Fratus v. Republic Western

• Court: Court of Appeals for the First Circuit
• Decided: June 23, 1998
• Docket: 97-1876
• Status: Published

Opinion

USCA1 Opinion

                  United States Court of Appeals

                      For the First Circuit

                       ____________________



No. 97-1876



                    JOSEPH J. FRATUS, ET AL.,



                      Plaintiffs, Appellees,



                                v.



               REPUBLIC WESTERN INSURANCE COMPANY,



                      Defendant, Appellant.



                       ____________________



No. 97-1955



                    JOSEPH J. FRATUS, ET AL.,



                     Plaintiffs, Appellants,



                                v.



               REPUBLIC WESTERN INSURANCE COMPANY,



                       Defendant, Appellee.



                       ____________________



          APPEALS FROM THE UNITED STATES DISTRICT COURT



                 FOR THE DISTRICT OF RHODE ISLAND



       [Hon. Francis J. Boyle, Senior U.S. District Judge]



                       ____________________



                              Before



                     Torruella, Chief Judge,



                  Aldrich, Senior Circuit Judge,



                    and Boudin, Circuit Judge.



                      _____________________    Robert A. Sherman, with whom Joseph E. Boyland, Peter F.

Carr II, Ross A. Keene and Eckert Seamans Cherin & Mellott, LLCwere on brief, for appellant Republic Western Insurance Company.

    Fred T. Polacek, with whom Rodio & Ursillo, Ltd. was on brief,

for appellees Joseph J. Fratus, et al.


____________________



                         June 23, 1998

                       ____________________          TORRUELLA, Chief Judge. In a personal injury suit

stemming from a tragic accident involving Joseph Fratus, a jury

previously awarded him, his wife, Stephanie Fratus, and his

daughter, Carissa Fratus (collectively, "Fratus family" or

"plaintiffs") over three million dollars.  Republic Western

Insurance Company ("Republic") -- defendant in the current action

-- defended that suit and was liable for at least $25,000 of that

judgment under a policy which indisputably applied to the accident

in question.  Nonetheless, for almost six years, Republic paid

plaintiffs nothing.  During that time, over one million dollars in

interest had accrued on the entirety of the original verdict.  The

district court ruled that Republic was obligated, under either

Massachusetts or Rhode Island law, to pay this interest in

accordance with a policy it had issued.  See Fratus v. Republic

Western Ins. Co., 963 F. Supp. 113, 116-18 (D. R.I. 1997).  The

district court also ruled that the insurance company was not liable

for three million dollars of the principal judgment in the

underlying case because three additional "umbrella" coverage

policies did not apply to the defendants in that case.  See id. at

119.  Both parties appeal.  We affirm in part, reverse, and remand

in part.



                            BACKGROUND

     On June 4, 1985, Joseph J. Fratus was rendered a

paraplegic when a rented truck ran into him as he directed traffic

at a construction site in Cranston, Rhode Island.  The driver of

the truck was Joseph Obert.  Obert had rented the truck from U-Haul

Truck Rental in Worcester, Massachusetts on behalf of his employer,

American Drywall Company, Inc. ("Drywall").  At the time, Republic

was insuring the truck under a number of different policies which

had been purchased by U-Haul.  While the scope of coverage in three

of the policies is at issue in this case, it is not disputed that

a fourth policy, Business Auto Policy No. RL-1000, provided limited

coverage to Obert and Drywall for the accident.

     When Fratus and his family sued Obert, Drywall, and U-

Haul under various theories, Republic defended the suit.  A jury

returned verdicts totaling over three million dollars on

December 12, 1988, and, two days later, judgments were entered

accordingly.  One question not addressed by the judgments was

whether, as a matter of law, U-Haul was vicariously liable, and

thus jointly and severally liable, in Rhode Island for the

judgments against Obert and Drywall.  On January 27, 1989, U-Haul

moved to certify to the Rhode Island Supreme Court "[w]hether Rhode

Island law imposes joint and several liability on any owner of a

rental vehicle not registered or rented in, but negligently

operated by the bailee thereof, on the public highways of the State

of Rhode Island?"  The motion was granted.  On June 5, 1990, the

Rhode Island Supreme Court concluded that U-Haul was not jointly

and severally liable for Obert and Drywall's negligence.  SeeFratus v. Amerco, 575 A.2d 989, 993 (R.I. 1990).  On July 2, 1990,

the district court entered judgments consistent with the Rhode

Island Supreme Court's decision.

