Daly, Michael J.

Proietta, Joseph

English

DOCS@RWU

Roger Williams University Law ReviewVolume 6 | Issue 2 Article 14Spring 20012000 Survey of Rhode Island Law: Cases:Insurance LawMichael J. DalyRoger Williams University School of LawJoseph ProiettaRoger Williams University School of LawFollow this and additional works at: http://docs.rwu.edu/rwu_LRThis Survey of Rhode Island Law is brought to you for free and open access by the Journals at DOCS@RWU. It has been accepted for inclusion inRoger Williams University Law Review by an authorized administrator of DOCS@RWU. For more information, please contact mwu@rwu.edu.Recommended CitationDaly, Michael J. and Proietta, Joseph (2001) "2000 Survey of Rhode Island Law: Cases: Insurance Law," Roger Williams University LawReview: Vol. 6: Iss. 2, Article 14.Available at: http://docs.rwu.edu/rwu_LR/vol6/iss2/14SURVEY SECTIONInsurance Law. Fleet Construction Co. v. Aetna Life & CasualtyCo., 746 A.2d 1247 (R.I. 2000). Absent a statutory or contractualduty to the contrary, an insurer is under no duty to its customersto charge them the lowest or most competitive bond premiumrates. Furthermore, an insured cannot maintain a cause of actionagainst its insurer merely for charging them unfavorable rates.FACTS AND TRAVELIn Fleet Construction Co. v. Aetna Life & Casualty Co.,' FleetConstruction Co. (Fleet), brought an action in superior courtagainst its insurer, Aetna Life and Casualty Co. (Aetna), and in-surance agent, Goodrich-Blessing Agency, Inc. (Goodrich). 2 As aprerequisite to performing certain construction projects, Fleet wasrequired to obtain bonding and other insurance coverage. Good-rich placed the requisite coverage on behalf of Fleet with Aetna.3The defendants in this case relied on a rating system that providedfor multiple contractor ratings based on the level of complexity anddifficulty of projects performed by the contractor. 4 Fleet claimedthat it was entitled to the less expensive Class A rating because ofthe less complex and difficult nature of the work it performed.5However, Fleet asserted that it was wrongly charged premiums atthe more expensive Class B rate.6Fleet filed a five-count complaint against the defendants seek-ing reimbursement for the amounts overcharged and for lost prof-its. 7 Counts one through four concerned overcharged premiums. sCount five concerned lost profits that Fleet claims to have sufferedbecause it was not the low bidder on several projects as a result ofthe defendants' overcharges.9 Goodrich filed a breach of contractcounterclaim alleging that Fleet owed it $42,784 for unpaid pre-mium costs. 101. 746 A.2d 1248 (R.I. 2000).2. See id.3. See id.4. See id.5. See id. at n.1 (employing the rating system used by the Surety Associationof America's Rate Manual of Fidelity, Forgery and Surety Bonds (March 2, 1987and July 15, 1977 Revisions)).6. See id.7. See id. at 1248-49.8. See id.9. See id. at 1249.10. See id.20011758 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 6:593Defendants, Goodrich and Aetna, moved for partial summarywith respect to counts one through four. 1 The defendantsclaimed, and Fleet admitted, that all premium costs were reim-bursed by the parties who awarded contracts to Fleet, hence, Fleethad suffered no damage as a result of any alleged overcharging. 12A superior court motion justice agreed with the defendants andgranted their motion for partial summary judgment.' 3 Thereafter,the defendants moved for partial summary judgment with respectto count five, claiming that they owed no duty to Fleet to chargethem the lowest premium rates for construction bonds or chargethem Class A rather than Class B rates. 4 Fleet countered that thedefendants' breach of duty was their misclassification of projects asClass B rather than Class A.' 5 A different superior court motionjustice agreed with the defendants and granted their motion. 16Goodrich then moved for summary judgment on its counter-claim for unpaid premiums.' 7 The motion was identical to one thatwas filed and denied prior to the granting of partial summary judg-ments concerning counts one through five.' Fleet objected to themotion arguing that it was barred by the law of the case doctrine.' 9However, a superior court motion justice granted the motion be-cause the granting of the defendants' earlier motions for summaryjudgment had dramatically changed the state of the record.20 Thegranting of the summary judgment motions negated any of Fleet'spossible defenses to Goodrich's breach of contract counterclaim.Accordingly, Goodrich's motion for summary judgment wasgranted.21On appeal, Fleet argued that the motions below were errone-ously granted.22 Concerning counts one through four, Fleetclaimed that the lower court's finding that the defendants owed11. See id. at 1248.12. See id.13. See id. at 1249.14. See id.15. See id.16. See id.17. See id.18. See id.19. See id.20. See id.21. See id.22. See id.SURVEY SECTIONthem no duty to charge the lower rates was erroneous. 23 Fleet alsoclaimed that it was in fact damaged by the defendants' overchargesby making its business less competitive and causing it to "lose atleast one lucrative contract."24 Relying on the collateral sourcedoctrine, Fleet contended that the defendants, as tortfeasors,"should not be permitted to reap the benefit of an injured party'sability to recoup some of its losses from a third party." 5 Fleet as-serted that it should not matter that its insurance costs werepassed along to its customers and that the defendants should notescape liability merely because Fleet had received benefits fromthird parties. 