Opinion
No. 98-505, September Term, 1999.
Filed April 14, 2000
On Appeal from Orange Superior Court, Shireen Avis Fisher, J.
R. Bradford Fawley of Downs Rachlin Martin, PLLC, Brattleboro, for Plaintiffs-Appellants.
Frank H. Zetelski, Rutland, for Defendant-Appellee Kansa General International Insurance Co.
John L. Putnam and David R. Putnam of Stebbins, Bradley, Wood Harvey, Hanover, New Hampshire, for Defendant-Appellee U.S. Fire Insurance Co.
William H. Quinn of Pierson, Wadhams, Quinn Yates, Burlington, for Defendant-Appellee Zurich Insurance Co.
John Davis Buckley of Theriault Joslin, P.C., Montpelier, and Richard W. Bryan and Richard S. Kuhl of Jackson Campbell, P.C., Washington, D.C., for Defendants-Appellees American Homes Assurance Co. and New Hampshire Insurance Co.
Samuel Hoar, Jr., Shapleigh Smith, Jr. and Elizabeth H. Miller of Dinse, Knapp McAndrew, P.C., for Defendant-Appellee Reliance Insurance Co.
Brooks, McNally, Platto Vitt, P.C., Norwich, and Alexandre de Gramont of Crowell Moring, LLP, Washington, D.C., for Defendant-Appellee Cigna Insurance Co.
PRESENT: Amestoy, C.J., Morse, Johnson, Skoglund, JJ., and Van Benthuysen, Superior J., Specially Assigned.
Plaintiff Copeland, as judgment creditor, sued the seven insurance companies of the judgment debtor, Maska U.S., Inc., for damages under a direct action statute, which provides, "in case of [the] insolvency or bankruptcy [of insured,] an action may be maintained by the injured person or claimant against the company under the terms of the policy." 8 V.S.A. § 4203(3). The superior court granted defendants' motions to dismiss on the ground that Copeland's suit was time-barred by the one-year limitations period established by 8 V.S.A. § 4203(2) ("No action shall lie against the company to recover for any loss under this policy, unless brought within one year after the amount of such loss is made certain either by judgment against the insured . . . or by agreement between the parties . . . ."). Copeland argues that the court erred by not applying the general six-year limitations period provided by 12 V.S.A. § 511 ("A civil action . . . shall be commenced within six years after the cause of action accrues and not thereafter."). The issues raised in this appeal are (1) what limitations period governs direct actions brought under § 4203; (2) when does it start to run; and (3) when does the right of action accrue. We affirm.
Copeland manufactures furniture at the Pierson Industrial Park in Bradford, Vermont. In June 1992, Copeland sued Maska, an adjoining manufacturer of hockey jerseys, for alleged contamination of its real property. The case settled, and, on June 28, 1995, the superior court entered judgment against Maska in the amount of $7,000,000. On October 24, 1995, after it had paid Copeland $1,000,000 towards satisfaction of the judgment, Maska filed for bankruptcy. On November 1, 1996, Copeland sued Maska's several insurers, the defendants below, to recover its judgment.
According to Copeland, upon the adjudication of Maska's bankruptcy, they expect to recover $3,000,000 from the estate, and be left with an unsatisfied judgement of a like amount.
Maska established that its several insurers — Kansa General Insurance Company, United States Fire Insurance Company, Zurich Insurance Company, American Home Assurance Company, New Hampshire Insurance Company, Reliance Insurance Company, and CIGNA Insurance Company — had a duty to defend it from Copeland's suit. See Maska U.S., Inc. v. Kansa Gen. Ins. Co., File No. 5:93-CV-309, at 42 (D. Vt. Sep. 30, 1996) (Magistrate Judge's Report and Recommendation).
In 1919, the Vermont Legislature passed an act requiring that all liability insurance policies issued in Vermont contain four conditions. See 1919, No. 155, § 2 (codified as 8 V.S.A. § 4203(1)-(4)). Two are at issue in this case. They are subsection (2):
No action shall lie against the [insurance] company to recover for any loss under this [insurance] policy, unless brought within one year after the amount of such loss is made certain either by judgment against the insured after final determination of the litigation or by agreement between the parties with the written consent of the company;
id. § 4203(2), and subsection (3):
The insolvency or bankruptcy of the insured shall not release the company from the payment of damages for injury sustained or loss occasioned during the life of the policy, and in case of such insolvency or bankruptcy an action may be maintained by the injured person or claimant against the company under the terms of the policy, for the amount of any judgment obtained against the insured not exceeding the limits of the policy.