     Republic never disputed that it was responsible for at

least $25,000 of the judgment.  According to insurance policy RL-

1000, Republic was responsible for the minimum responsibility

insurance coverage for the state in which the loss occurred, which,

in Rhode Island, was $25,000.  On October 20, 1994, nearly six

years after the jury returned its verdict, and pursuant to a demand

stemming from the present litigation, Republic finally tendered

payment of the $25,000 to the plaintiffs.  In the interim, however,

well over one million dollars in interest had accumulated on the

original judgments.

     Plaintiffs brought this suit under the district court's

diversity jurisdiction, arguing that, under the terms of one policy

RL-1000, Republic was obligated to pay all of the interest which

had accumulated on the original judgments.  The district court

agreed that, under either Massachusetts or Rhode Island law,

Republic was obligated by the plain terms of its RL-1000 policy to

pay the interest on the judgments, despite the fact that, with the

passage of time, this obligation became one of a far greater

magnitude than payment of the policy "limits."  See Fratus, 963 F.

Supp. at 116-118.  Republic appeals this determination.

     Plaintiffs also argued that Republic was bound, under the

terms of three "umbrella" policies, RU-01000, RU-02000 and RU-

03000, to pay three million  dollars -- the policy limits of those

policies -- of the original judgments against Obert and Drywall. 

The district court held that these umbrella policies did not apply

to the accident because only U-Haul, and not Obert or Drywall, was

insured under the policies.  See id. at 119.  Plaintiffs appeal

this ruling, arguing that Obert was insured as a "permissive user"

of the truck.

                             ANALYSIS

I.  Choice of law

     This case arises under federal diversity jurisdiction as

set forth by 28 U.S.C.  1332.  Plaintiffs are Rhode Island

residents and the defendant is a Michigan-based insurance company. 

In the district court, the parties disputed whether the law of

Massachusetts -- where the truck was rented -- or Rhode Island --

where the accident occurred -- applied.  However, the district

court did not resolve the question in its opinion, concluding that

"it makes no difference which law applies because the application

of either state's law leads to the same conclusion."  See, 963 F.

Supp. at 116.  Neither party specifically appeals this ruling, and

we conclude that the district court acted within its discretion in

bypassing the choice of law issue.  A federal court sitting in

diversity need not make a finding regarding which state's law is to

be applied where the case's resolution would be identical under

either state's law.  See Pediatricians, Inc. v. Provident Life &

Accident Ins. Co., 965 F.2d 1164, 1168 (1st Cir. 1992); Fashion

House, Inc. v. K Mart Corp., 892 F.2d 1076, 1092 (1st Cir. 1989).

II.  Interpreting RL-1000

     According to Republic's RL-1000 insurance policy, which

indisputably covered Obert, "[i]n addition to our limit of

liability, we will pay for the insured . . . [a]ll interest

accruing after the entry of judgment in a suit we defend.  Our duty

to pay interest ends when we pay or tender our limit of liability"

(emphasis in original).  The insurance industry refers to this

clause as a "standard interest clause."  Republic does not dispute

that it defended the underlying suit in this case.  In that case,

verdicts were delivered for the plaintiffs in the amount of

$3,170,000 ($4,482,300 after computing pre-judgment interest).

Judgments were entered on the verdicts on December 14, 1988.  As of

that date, RL-1000 obligated Republic to pay $25,000 to the

plaintiffs.  Nonetheless, Republic did not pay the plaintiffs any

money until October 20, 1994.  During the almost six years between

the trial and Republic's tender of the policy limits, well over one

million dollars in interest had accumulated on the original

judgments.

