Summary
finding that the analogous statute in Virginia makes prejudgment interest discretionary
Summary of this case from Union Labor Life Ins. Co. v. O'NeillOpinion
49677 Record No. 931735 Record No. 931741
November 4, 1994
Present: All the Justices
Since the trial court effectively rewrote the parties' insurance contracts in the absence of any overriding statutory requirement, and it imposed on the insurers an obligation that they had not contracted to assume, the trial court's judgment was in error and is reversed.
Insurance — Liability Limits — Prejudgment Interest — Exceeding Limits — Contracts
The injured driver of one car brought a personal injury action against the driver of another. The jury awarded the plaintiff $95,000 in damages, with prejudgment interest on that sum from the date of the accident. Shortly before the entry of judgment in the tort action the defendant's insurer paid the plaintiff its policy limits of $25,000 and the plaintiff's insurer paid her the maximum available under the uninsured/underinsured motorist coverage provision, $75,000. The injured driver thus received the entire $95,000 damages awarded, plus $5,000 attributable to prejudgment interest. She then brought this action against the insurers seeking judgment for the unpaid amount of prejudgment interest awarded in the tort action. The insurers contended that they were not obligated to pay any amounts of prejudgment interest that exceeded their combined policy limits. The trial court entered summary judgment for the injured insured, ruling that current law establishes pre-judgment and post-judgment interest and requires it to be paid even though the payment may exceed the limits stated in the policy. The insurers agree that prejudgment interest is an element of compensatory damages payable under their contracts of insurance, but they assert that the amount of such interest they must pay is subject to their policy limits.
1. Insurance policies are contracts to be construed in accordance with the general principles applicable to all contracts and, if the terms of the insurance policy do not conflict with provisions of law, the terms of the contract, as written, will govern and limit the extent of recovery under the policy.
2. By its express language, Code Sec. 8.01-382 draws an important distinction between prejudgment and postjudgment interest: while the award of prejudgment interest is discretionary with the trier of fact, the accrual of postjudgment interest is mandatory.
3. Prejudgment interest is normally designed to make the plaintiff whole and is a part of the actual damages south to be recovered, while postjudgment interest not an element of damages, but is a statutory award for delay in the payment of money actually due.
4. Although the insurer's duty to pay damages is a contractual liability, enforced by the insurance statutes, the duty to pay post judgment interest is an extra-contractual obligation that is imposed as a statutory penalty for failure to pay a liquidated debt when due.
5. Since there is no obligation imposed by statute for such payment, an insurer has no duty to pay prejudgment interest in excess of its policy limits, absent a contractual provision to the contrary.
6. Here the trial court effectively rewrote the parties' insurance contracts in the absence of any overriding statutory requirement and it imposed on the insurers an obligation that they had not contracted to assume.
Appeal from a judgment of the Circuit Court of Pulaski County. Hon. A. Dow Owens, judge presiding.
Reversed and final judgment.
Wm. Bradford Stallard (Penn, Stuart, Eskridge Jones, on briefs), for appellant. (Record No. 931735)
Debra Fitzgerald-O'Connell (Robert J. Ingram; Gary C. Hancock; Gilmer, Sadler, Ingram, Sutherland Hutton, on brief), for appellee. (Record No. 931735)
John D. Eure (Johnson, Ayers Matthews, on briefs), for appellant. (Record 931741)
Debra Fitzgerald-O'Connell (Robert J. Ingram; Gary C. Hancock; Gilmer, Sadler, Ingram, Sutherland Hutton, on brief), for appellee. (Record No. 931741)
The sole issue in this appeal is whether Dairyland Insurance Company (Dairyland) and State Farm Mutual Automobile Insurance Company (State Farm) are required to pay prejudgment interest which, when added to the judgment award, exceeds the liability limits for damages under their insurance contracts.
Maria Elena Douthat brought a personal injury action against Allen Price Dunford arising out of an automobile accident that occurred on October 5, 1987. In that action, a jury awarded Douthat $95,000 in damages, with prejudgment interest on that sum from the date of the accident. The trial court entered judgment on the verdict on December 10, 1991.
