[co-author: Fred Poindexter]

Columbia Casualty Company v. Ironshore Specialty Insurance Company, No. 15-197, 2019 WL 2176306 (D.R.I. May 20, 2019)

In a dispute between two insurers arising from the once-largest medical malpractice award in Rhode Island history, the United States District Court for the District of Rhode Island held that Ironshore Specialty Insurance Company ("Ironshore")’s claims could proceed against Columbia Casualty Company ("Columbia") where it alleged Columbia acted in bad faith by gambling with the insured’s money in rejecting settlement offers and going to trial, causing Ironshore to pay $11 million in final-tier insurance coverage, but did not allege breach of contract.

In April 2015, a Providence County Superior Court jury awarded medical malpractice plaintiff Carl Beauchamp a $25,600,000 verdict, $35,000,000 after interest, against Rhode Island Hospital (the "Hospital") for negligence that caused Beauchamp severe and permanent brain damage. The verdict came after two years of unsuccessful settlement negotiations during which Beauchamp and the Hospital entered into a "High-Low" agreement, which set a minimum recovery and maximum award amount contingent upon the jury verdict. The "low" was set at $15,000,000 and the "high" at $31,500,000. The $35,000,000 award triggered the high end of the agreement.

The Hospital maintained three layers of tiered insurance coverage totaling $32,000,000: a self-insured retention policy provided the first $6,000,000; Columbia provided the next $15,000,000; and Ironshore provided the next $11,000,000 as the third layer of coverage. The Beauchamp verdict, totaling approximately $35,000,000, triggered the "high" end of the high-low agreement and exhausted the Hospital’s policy coverage. Ironshore, on the hook for $11,000,000, demanded Columbia reimburse it, arguing that Columbia could have settled the case within the policy limits of the first two tiers of coverage before trial at $21,000,000, and later during trial for $25,000,000, but failed to do so in bad faith. Columbia sought a declaratory judgment in the district court that it did not breach any obligation to Ironshore and had no obligation to pay Ironshore’s share of the settlement. Ironshore counterclaimed for common law bad faith and statutory bad faith under R.I. Gen. Laws § 9-1-33 (two additional counts were dismissed and are not discussed here). Ironshore’s position was that Columbia, already on the hook for some millions under even the "low" end of the high-low agreement, declined to settle for $21,000,000 or $25,000,000 with the hope of getting a lesser verdict at trial, all while understanding that any award beyond $21,000,000 would come from the Hospital and ultimately Ironshore as its insurer.

Columbia moved for summary judgment on Ironshore’s bad faith counterclaims arguing (1) Ironshore failed to allege breach-of-contract, a necessary prerequisite to establish a bad faith claim in Rhode Island, and (2) the Hospital never validly assigned its interest in the Beauchamp case to Ironshore, leaving Ironshore with no standing to assert claims.

Columbia noted in its motion that the U.S. District Court and the Rhode Island Supreme Court "have been virtually unequivocal that establishing a breach of contract is a necessary predicate for any bad faith claims, including insurer bad faith."

A magistrate judge in the insurance litigation previously issued a report and recommendation ("R&R") concluding that Ironshore was allowed to pursue the claims as lawful assignee of the Hospital based on a subrogation provision in the Hospital’s policy with Ironshore. The magistrate judge found Ironshore’s claims viable notwithstanding the fact that it never pleaded a claim of breach of contract by following Eighth Circuit rationale, providing that Ironshore adequately stated a bad faith claim by alleging Columbia utilized the high-low agreement to gamble with Ironshore’s money, at the risk of injuring its insured’s reputation and exhausting its final layer of insurance coverage, rather than diligently attempting to settle. The R&R further explained that the Eighth Circuit support for finding Ironshore adequately stated its bad faith claims was well-reasoned, persuasive, and "fully consistent with the policy rationale expressed by the Rhode Island Supreme Court in recognizing an insurer’s duty of good faith to its insured." The district court adopted the R&R in its entirety as the "law of the case," which governed issues in subsequent stages of litigation, and thus denied Columbia’s motion for summary judgment despite the virtually unequivocal decisions from the Rhode Island Supreme Court that a claim for breach of contract is a predicate for a claim for insurance bad faith.

As such, following Eighth Circuit rationale, the United States District Court for the District of Rhode Island allowed Ironshore’s claim of insurance bad faith against Columbia for $11,000,000 to survive summary judgment without the traditional predicate claim for breach of contract.