     Plaintiffs claim that Republic is bound by its contract

terms to pay this interest, in spite of the fact that the limit of

liability under the policy was only $25,000.  Republic claims that

it is, at most, obligated to pay interest on $25,000 of the

judgment, since that is the limit of liability under the policy. 

Republic argues that the district court's decision produced the

"absurd" result of requiring it to pay interest worth many times

the policy limits.

     This dispute does not merit much discussion.  The

contract terms could not be clearer.  Republic agreed, in addition

to its limit of liability, to pay "[a]ll interest accruing after

the entry of judgment" (emphasis added) until the $25,000 was

tendered.  As the district court observed, "all interest" does not

mean "partial interest."  Republic essentially asks this court to

ignore the plain terms of its own policy because, under

circumstances like those in the present case, it would be obligated

to pay sums of interest that are grossly disproportionate to the

policy limits.  This argument is unavailing.  Where the terms of a

contract are clear and unambiguous, they must be applied as

written.  See Cody v. Connecticut Gen. Life Ins. Co., 439 N.E.2d

234, 237 (Mass. 1982); Factory Mut. Liability Ins. Co. of Am. v.

Cooper, 262 A.2d 370, 372 (R.I. 1970).

     At any time after judgments were entered in this case,

Republic could have stopped the interest from accumulating by

paying the Fratuses the $25,000 that they were owed.  Republic's

burden of adhering to its own contract was not onerous.  Yet, to

this date, no explanation has been offered for the delay in making

the payment to which plaintiffs were entitled.

     It may, at first, seem shocking to impose this immense

obligation on Republic for a failure to deliver a relatively small

sum to the plaintiffs.  Yet, the clear majority of modern courts

that have interpreted a standard interest clause under similar

circumstances have concluded that the policies mean what they say. 

See In re Estate of Tichota, 215 N.W.2d 885, 886-87 (Neb. 1974)

(explaining that the modern trend and majority rule holds insurers

liable for interest on the entire amount of the judgment); Weber v.

Biddle, 483 P.2d 155, 161-62 (Wash. Ct. App. 1971); 8A John Alan

Appleman and Jean Appleman, Insurance Law and Practice  4894.25

(1979) (listing cases applying the majority rule); 15A George J.

Couch, Couch on Insurance  56:39 (1983) (same).

     These opinions not only apply the straightforward terms

of the contracts, but produce sound policy.  Compelling the insurer

to pay all of the interest which accrues pending appeal protects

the insureds, who may wish to pay the portion of the judgment in

excess of policy limits and stop the tolling of interest, but whose

lack of control over the litigation prevents them from doing so. 

See River Valley Cartage Co. v. Hawkeye-Security Ins. Co., 161

N.E.2d 101, 103 (Ill. 1959).  The rule also serves to protect

plaintiffs from unreasonable delay on the part of insurers, or, as

in this case, compensate them for such delays.  The rule does not

impose an unfair burden on insurers because they remain in control

of both the tolling of interest and the litigation, and can fairly

be expected to understand how the majority of jurisdictions

interpret standard interest clauses.  See id.; Cf. Tichota, 215

N.W.2d at 887 (citing three articles in insurance industry journals

urging  the continued adoption of the majority rule).  We therefore

affirm the district court's determination that Republic is liable

for all interest accruing on the judgments from their date of

entry.

III.  Judgment Day

     Having concluded that Republic's liability for interest

on the Fratus judgments began upon their date of final entry, we

must resolve a dispute as to that date.  According to 28 U.S.C.