Id. § 4203(3). Thus, subsection (2) established a one-year limitations period for actions against insurers seeking to recover under an insurance policy, and subsection (3) created an avenue through which injured parties could directly sue insurance carriers if the insured is insolvent or bankrupt. As mentioned above, Copeland invoked subsection (3) to bring the underlying suit against defendants. We now must determine whether it was too late in doing so, because the judgment was entered on June 28, 1995, Maska filed for bankruptcy on October 24, 1995, and the suit to recover judgment was not brought until November 1, 1996.
Copeland contends that the plain language of § 4203 means that the one-year limitations period is applicable solely to claims brought by the insured against the insurer, not by third-party judgment creditors. Copeland supports its plain-language interpretation by arguing that subsection (2) is separate from, and unrelated to, subsection (3) because the former lacks any reference to direct actions or third-party claims, and that its only relation to subsection (3) is the happenstance of being one in a series of six conditions that the Legislature requires all insurers to include in the policies they deliver or sell in Vermont. Copeland maintains that the words "loss under this policy" in subsection (2) refer only to the financial detriment suffered by an insured for which the insurer is liable, and the word "recover" preceding them, by definition, means only to get back or regain. Therefore, the limitations period is applicable to those actions brought by the insured to get back or regain the financial detriment that he has suffered, and does not apply to third-party actions seeking payment on a judgment. See Olds v. General Accident Fire Life Assurance Corp., Ltd., 155 P.2d 676, 680 (Cal. Dist. Ct. App. 1945) ("The words `recover' and `loss under this policy,' in their normal connotation, would seem to refer to actions by the assured after he has paid the judgment. The injured third person does not suffer a `loss under this policy' nor are his actions to `recover' such a loss . . . . [,] but an action to be reimbursed for damages suffered. . . ."). Furthermore, Copeland asserts, reading subsection (2) as applicable to actions brought by third parties would render the operative phrase "loss under this policy" surplusage. See Trombley v. Bellows Falls Union High School, 160 Vt. 101, 104, 624 A.2d 857, 860 (1993) (statutes may not be construed so as to render a significant part pure surplusage).
Olds is distinguishable from the instant case. In Olds, the limitations period was established by a provision in the insurance policy and was analyzed along with a direct action statute. See Olds, 155 P.2d at 678-79. Here, both the limitations period and the right to direct action are set forth by statute, each provision a part of a larger statutory scheme.
Our primary objective in construing a statute is to give effect to the intent of the Legislature. See In re P.S., 167 Vt. 63, 70, 702 A.2d 98, 102 (1997). The first step in determining such intent is to study the language of the statute. See Brennan v. Town of Colchester, ___ Vt. ___, ___, 730 A.2d 601, 603 (1999). Our review of the plain language of § 4203 leads to the conclusion that the Legislature intended to limit the time during which third parties may invoke a direct action under subsection (3) to one year from the date on which judgment against the insured is obtained.
First, we are not persuaded by Copeland's argument that subsections (2) and (3) are isolated and unrelated statutory provisions. The Legislature has not amended the language of § 4203 from its original form with the exception of adding subsections (5) and (6). The original act mandated that four conditions be included in liability insurance policies, setting out the conditions one per paragraph. See 1919, No. 155, § 2. In other words, the subsections first appeared as a larger whole that read as one section of the original act, not as four separate and independent subsections. Thus, subsections (2) and (3) were drafted as part of an overall statutory scheme and should be read and construed together. See Galkin v. Town of Chester, 168 Vt. 82, 87, 716 A.2d 25, 29 (1998) (statutes in pari materia are to be construed together).
We find this axiom of statutory construction particularly relevant here. Copeland would have us liberally construe subsection (3) in favor of third parties, see Vincent v. Vermont State Retirement Bd., 148 Vt. 531, 536, 536 A.2d 925, 929 (1987) (remedial legislation is to be construed in favor of beneficiary), and strictly construe subsection (2) as applying solely to insureds, see Marshall v. Town of Brattleboro, 121 Vt. 417, 419, 160 A.2d 762, 764 (1960) (curtailment of remedy must receive strict construction). Reading the two subsections together, however, is the rule of statutory interpretation that best informs us of Legislature's intent behind § 4203.
Second, as illustrated by their use in other subsections of § 4203, the Legislature accorded a broader definition to "recover" and "loss" than Copeland argues. For example, subsection (1) sets forth the first condition required of insurance policies: "The company shall pay and satisfy any judgment that may be recovered against the insured upon any claim covered by this policy. . . ." 8 V.S.A. § 4203(1). If a third-party judgment creditor may "recover" the judgment against the insured, we see no reason why it cannot also be said that he can "recover" against the insurer.