26With respect to count five, Fleet again claimed that the lowercourt erroneously concluded that the defendants owed no duty tocorrectly classify its bond rates.27 Finally, with respect to Good-rich's counterclaim, Fleet argued that an earlier denial of Good-rich's motion for summary judgment precluded a subsequent grantof the same motion.28ANALYsIs AND HOLDINGThe Rhode Island Supreme Court affirmed the superior court'sgranting of the defendants' motions for summary judgment.29Counts One Through Four-The "Wrong" Rates.The court held that an insurer, absent a statutory or contrac-tual duty to the contrary, owes no duty to its clients to charge thelowest or best premium rates for bond coverage. 30 Without an ex-press promise to do so, an insurer need not offer coverage at themost competitive rates. 31 As the established rates did not violateany law or contractual provision, the defendants breached no duty23. Id. at 1249-50.24, See id. at 1249.25. Id. at 1249.26. See id. at 1249-50.27. See id. at 1250.28. See id. at 1251.29. See id.30. See id. at 1250.31. See id.2001] 759760 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 6:593owed to Fleet.32 If Fleet was not happy with the rates offered bythe defendants, they were free to obtain coverage elsewhere. 33Arguing that it should not matter that their insurance costswere passed on to its customers, Fleet claimed that the collateral-source doctrine should prevent the defendants from escaping liabil-ity merely because their customers had reimbursed them for thealleged overcharging.34 The collateral source doctrine requires anegligent party to pay the full amount of damages suffered by theinjured party regardless of any amounts received by the injuredparty from a third party.3 5 While not questioning that the collat-eral source doctrine is followed in Rhode Island, the supreme courtheld it inapplicable in this case because the defendants had com-mitted no tort.36Count Five-Lost ProfitsThe supreme court held that the defendants owed no duty toFleet to classify Fleet's projects as Class A and charge the corre-sponding lower rates.37 The court noted that that imposition ofsuch a duty would transform the insurance industry to one of pub-lic welfare.38 Accordingly, the court held that the defendants hadno duty to sell coverage at the most competitive rates or classify aproject in any particular manner.39 Further, an insurer is underno duty to charge "similarly situated" customers the same rate.40Counterclaim-Unpaid PremiumsThe supreme court upheld the superior court's grant of Good-rich's second motion for summary judgment with respect to itsbreach of contract counterclaim. 41 Although Goodrich's same mo-tion had previously been denied, the subsequent events justified32. See id.33. See id.34. See id. at 1249-5035. See id.36. See id. at 1250.37. See id. at 1250-51.38. See id. at 1250 (quoting Dubreuil v. Allstate Ins. Co. 511 A.2d 300, 302(R.I. 1986)).39. See id. at 1250-51.40. Id.41. See id. at 1251.SURVEY SECTIONthe later grant.42 The grant of summary judgment with respect tocounts one through five sufficiently changed the status of the re-cord when the second motion was filed and granted.43 As the de-fendants had breached no duty owed to Fleet and Fleet suffered nodamage as a result of the alleged overcharging, any possible de-fenses to Goodrich's breach of contract counterclaim necessarilyvanished. 44CONCLUSIONIn Fleet Construction Co., Inc. v. Aetna Life & Casualty, theSupreme Court of Rhode Island made clear that an insurer, absenta statutory or contractual duty to the contrary, is under no duty toits customers to charge the lowest or most competitive bond pre-mium rates. Hence, an insured cannot maintain a cause of actionagainst its insurer for charging unfavorable rates.The court also made clear that the law of the case doctrinedoes not automatically prevent a previously denied motion forsummary judgment from being granted. A trial court justice mayreconsider and grant a previously denied motion if interim factssufficiently change the record so as to justify the subsequent grant.Michael J. Daly42. See id.43. See id.44. See id.20011762 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 6:593Insurance Law. Lombardi v. Rhode Island Insurers, 751 A.2d1275 (R.I. 2000). Before recovering from the Insurers' InsolvencyFund, an insurance guarantee association, an insured is not re-quired to first exhaust the insurance of his or her creditor or mort-gagee. Where the insured is a stranger to those relationships hewill derive no benefit from the creditor's policies, and will remainliable on the original promissory note. An insured's interests in aninsurance policy are not forfeited merely because the insured'sname did not appear as loss payee in the contract.FACTS AND TRAVELPlaintiff Arlene D. Lombardi (Lombardi) was the owner of atwo family dwelling located on Gendron Street in West Warwick,Rhode Island, when, in November 1990, the building was signifi-cantly damaged by a fire.1 The premises was insured by a policyissued by American Universal Insurance Group (American).2 Thelimit of insurance coverage under the policy was $75,000 for prop-erty loss, plus $5,000 for debris removal, less a $500 deductible.3At the time of the fire, Colonial Bank (Colonial) held a mortgage onthe premises in accordance with a promissory note and mortgagegiven by Lombardi in the amount of $75,000, for which approxi-mately $68,540 remained outstanding.4 Colonial was designatedthe loss payee under the terms of the insurance policy.5 As a resultof the fire, the premises incurred damage in excess of the policylimits. 