 1961, "[i]nterest shall be allowed on any money judgment in a

civil case recovered in a district court."  Both parties

acknowledge that on December 14, 1988, the Clerk of the District

Court entered eighteen separate judgments pursuant to the jury

verdicts in the underlying case.  However, the district court

subsequently certified to the Rhode Island Supreme Court a lone

remaining issue: whether U-Haul could be held jointly and severally

liable for the Fratus judgments.  See Fratus v. Amerco, 575 A.2d

989, 990 (R.I. 1990).  Republic claims to be obligated only to pay

interest which accrued after the district court acknowledged the

Rhode Island Supreme Court's decision on July 2, 1990, through the

last judgments entered in the case.  According to Republic,

interest does not begin to accrue under  1961 until the entry of

"final" judgment, and the judgments entered pursuant to the

verdicts in the underlying case were not "final" because they were

not entered pursuant to Fed. R. Civ. P. 54(b).  Under Rule 54(b),

when multiple parties or multiple claims are involved in an action,

the court may enter final judgment as to one or more of the claims

or parties, but on fewer than all of the claims or parties, only

upon an express determination that there is no just reason for

delay and upon an express direction for the entry of final

judgment.  Because plaintiffs' claim that U-Haul was vicariously

liable for the judgments obtained against Obert and Drywall was

certified to the Rhode Island Supreme Court, a judgment was still

pending against at least one party to the original litigation.  No

Rule 54(b) determination was made or requested in conjunction with

the December 1988 judgments.

     We agree that the district court made an error in

determining the date from which to compute post-judgment interest. 

This court has previously determined that, while a judgment need

not be final for all purposes in order to begin the tolling of

interest under  1961, see Marshall v. Avis Rent-A-Car of P.R.,

Inc., 866 F.2d 521, 523 (1st Cir. 1989), where a judgment is not

final for purposes of Rule 54(b), post-judgment interest does not

accrue.  See id. at 522-23; Explosives Corp. of Am. v. Garlam Ent.

Corp., 817 F.2d 894, 903-04 (1st Cir. 1987).  Because the December

1988 judgments did not address plaintiffs' claims of vicarious

liability against U-Haul, interest could not be imposed until

either those claims were resolved via recorded judgment or a Rule

54(b) determination was entered.  

     Thus, although the original judgments were set forth on

separate documents in accordance with Fed. R. Civ. P. 58, and were

entered on the civil docket by the district court clerk in

accordance with Fed. R. Civ. P. 79(a), they were not final

judgments to which post-judgment interest could attach.  The

interest was improperly calculated from December 14, 1988, and,

upon remand, post-judgment interest is to be calculated from

July 2, 1990, the date that final and appealable judgments were

entered in the case.

IV.  Pre-Judgment Interest

     Republic also contends that the district court erred in

awarding pre-judgment interest for the period from October 20, 1994

until June 13, 1997 -- the time in between Republic's tender of the

$25,000 during the present litigation and the district court's

final judgment in this case.  Republic argues that the district

court erroneously awarded this pre-judgment interest pursuant to 28

U.S.C.  1961, which only provides authority for the awarding of

post-judgment interest.  We agree.  

     In diversity cases, state law must be applied in

determining whether and how much pre-judgment interest should be

awarded.  See Commercial Union Ins. Co. v. Walbrook Ins. Co., 41

F.3d 764, 774 (1st Cir. 1994).  Under both Rhode Island and

Massachusetts law, the appropriate rate for pre-judgment interest

in a contract action is 12 percent.  See Mass. Gen. Laws ch. 231,

 6C; R.I. Gen. Laws  9-21-10.  In both states, the interest is

automatically added by the clerk of courts from the date of demand

until the judgment is entered.  See id.

     Republic argues that these statutes do not apply to the 

present action because RL-1000 already provides for and limits the

interest for which it is responsible.  It claims to have thus

"contracted out of" these statutes providing for pre-judgment

interest in civil actions.  Indeed, parties may contract out of

these statutes.  See id. (both statutes expressly allow contracting

parties to provide for alternate pre-judgment interest rates). 