Shortly before entry of the judgment order in the tort action, Dairyland, Dunford's automobile liability insurer, paid Douthat its policy limits of $25,000. In addition, State Farm paid Douthat $75,000, which was the maximum amount available under the uninsured/underinsured motorist (UM) coverage provision of Douthat's automobile insurance policy issued by State Farm. Douthat thus received the entire $95,000 damages awarded, plus $5,000 attributable to prejudgment interest.
Douthat then brought this action against Dairyland and State Farm (collectively, the insurers), seeking judgment for the unpaid amount of prejudgment interest awarded in the tort action. The insurers asserted that they were not obligated by the terms of their policies to pay Douthat any amounts of prejudgment interest that exceeded their combined policy limits.
Neither of the policies issued by the insurers specifically addressed the subject of prejudgment interest. Dairyland's liability policy provided, under "Limits of Liability," that [t]he limit of bodily injury liability stated in the declarations as applicable to "each person" is the limit of the company's liability for all damages . . . arising out of bodily injury sustained by one person as the result of any one occurrence[.]
Under a "Supplementary Payments" provision, Dairyland further agreed [t]o pay, in addition to the applicable limits of liability:
(a) all expenses incurred by the company, all costs taxed against the insured in any such suit and all interest on the entire amount of any judgment therein which accrues after entry of the judgment and before the company has paid or tendered or deposited in court that part of the judgment which does not exceed the limit of the company's liability thereon[.]
State Farm's policy issued to Douthat provided UM coverage, subject to the limits of liability insurance in its policy, obligating State Farm to pay Douthat "all sums" which she was "legally entitled to recover as damages from [the underinsured tortfeasor, Dunford,] because of bodily injury sustained by [Douthat] . . . caused by accident and arising out of [Dunford's use of an underinsured] motor vehicle." The policy further provided that any amount payable by State Farm would be reduced by sums paid by or on behalf of Dunford, the underinsured motorist.
After reviewing the policy provisions, the trial court entered summary judgment for Douthat, ruling that "current statutory and case law establishes pre-judgment and post-judgment interest, and requires the payment of such even though it may exceed the limits stated in the policy." The trial court found that Douthat was entitled to an additional $27,175.56 in prejudgment interest that had accrued before the insurers made payment in the amount of their policy limits. The court entered judgment against the insurers in amounts totalling $27,175.56, apportioned in accordance with the principal amounts they had paid pursuant to their respective policy limits.
On appeal, the insurers argue that the trial court erred in imposing liability on them beyond their contractual duties. The insurers contend that the trial court failed to distinguish between the insurers' duties under their contracts of insurance and the duties that Code Sec. 8.01-382 imposes upon a judgment debtor. While the insurers agree that prejudgment interest is an element of compensatory damages payable under their contracts of insurance, they assert that the amount of such interest they must pay is subject to their policy limits.
In response, Douthat argues that the statutory provision for interest in Code Sec. 8.01-382 makes no distinction between interest accruing prejudgment or postjudgment, and that this statute obligates the insurers to pay prejudgment interest in excess of their policy limits. She further contends that this Court's holding in Nationwide Mutual Insurance Co. v. Finley, 215 Va. 700, 214 S.E.2d 129 (1975), supports the trial court's ruling. We disagree with Douthat.
Initially, we observe that insurance policies are contracts whose terms are construed in accordance with the general principles applicable to all contracts. Allstate Ins. Co. v. Eaton, 248 Va. 246, 431, 448 S.E.2d 652, 655 (1994); State Farm Fire Casualty Co. v. Walton, 244 Va. 498, 502, 423 S.E.2d 188, 191 (1992). If the terms of an insurance policy do not conflict with any provision of law, the terms of the contract, as written, will govern and limit the extent of recovery under the policy. See Eaton, 248 Va. at 431, 448 S.E.2d at 655; Peerless Ins. Co. v. Associates Fin. Servs. of America, Inc., 218 Va. 876, 879, 241 S.E.2d 792, 794 (1978).
