions of a Restatement or common law existing in other jurisdictions.

I am inferring this from the opinion. The parties' briefs are not on file in the Supreme Court law library, perhaps, because the Court "show caused" the issues on appeal and rendered a per curiam decision.

I have not done any significant amount of insurance defense work in over five years and, even then, my experience was much less than many others. I have not worked in the insurance industry as an actuary or adjuster. My firm does subrogation work but we do not represent Allstate. I suspect that those with more experience could make much stronger arguments on either side of this issue, if given the opportunity.

See, Mello v. General Insurance Co. of America, 525 A.2d 1304 (R.I. 1987)(upholding right of insured to assign its bad faith claim to the injured claimant for purpose of recovering the difference between the judgment and the policy limits.

I know of no reported Rhode Island decision in which a plaintiff was attempting to recover the excess portion of a judgment from the insured defendant.

Depending on where a corporation is incorporated, it may owe fiduciary duties to its shareholders. See, e.g., Shewmake v. Badger Oil Corp., 654 F.Supp. 1184 (D.Colo. 1987); (Under Colorado law, corporation is held to standards of trustee for its stockholder, and therefore, is bound by fiduciary relation to protect their interests); Thompson v. Central Ohio Cellular, Inc., 93 Ohio App.3d 530, 639 N.E.2d 462, 468 (Ohio App. 1994) ("It is axiomatic that corporations and their officers and directors occupy a fiduciary relationship with corporate shareholders.") See, also, Appleman, Insurance Law and Practice, §10003, p. 12 (West. 1945) ("...the capital stock of an insurance company is a trust fund for the payment of all the debts and legal liabilities of the company and not a trust fund simply, or even primarily, for the payment of obligations growing out of contracts of insurance."). Even in those states which do not impose a fiduciary status on the corporation, it is still typically held the corporation must treat shareholders "in good faith and with conscientious fairness, morality and honesty in purpose." Ripplemeyer v. National Grape Cooperative Association, Inc., 807 F.Supp. 439 (W.D. Ark. 1992) (applying N.Y. law).

See, Appleman, Insurance Law and Practice, §10041, 79-80 (West 1945); see, also, id. at §10046, p. 97 ("It is fundamental in such insurance that the excess in premium over actual cost as ascertained shall be returned to the policyholder. Thus, such members are entitled to a pro rata distribution of the net profits¼").

See, Pinto v. Allstate Insurance Co., No. 98-9356, slip op. (2nd Cir. July 26, 2000), in which the court reversed a grant of summary judgment in Allstate's favor, holding that where before and during trial plaintiff indicated it would settle for the $100,000 policy limits and the insured's counsel retained by Allstate predicted a verdict in excess of the policy limits, the insured's bad faith claim should go to trial.

See, e.g., Dodge v. Stone, 76 R.I. 318, 69 A.2d 632 (1949); Meehan v. Hurley, 51 R.I. 51, 150 A. 819 (1930).

See, Dennis v. Rhode Island Hospital Trust National Bank, 571 F.Supp. 623 (D.R.I. 1983), affirmed as modified, 744 F.2d 893 (1st. Cir. 1984).

See, Pace v. Insurance Co. of North America, 838 F.2d 572 (1st Cir. 1988). (The statute requires a showing that there was no objectively reasonable basis to refuse the settlement offer and that the insurer knew there was no objective basis or recklessly disregarded the lack of such a basis).

See, Dennis v. Rhode Island Hospital Trust National Bank, 744 F.2d at 896.

See, Dodge v. Stone, supra, n. 10.

See, Point Trap Co. v. Manchester, 98 R.I. 49, 199 A.2d 592 (1964).