Derderian v. Essex Ins. Co. (R.I. Apr. 27, 2012)
The Supreme Court of Rhode Island recently held that two night club owners charged with involuntary manslaughter in connection with 100 deaths at the club were not entitled to a defense from the club’s liability insurer for the criminal proceedings against them.
In February 2003, 100 people died in a fire that occurred at the Station nightclub, which was co-owned by appellants Michael and Jeffrey Derderian. The fire engulfed the Station within a matter of minutes when polyurethane foam covering the ceiling and walls caught fire after a band performing at the nightclub ignited a pyrotechnic display. The foam that kindled the conflagration had been installed by the Derderians in June 2000, and was not flame-resistant, as required by the statute in effect at that time.
The Derderians were indicted on charges of criminal negligence as a result of the fire. They tendered their defense in the criminal proceeding to Essex Insurance Company under a general liability policy issued to the nightclub. Essex denied coverage, contending that the policy provided coverage for a “suit,” which was specifically defined as a “civil proceeding.” The Derderians argued that Rhode Island General Law §12-28-5 required Essex to provide a defense. The statute, referred to as the "Victim's Rights" statute, provides:
Upon his or her final conviction of a felony after a trial by jury, a civil judgment shall automatically be entered by the trial court against the defendant conclusively establishing his or her liability to the victim for any personal injury and/or loss of property that was sustained by the victim as a direct and proximate cause of the felonious conduct of which the defendant has been convicted. The court shall notify the victim at his or her last known address of the entry of the civil judgment in his or her favor and inform him or her that he or she must establish proof of damages in an appropriate judicial proceeding in order to recover for his or her injury or loss. This section shall not apply to crimes set forth in title 31 arising from the operation of a motor vehicle.
The Derderians contended that Essex’s defense obligation was triggered because the statute required an automatic civil judgment against them if convicted. Essex argued, in response, that the criminal proceedings were not “suits” within the meaning of the policy because they did not seek damages because of “bodily injury.” Essex also contended that, as a matter of course, general liability policies do not provide coverage for criminal proceedings, and that to interpret §12-28-5 as requiring a general liability policy to provide a defense for such matters would result in an undue windfall for insureds.
The lower court held that the criminal proceedings were not “suits” within the meaning of the policy. The Rhode Island Supreme Court affirmed, noting that the statute is merely a “procedural mechanism" that fixes civil liability, but that still requires a separate proceeding to establish damages. As a result, the court held that the statute was not meant to require an insurer to defend its insured in a criminal proceeding. As the court explained, “[u]nlike the alchemists of yore, we do not claim the ability to transmute base metal into gold; neither can we transmute a 200-count criminal indictment into a civil proceeding.”
For a copy of the decision, click here.