In the present case, Douthat does not argue that either insurer undertook in its policy to pay prejudgment interest in excess of its policy limits. Moreover, we find nothing in the language of either policy that expressly requires such payment. Thus, our inquiry here is limited to determining whether any provision of law precludes the enforcement of these contracts as written.
Code Sec. 8.01-382, on which Douthat relies, provides in material part that
in any action at law or suit in equity, the verdict of the jury, or if no jury the judgment or decree of the court, may provide for interest on any principal sum awarded, or any part thereof, and fix the period at which the interest shall commence. The judgment or decree entered shall provide for such interest until such principal sum be paid. If a judgment or decree be rendered which does not provide for interest, the judgment or decree awarded shall bear interest from its date of entry, at the rate as provided in Sec. 6.1-330.54, and judgment or decree entered accordingly; provided, if the judgment entered in accordance with the verdict of a jury does not provide for interest, interest shall commence from the date that the verdict was rendered.
By its express language, Code Sec. 8.01-382 draws an important distinction between prejudgment and postjudgment interest. This section provides for the discretionary award of prejudgment interest by the trier of fact, who "may provide for" such interest and fix the time of its commencement. The accrual of postjudgment interest, however, is mandatory; the entire amount of a judgment or decree "shall bear interest" from its date of entry.
Underlying this distinction is the principle that "[p]rejudgment interest is normally designed to make the plaintiff whole and is part of the actual damages sought to be recovered." Monessen Southwestern Ry. v. Morgan, 486 U.S. 330, 335 (1988); see also Allstate Ins. Co. v. Starke, 797 P.2d 14, 19 (Colo. 1990); Buckhannon-Upshur County Airport Auth. v. R R Coal Contracting, Inc., 413 S.E.2d 404, 408 (W. Va. 1991). In contrast, postjudgment interest is not an element of damages, but is a statutory award for delay in the payment of money actually due. Nationwide Mut. Ins. Co. v. Finley, 215 Va. at 702, 214 S.E.2d at 131.
In Finley, an insurer providing UM coverage argued that it was not liable to pay postjudgment interest in excess of its policy limits. This Court disagreed, explaining that the statutory requirement of postjudgment interest is based on the liquidated nature of the debt owed by the insurer. Id. Thus, although the insurer's duty to pay damages is a contractual liability, enforced by the insurance statutes, the duty to pay postjudgment interest is an extra-contractual obligation that is imposed as a statutory penalty for failure to pay a liquidated debt when due. Id.
Since there is no corresponding statutory requirement for the payment of prejudgment interest, Finley is not dispositive of the issue before us. Rather, because no such obligation is imposed by Code Sec. 8.01-382 or any other statute, we hold that an insurer has no duty to pay prejudgment interest in excess of its policy limits, absent a contractual provision to the contrary.
In the present case, the trial court effectively rewrote the parties' insurance contracts in the absence of any overriding statutory requirement, and it imposed on the insurers an obligation that they had not contracted to assume. Therefore, we conclude that the trial court's judgment is in error. See Eaton, 248 Va. at 431, 448 S.E.2d at 655.
Finally, we note that the holding we reach here accords with the view of the majority of courts that have addressed this issue. See, e.g., Starke, 797 P.2d at 18-22; Nunez v. Nationwide Mut. Ins. Co., 472 A.2d 1383, 1384-85 (Me. 1984); Laplant v. Aetna Casualty Sur. Co., 219 A.2d 283, 285 (N.H. 1966); Russo v. Kemper Group, 537 N.Y.S.2d 200, 202 (N.Y. App. Div. 198 9); Carney v. State Farm Mut. Auto. Ins. Co., 877 P.2d 1113, 1115-19 (Okla. 1994); Factory Mut. Liab. Ins. Co. of America v. Cooper, 262 A.2d 370, 372-74 (R.I. 1970); Nielsen v. O'Reilly, 848 P.2d 664, 670 (Utah 1992); Buckhannon-Upshur County Airport Auth., 413 S.E.2d at 407-11.
For these reasons, we will reverse the trial court's judgment and enter final judgment in favor of Dairyland and State Farm.
Reversed and final judgment.