Rhode Island

Under Rhode Island law, “bad faith is established when the proof demonstrates that the insurer denied coverage or refused payment without a reasonable basis in fact or law for the denial.”[1] This rule is “of particular significance in this jurisdiction because claims of insurer bad faith are severed and tried separately from the breach of insurance contract claim, a procedure that provides the insurer with significant procedural protections, including nondisclosure of its file until the completion of the breach-of-contract action.”[2]

“An insurer has a responsibility to assemble all the facts necessary for a fair and comprehensive investigation before it refuses to pay a claim and may not base a defense to bad faith on later acquired information.”[3] “[T]he decision of the insurance company to deny a claim under an insurance policy must be judged by what was before it at the time the decision was made.”[4] Notably: not every refusal to pay amounts by the insurer is bad faith. A plaintiff must demonstrate an absence of a reasonable basis in law or fact for denying the claim or an intentional or reckless failure to properly investigate the claim, and subject the result to cognitive evaluation. “However, the obligations imposed on insurers doing business in Rhode Island have never changed—‘an insurance company has a ‘fiduciary obligation to act in the ‘best interests of its insured,’ and not its own pecuniary interest at all times.”[5]

However, it is important to note that R.I.G.L§ 9-1-33 only creates a cause of action for an insured against the insurer –not a third-party claimant. In Summit Insurance Company v. Stricklett, the Supreme Court of Rhode Island held that – similar to many jurisdictions – the duty to act in a reasonable manner and in good faith settling a claim does not run to the claimant absent an assignment from the insured.[6] This recent decision is in accordance with other statutory law in Rhode Island, which states: “An injured party, or, in the event of that party's death, the party entitled to sue for that death, in his or her suit against the insured, shall not join the insurer as a defendant.”[7]

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A. Asermely v. Allstate: 

In 1999, the Rhode Island Supreme Court issued a concerning decision in the case of Asermely v. Allstate Ins. Co.[8] In that case, the plaintiff was involved in an automobile accident with a vehicle insured by Allstate Insurance Company under a policy with a $50,000limit.[9] After the plaintiff filed suit, the parties were referred to arbitration, after which the arbitrator issued an award in favor of the plaintiff totaling $47,557.37.[10] Although the plaintiff accepted this award, Allstate decided to take its chances at trial and promptly rejected the result of arbitration.[11] After trial, a verdict entered for the plaintiff in the amount of $86,333.57,including interest, which was well above both the policy limit and the arbitrator's award.[12] Subsequent to the entry of judgment, Allstate attempted to tender the full policy limit by issuing a check for $50,000, noting that the check was in "final settlement" of the entire claim.[13] After the plaintiff refused to endorse this offer, Allstate sent another check for the same amount, this time without the limiting language, and the plaintiff accepted.[14]

The plaintiff in Asermely, having received an assignment of the insured's claims against Allstate, brought an action directly against Allstate, alleging, inter alia, that Allstate had "disregarded its duty to its insured in bad faith."[15] The Superior Court granted summary judgment in favor of Allstate on that count.[16] On appeal, the Supreme Court reversed the grant of summary judgment and took the "opportunity to promulgate a new rule to guide the trial courts in deciding these issues," stating: "This Court has held that an insurance company has a fiduciary obligation to act in the 'best interests of its insured in order to protect the insured from excess liability [and to]refrain from acts that demonstrate greater concern for the insurer's monetary interest than the financial risk attendant to the insured's situation."[17] The SJC further stated that:

"[I]f it has been afforded reasonable notice and if a plaintiff has made a reasonable written offer to a defendant's insurer to settle within the policy limits, the insurer is obligated to seriously consider such an offer. If the insurer declines to settle the case within the policy limits, it does so at its peril in the event that a trial results in a judgment that exceeds the policy limits, including interest."[18]

This decision created a construct specific to Rhode Island, known as the “Asermely Rule.” The rule is based on the “fiduciary obligation of insurance companies to act in the ‘best interest of its insured’ to protect the insured from excess liability . . . [and to] refrain from acts that demonstrate greater concern for the insurer’s monetary interest than the financial risk attendant to the insured’s situation.”[19] The Asermely Rule provides that if a claimant gives reasonable notice of a reasonable written offer to an insurance company to settle within policy limits the insurance company is obligated to seriously consider such an offer. The Aserlemy Rule goes further to permit a claimant to receive an award in excess of policy limits where an insurance company fails to settle within policy limits following a claimant’s written offer to settle within limits. Any such excess verdict must be paid by the carrier, without a finding of bad faith, essentially uncapping policy limits. The Asermely Rule created a subjective obligation for claimants and insurance companies alike: in order for claimants to be entitled to judgments in excess of policy limits they must make reasonable written notice of an offer to settle within limits; on the flip side, insurance companies must give due consideration to such offers or risk paying out on verdicts above the policy limits.

Once the Asermely ruling was issued, plaintiff attorneys began sending out “Asermely Demand Letters” in an effort to frighten carriers into paying out policy limits on claims. Notably, several carriers pulled out of writing insurance in the state due to the implications of extra contractual liability over and above the limits of the policies written. Since that time, the Rhode Island Courts have been struggling with how and when to apply the Asermely Rule, as the decision was less than clear as to the obligations of the insurer. The decision this year from the Rhode Island Supreme Court in the Summit Insurance Company v. Stricklett case (discussed above) is the first indication that the Asermely Rule does not apply to third-party claims, unless there is an assignment by the insured to the claimant. This is a significant and welcome clarification, almost exactly 20 years after the Asermely ruling was published. However, the spirit of Asermely persists, in that the Insurer should settle clearly compensable claims at or within the policy limits, rather than expose its insured (or itself) to a potential excess verdict.

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[1] Skaling v. Aetna Ins. Co., 799 A.2d 997, 1010 (R.I. 2002).

[2] Id.

[3] Id.

[4] Id.(citing to Insurance Company of North America v. Citizensbank of Thomasville,491 So.2d 880, 883 (Ala.1986) and Federated Guaranty Life Insurance Co. v. Wilkins, 435 So.2d 10, 13 (Ala.1983)).

[5] Bolton v. Quincy Mutual Fire Ins. Co., 730 A.2d 1079, 1081 (quoting Asermely. Allstate Ins. Co., 728 A.2d 461, 464 (1999)); Skaling at 1012 (R.I.2002).

[6] Summit Insurance Company v. Stricklett, 199 A.3d 523, (R.I. Jan. 15, 2019).

[7] R.I.G.L§ 27-7-2.

[8] Asermely,728 A.2d 461, 1999

[9] Id. at 462

[10] Id.

[11] Id.

[12] Id.

[13] Id.at 462-63

[14] Asermely, 728 A.2d 461 at 463.

[15] Id.at 464.

[16] Id.

[17] Id.

[18] Id.

[19] Medical Malpractice Joint Underwriting Association of Rhode Island v. Rhode Island Insurers’ InsolvencyFund,703 A.2d 1097, 1102 (R.I. 1997).