However, Republic, through RL-1000, did not do so.  As discussed

previously, RL-1000 provides that "[i]n addition to [the] limit of

liability," Republic will pay "[a]ll interest accruing after the

entry of judgment" (emphasis added) against its insured in a case

it defends.  It would be illogical to interpret this provision to

somehow exclude pre-judgment interest provided by state statute on

a subsequent action demanding payment pursuant to the insurance

policy.  Republic's contention to the contrary is merely an

outgrowth of its failed argument that RL-1000 limits the amount of

interest for which Republic could be held liable in this case.

     Finally, Republic notes that, at least under Rhode Island

law, a court may choose not to follow the statutory mandate if the

award of interest, in light of the facts of the case, does not

further policy goals.  See Martin v. Lumberman's Mut. Cas. Co., 559

A.2d 1028, 1031 (R.I. 1989).  According to Republic, the award of

pre-judgment interest in this case was so unfair and contrary to

public policy as to constitute an abuse of discretion on the part

of the district court.  We do not agree.  While Republic's

characterization of pre-judgment interest in this case as a

"windfall" to plaintiffs is not ludicrous, this award remains

entirely consistent with the public policy promoted by these pre-

judgment interest statutes.  "Statutes that award prejudgment

interest generally serve the dual purposes of encouraging the early

settlement of claims . . . and compensating plaintiffs for waiting

for recompense to which they were legally entitled."  Id. at 1031. 

In this case, plaintiffs have been unable to settle their claim

with Republic and have been forced to wait many years for the money

to which they were unquestionably entitled.  While the sum of the

pre-judgment interest award in this case is quite sizable, we are

unprepared to say that the actions of the district court approach

an abuse of discretion.  

          Because, under either Massachusetts or Rhode Island

law, pre-judgment interest is awarded from the date of demand, seeMass. Gen. Laws ch. 231,  6C; R.I. Gen. Laws  9-21-10, the

district court erred in awarding pre-judgment interest from October 

20, 1994, the date Republic tendered its policy limits.  Instead,

pre-judgment interest began to accrue on July 26, 1994, the date

that plaintiffs filed their complaint and demand for payment in the

district court.  See Restatement (Second) of Contracts  354 cmt.

b (1981) (where "performance is to be rendered on demand, interest

does not begin to run until a demand is made [and if] the action

itself is considered to be the required demand, interest begins to

run from the time the action is brought").  We therefore affirm the

award of pre-judgment interest, but adjust the starting date of the

interest's accrual to July 26, 1994.

V.  The Umbrella Policies

     At the time of the accident, Republic had issued three

additional policies, RU-01000, RU-02000 and RU-03000, to U-Haul. 

These umbrella policies provided U-Haul with up to three million

dollars of liability insurance coverage.  According to plaintiffs,

these policies also covered "permissive users" of U-Haul vehicles,

and thus covered Obert and Drywall at the time of accident.  As a

result, plaintiffs claim that Republic owes them an additional

three million dollars.

     The district court concluded that, because Obert and

Drywall were not named insureds under the umbrella policies, they

were not covered by the contracts.  That conclusion relied upon an

incomplete and erroneous reading of the umbrella policies.  The

language in the insurance policies at issue clearly defines an

"insured" as including "any person while using an automobile or

aircraft owned by . . . the named insured . . . provided the actual

use of the automobile or aircraft is . . . with the named insured's

permission."  Because Obert was operating a vehicle owned by a

"named insured" and Obert's use of that vehicle "was with the named

insured's permission," there is no question that Obert was

"insured" within the definition provided in the body of the

umbrella policies.  However, our inquiry does not end here.

     Appended to each of the umbrella policies is a series of

"Amendatory Endorsements."  These endorsements each serve to alter,

amend or clarify terms contained within the main bodies of the

insurance contracts.  By adding these endorsements, Republic is

able to tailor standard insurance contracts to meet a particular

insured's needs.  

     Each of the umbrella policies contains a special

endorsement which explicitly amends the definition of "insured"

provided in the body of the policy.  These endorsements exclude

all renters of vehicles from coverage under the policies.  If these

endorsements were agreed to by both Republic and U-Haul, and were

added to the umbrella policies before the date of the Fratus

accident, then the policies do not provide Obert, as a permissive

user of U-Haul's truck, with any coverage.