6  Later, in January 1991, American was declaredinsolvent.7In October 1991, Lombardi filed a breach of contract actionagainst American.8 Because of American's insolvency, the partiesstipulated that the Rhode Island Insurers' Insolvency Fund (Fund)be substituted as a party defendant for American. 9Thereafter, Colonial was placed into receivership and its as-sets came under the control of the Resolution Trust Company (Res-1. See Lombardi v. R.I. Insurers, 751 A.2d 1275, 1275 (R.I. 2000).2. See id.3. See id. at 1275-76.4. See id. at 1276.5. See id.6. See id.7. See id.8. See id.9. See id.SURVEY SECTIONolution).' 0 Included in Colonial's assets was an insurance policy inthe amount of $1,000,000 issued by Lloyd's of London (Lloyd's) thatpurportedly covered the loss on Lombardi's note.11The superior court, sitting without a jury, held that the clausein the mortgage pursuant to the standard Rhode Island fire insur-ance contract created two separate and independent contracts:12one contract between the mortgagor and the insurer, and one con-tract between the mortgagee and the insurer.13 Therefore, Lom-bardi had a separate and independent cause of action against herinsolvent insurer for breach of contract.14 The trial justice orderedthe Fund to pay Lombardi $79,500, and subsequently denied de-fendant's motion to dismiss on the ground that Lombardi was notthe real party in interest.15The Fund appealed. Before the Rhode Island Supreme Court,the Fund argued that Lombardi was not the real party in interestand that her claim should be dismissed on the clause in the insur-ance contract that lists Colonial as the loss payee.16 The defendantfurther argued that, although Colonial is the appropriate payeeunder the policy, pursuant to section 27-34-12(a) of the Rhode Is-land Insurers' Fund Act, Colonial must first exhaust its own insur-ance policies before it is entitled to recovery. 17 The Rhode IslandInsurers Fund Act provides: "any person having a claim against aninsurer under any provision in an insurance policy other than apolicy of an insolvent insurer which is also a covered claim, shall berequired to exhaust first his or her right under that policy."' 8 TheFund argued that since Colonial has $1,000,000 worth of coverageavailable from Lloyd's, that coverage must first be exhausted. 1910. See id.11. See id.12. See id.13. See id.14. See id.15. See id.16. See id.17. See id.18. Id. at n.2. (quoting R.I. Gen. Laws § 27-34-12(a) (1956) (1998Reenactment)).19. See id.20011764 ROGER WILLIAMS UNIVERSITY LAW REVIEW [Vol. 6:593ANALYSIS AND HOLDINGThe court stated that the purposes of the Fund were to providea mechanism for the payment of covered claims, to avoid excessivedelay in payment, to avoid financial loss to claimants and to createan entity to assess the cost of the protection and distribute it equi-tably among member insurers. 20 The Fund is obliged to assume allthe obligations that the insured would have had if not for its insol-vency. 21 "The paramount responsibility of an insurer is to at alltimes act in the best interests of its insured to protect the insuredfrom loss and excess liability."22The court declined, as a matter of public policy, to extend sec-tion 27-34-12(a) to require an insured whose insurer has been de-clared insolvent to look to any outstanding policies of the insured'screditor merely because the creditor is the loss payee under thepolicy.23 The court held that it will not require:an insured who has made timely premium payments, andwho suffers a loss under [a] policy, to first exhaust the insur-ance of his or her creditor or mortgagee where the insured isa stranger to those relationships, will derive no benefit fromthe creditor's policies, and will remain liable on the originalpromissory note. 24The court further held that Lombardi was a real party in in-terest.25 At the time of the fire, Lombardi was insured up to$79,500 and only $68,540 was owing on the note, leaving a differ-ence of approximately $11,000.26 Although Lombardi subse-quently defaulted on the note because of her inability to continuemaking payments after losing the income that the property pro-duced, at the time of the loss Lombardi was not in default.27Therefore, the court held, her interest in the insurance proceeds atthe time was both real and significant, and Lombardi's interestswere not forfeited simply because her name did not appear as a"loss payee" under the policy.2820. See id. at 1277.21. See id.22. Id.23. See id.24. Id.25. See id.26. See id.27. See id.28. See id. at 1277-78.20011 SURVEY SECTION 765CONCLUSIONIn Lombardi v. Rhode Island Insurers, the Rhode Island Su-preme Court held that the Rhode Island Insurers' Fund Act doesnot require an insured who has made timely premium payments,and who has suffered a loss under a policy, to first exhaust theinsurance of his or her creditor or mortgagee where the insured isa stranger to those relationships, will derive no benefit from thecreditor's policies, and will remain liable on the original promis-sory note. The court also held that an insured's interests in aninsurance policy are not forfeited merely because the insured'sname did not appear as loss payee in the contract.Joseph Proietta

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2000 Survey of Rhode Island Law: Cases: Insurance Law

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