While "loss" traditionally has been defined as the amount of an insured's financial detriment that the insurer becomes liable to pay, we believe that the Legislature broadened "loss" to include the financial detriment suffered by a third party. Subsection (3) declares that bankruptcy shall not release the insurance company from "payment of damages for injury sustained or loss occasioned during the life of the policy, and in case of such insolvency or bankruptcy an action may be maintained by the injured person or claimant against the company under the terms of the policy. . . ." Id. § 4203(3). This language, particularly the inclusiveness of the phrases "injury sustained or loss occasioned" and "injured person or claimant," id. § 4203(3) (emphasis added), illustrates the Legislature's broad interpretation of the vocabulary employed in the context of liability insurance, as well as the interchangeable nature of words like "loss" and "injury," and "injured person" and "claimant."
This interchangeability, furthermore, does not render operative words of subsection (2) surplusage. Copeland argues by illustration that, had the Legislature intended to include third-party claims within the scope of subsection (2), it would have written the statute by deleting the following underlined words: "No action shall lie against the company to recover for any loss under this policy, unless brought within one-year after the amount of such loss is made certain either by judgment against the insured. . . ." Id. § 4203(2). The language emphasized above, however, merely describes a traditional first-party action brought under an insurance policy, which in turn becomes interchangeable with a third-party action under subsection (3). We believe, therefore, that the Legislature used "loss" in subsection (2) to refer to damages suffered by either the insured or an injured third party. Consequently, the plain language of subsection (2) — "[n]o action shall lie against the company to recover for any loss" — applies to third-party actions brought under the direct action provision. Id. § 4203(2).
We also note that subsection (2) was not worded so as to apply only to those actions brought upon the policy. Copeland marshals cases in which the phrase "[n]o suit or action on this policy," preceding language setting forth a limitations period, has been interpreted as narrowing the applicability of the limitations period such that it does not include all suits. See, e.g., Stahl v. Preston Mutual Ins. Ass'n, 517 N.W.2d 201, 203 (Iowa 1994); Lees v. Middlesex Ins., 594 A.2d 952, 956 (Conn. 1991); Hearn v. Rickenbacker, 400 N.W.2d 90, 94 (Mich. 1987).
Accordingly, Copeland urges us to reject the notion that subsection (2) applies to all suits, including direct actions.
Subsection (2), unlike the language in the cases cited by Copeland, states that "[n]o action shall lie against the company to recover for any loss under this policy." 8 V.S.A. § 4203(2). There is no restriction that actions must be upon the policy; rather, the language is inclusive of all suits seeking recovery. Therefore, we find these cases unpersuasive.
Third, the plain language of subsection (3) — that a direct action "may be maintained by the injured person or claimant against the company under the terms of the policy," id. § 4203(3) (emphasis added) — grants third parties a derivative right to sue the insurer that is no greater than that of the insured's. "[W]here the injured party is given a right of action `under the terms of the policy,' he or she must obviously comply with policy terms and conditions or forfeit his or her rights the same as the insured." 7 L. Russ T. Segalla, Couch on Insurance § 104:39, at 104-62 (3d ed. 1997). Under the derivative-right theory, the third party levying a direct action stands in the same shoes as the insured and with rights equal to, but not greater than, the insured.
This Court has long recognized and approved of the derivative nature of third-party rights. For example, we stated, when addressing the question of whether notice of an accident was given as required by an automobile liability insurance policy, that:
It has been held that notice, given by the injured party as a beneficiary and a party in interest, acting in behalf of the insured, may be a sufficient compliance with the terms of the policy, in the absence of action by the insured. But notice must be reasonable . . . for, according to the weight of authority, the injured party stands in the shoes of the insured, and is subject to the provisions of the policy and to any defense which the insurer might have raised against the insured. This is so whether the right of action is conferred by statute . . . or arises under a clause in the insurance contract, as it does here, stipulating that a proceeding brought by the injured party against the insurer, after judgment obtained against the insured, shall be "under the terms of this policy."
Houran v. Preferred Accident Ins. Co., 109 Vt. 258, 265-66, 195 A. 253, 255-56 (1938), overruled in part on other grounds by Cooperative Fire Ins. Ass'n v. Bizon, 166 Vt. 326, 693 A.2d 722 (1997) (emphasis added). When this theory is literally followed, "it is apparent that the claimant is, in effect, merely a transferee of the claim against the insurer and holds the claim subject to each limitation and qualification to which it would be subject if it were asserted by the insured in an action against the insurer." 7 Couch, supra, § 104:37, at 104-61. Therefore, since subsection (2) mandates that an insured has only one year in which to bring an action against the insurer, a third party is bound by the same condition.