     Republic claims that these endorsements were part of the

original insurance contracts signed by U-Haul in 1985.  However,

plaintiffs contend that these endorsements were not added to the

umbrella policies until after the date of the accident, and that

Republic is not truthful about the date of the endorsements' birth

in a nefarious attempt to preclude plaintiffs from collecting more

money.  These accusations are indeed troubling.  Furthermore, they

are not altogether unsupported.  

     In the lower left-hand corner of the amendatory

endorsements at issue is a typewritten notation which reads "7/2/86

dmm."  No similar notations appear in the corners of the numerous

other amendatory endorsements which were part of the RU-01000 and

RU-02000 contracts when they were signed in 1985.  However, similar

notations do appear in the lower left-hand corners of many

endorsements which were added to the contracts in 1986 and beyond. 

Republic offers no explanation for this inconsistency. 

Furthermore, in response to interrogatories, Republic denied any

knowledge of the identity of either the author of the policies at

issue or "dmm," and claims to be unable to determine or locate

these former employees.

     Thus, a material dispute of fact exists regarding the

original date of the endorsements amending the umbrella policies'

definition of "insured."  If the amendments were added after

June 4, 1985, then Obert was insured under the policies.  If the

amendment was added before June 4, 1985, the policies did not

provide any coverage for Obert.  This is a factual dispute that

must be resolved by the district court upon remand.

VI.  The Dates of Coverage of RU-03000

     The previous analysis has assumed, arguendo, that RU-

03000 covered U-Haul on the date of the June 4, 1985 accident.  In

fact, the district court concluded that RU-03000 was not actually

in effect on that fateful day.  According to plaintiffs, the

district court made a simple and correctable error.

     Plaintiffs maintain that the actual RU-03000 policy in

effect at the time of the accident could not be located by

Republic.  As a result, the parties agreed to submit a successor

policy, the RU-03000 policy which covered the period from April 1,

1986 to April 1, 1987, into evidence for the purpose of providing

the court with the appropriate policy language.  According to

plaintiffs, the court overlooked or was unaware of this arrangement

and, after noting the dates of the policy in evidence, mistakenly

ruled that RU-03000 was not in effect at the time of the accident. 

In support of their contention that RU-03000 was in effect at the

time of the accident, plaintiffs refer this court to an

interrogatory wherein Republic unequivocally states that RU-03000

had been in effect since 1982. 

     Republic denies that any arrangement was ever made to

substitute a later version of the RU-03000 policy into evidence in

exchange for the policy in effect at the time of the accident.  It

contends that the RU-03000 policy entered into evidence was as

close as Republic came to ensuring U-Haul with an RU-03000 policy

during the time of the accident.  It claims to have been confused

or mistaken when it responded to the interrogatory in which it

indicated that U-Haul had been insured under an RU-03000 policy

since 1982.

     We conclude, upon examination of the district court

opinion, that the court did not make a factual finding regarding

the "authenticity" of the RU-03000 policy in evidence.  The opinion

reveals that the court was unaware that the policy was alleged by

plaintiffs to merely represent a surrogate exhibit, substituted for

evidence which was lost or misplaced by Republic.  We therefore

remand to the district court for a factual determination on this

question.

                            CONCLUSION

     For the reasons stated herein, we affirm the district

court's award of pre- and post-judgment interest on the underlying

judgments in this case, but remand for a recalculation of that

interest at 5.75% from July 2, 1990 until July 26, 1994 and at 12%

from July 26, 1994 until June 13, 1997 (in addition to the interest

which has accumulated on appeal and remand).  Furthermore, we

remand the case for factual findings regarding the dates that

amendatory endorsements altering the definition of "insureds" were

added to the umbrella policies and for factual findings regarding

the dates of U-Haul's insurance coverage by policy RU-03000.  On

remand, the district court may examine the effect, if any, of the

rental agreement on the applicability of the umbrella policies. Each party to bear its own costs.