Our conclusion that Copeland's direct action suit against defendants was subject to the one-year limitations period leads to the question: When does the period begin to run? Without deciding this question, the lower court concluded that Copeland's suit was nevertheless untimely because Copeland filed it more than one year after both the date on which it received a judgment against Maska and the date on which Maska filed for bankruptcy. The court implicitly decided that the only possible triggering dates were (1) the date on which a third party obtains judgment against an insured and (2) the date on which it receives notice of insured's insolvency.
The limitations period under § 4203(2) begins to run on the date that the loss is made certain by trial and entry of judgment or by agreement. In the instant case, that date was June 28, 1995. The right to bring a direct action, however, does not necessarily accrue at the time of judgment. The direct action provision does not provide a general right of action, but one contingent upon the insolvency or bankruptcy of the reinsured. Subsection (3) states that, "in case of such insolvency or bankruptcy, an action may be maintained." 8 V.S.A. § 4203(3). The insolvency or bankruptcy of the insured, therefore, is a condition precedent to a direct action, and the cause of action does not accrue until such insolvency or bankruptcy exists as a matter of fact. See 7 Couch, supra, § 105:10, at 105-18. We summed up the accrual of a third party's right to file a direct action against an insured when we stated that "an injured person [(1)] holding a judgment against a [(2)] bankrupt or insolvent insured may maintain an action under the terms of the policy against the insurer of the insured." Bennett Estate v. Travelers Ins. Co., 140 Vt. 339, 341 n. 1, 438 A.2d 380, 381 n. 1 (1981).
To further pinpoint the time of accrual, the question becomes: What constitutes insolvency or bankruptcy? According to Couch, "[i]t is the fact of insolvency which is significant; an adjudication of insolvency or bankruptcy is not a condition to the right." 7 Couch, supra, § 105:11, at 105-19. The Legislature has defined insolvency in Vermont as follows: "A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation. A debtor who is generally not paying . . . debts as they become due is presumed to be insolvent." See 9 V.S.A. § 2286. Under modern bankruptcy law, a debtor is considered bankrupt at the time of filing for bankruptcy. See, e.g., In re Ben Cooper, Inc., 896 F.2d 1394, 1399 (2d Cir. 1990) (filing of petition creates estate for bankruptcy purposes).
Copeland argues that starting the one-year limitations period at the time of judgment would lead to absurd and irrational consequences by extinguishing a cause of action before it accrues. According to Copeland, because an insured may file for bankruptcy more than one year after the date of judgment has passed, the direct action would not accrue until after the limitations period has run. As a result, continues Copeland, judgment creditors would consistently be forced to file suits against insurers even though the insured is not bankrupt. We disagree.
This Court recently acknowledged that the purpose behind statutes of limitations "is fairness to the defendants. . . . The time limits represent a balance, affording the opportunity to plaintiffs to develop and present a claim while protecting the legitimate interests of defendants in timely assertion of that claim." Investment Properties, Inc. v. Lyttle, ___ Vt. ___, ___, 739 A.2d 1222, 1226-27 (1999). In addition, other courts have held provisions similar to subsection (2) applicable to third-party actions. See 7 Couch, supra, § 107:10 at 107-19, 20 (citing Specht v. Bankers Indem. Ins. Co, 140 F.2d 30, 31 (2d Cir. 1944) (where policy provided that actions must be brought within two years of date of judgment and included statutory provision that insolvency would not release insurer, third-party direct action brought four years after entry of judgment was time-barred); Hyman v. Markus, 48 N.E.2d 478, 480 (Ohio Ct. App. 1942) (where policy provided that no action should lie against insurer unless brought within two years after loss had been rendered certain, such provision limited to two years after judgment action brought by third party); Ferguson v. Manufacturers' Casualty Ins. Co., 195 A. 661, 663 (Pa.Super.Ct. 1937) (provision that "no action" should lie upon "any claim" or for "any loss" under policy unless brought within 90 days after right of action accrued was valid and enforceable both as between parties to policy and as to injured third party)).
Copeland's hypothetical argument, moreover, doesn't apply in this case. Maska defaulted on its payment of the judgment and filed for bankruptcy before the completion of the one-year limitations period. In fact, Copeland admitted in its complaint that it brought this direct action against defendants "in light of Maska's bankruptcy filing," which occurred on October 24, 1995, only four months after the limitations period began to run.
Because the one-year limitations period governing Copeland's direct action against defendant began to run on June 28, 1995, and Copeland did not bring the action until November 1, 1996, the court correctly concluded that the action is time-barred.
Affirmed.
FOR THE COURT:
______________________________________ Associate Justice