Opinion ID: 1925572
Heading Depth: 1
Heading Rank: 4

Heading: Prior History of Prejudgment Interest Computation

Text: Before discussing the correct computation of prejudgment interest in UM arbitration claims, a review of Rhode Island law on this issue is useful. In Metropolitan Property and Casualty Insurance Co. v. Tanasio, 703 A.2d 1102 (R.I.1997), the Court addressed the proper method for calculating prejudgment interest in UM cases. In that case, the Superior Court hearing justice modified the arbitrator's award and formulated his own, three-step formula for computing prejudgment interest in the UM arbitration context. Id. at 1103. First, the insurer was required to pay interest on the full amount of the award until the insured received his medical payment; at which point interest was to be computed on the difference between the total award and the medical payments[.] Id. Thereafter, interest accrued on this reduced amount until the insured received a second payment, from the tortfeasor. Id. At that time the balance due [the insured] was to be further reduced, and the interest was to be recomputed on the remaining [amount] and interest was to accrue on that sum until the UM carrier paid the award. Id. This Court affirmed the judgment and concluded that the trial justice's method for calculating prejudgment interest was not unreasonable. Id. at 1104. Next, in Merrill v. Trenn, 706 A.2d 1305, 1314 (R.I.1998), we extended the Tanasio formula to cases involving joint tortfeasors when the plaintiff settles his or her claim against one, but not all tortfeasors. We noted that the formula adopted in Trenn, offers the added virtue of paralleling the method of interest computation that we recently endorsed in the context of underinsured-motorist-liability insurance coverage in [ Tanasio ]. Id. The Tanasio prejudgment interest formula then became referred to as the Trenn formula, and will be so referred to in this opinion. According to the Trenn formula, a nonsettling or later-settling defendant is responsible for prejudgment interest at the statutory rate on the entire amount of damages from the date on which the plaintiff's cause of action arose to the date of any prejudgment-settlement payment by an earlier-settling alleged tortfeasor. Trenn, 706 A.2d at 1313. At that point, the total damages shall be reduced by the earlier payment; with the nonsettling defendant charged with interest on the reduced balance of the remaining damages from the date of the partial payment to the date of the next payment, or the date of entry of judgment, as the case may be. Id. The interest charged for both periods shall then be added together and the sum added to the amount of the remaining net damage award. Id. In the case of multiple tortfeasors who settle at different times, we declared that interest shall be computed in a like manner for each relevant period such that any nonsettling alleged tortfeasor(s) are charged with interest only for those periods during which the plaintiff's damages remained uncompensated. Id. Our decision in Trenn reflected the policy behind the law of prejudgment interest: to encourage early settlement of a claim with a tortfeasor in a manner that enables the injured party to be made whole, or as near thereto as possible without providing him or her with a windfall or any excess recovery. Trenn, 706 A.2d at 1311. On the other hand, when a plaintiff reaches an earlier settlement with a tortfeasor and proceeds against the remaining alleged tortfeasors, the injured party should not be precluded from recovering prejudgment interest on the entire amount of damages from the date the cause of action accrues. We declared in Trenn that the prejudgment-interest statute and the Uniform Contribution Among Tortfeasors Act, G.L. 1956 § 10-6-7, call for a method of interest computation that will not impose disincentives on willing litigants to reach as early and as accurate a settlement as the parties can fashion. Trenn, 706 A.2d at 1312. We adopted the Trenn formula as a simpler and relatively more workable calculation while still meeting the policy goals of our prejudgment-interest statute[.] Id. at 1313. However, as is often the case, time marched on and the Court did not adhere to all aspects of the Trenn formula. The next case of significance to this issue was Liberty Mutual Insurance Co. v. Tavarez, 797 A.2d 480 (R.I.2002) ( Tavarez II ). In Tavarez II, the issue was whether prejudgment interest in excess of the UM policy limits could be ordered when the UM carrier had breached the contract with its insured by denying coverage and refusing to arbitrate the claim. Id. at 482. Tavarez II was decided as a breach of contract case, in which the Court applied the Tanasio and Trenn calculation formula to payment of the policy limits shortly after this Court's decision in Liberty Mutual Insurance Co. v. Tavarez, 754 A.2d 778 (R.I.2000) ( Tavarez I ). [3] In Tavarez II, we directed that prejudgment interest accrued on the claim from the date that Liberty Mutual denied the claim until the date it paid the policy limits, at which point the payment would be deducted and prejudgment interest would accrue on that reduced amount until the date of judgment. Tavarez II, 797 A.2d at 488. The date that interest was held to begin to run in Tavarez II was not in accordance with our previous holdings. In other words, in Tavarez II, we adhered to the Trenn formula for computing prejudgment interest when there is a partial payment, but we parted company with Trenn on the crucial point of when interest should begin to accrue. Tavarez II, 797 A.2d at 488. In Tavarez II, 797 A.2d at 487-88, we declared that the partial payment must first be applied to prejudgment interest, then to principal, but that prejudgment interest began to accrue when the UM carrier wrongfully denied the claim and not on the date of the underlying incident. As the next case demonstrates, it is not possible to harmonize this part of our holding in Tavarez II with our decisions in Trenn and Tanasio. Of final importance is Geremia v. Allstate Insurance Co., 798 A.2d 939, 939-40 (R.I.2002), which, like the case at bar, concerned an insured who received a tortfeasor payment for the policy limits and then sought recovery from his own UM insurer. The arbitrators did not follow Tanasio or Trenn and calculated the net damages by subtracting the tortfeasor payment from the total damages and adding prejudgment interest on the reduced amount from the date of the injury. [4] Id. at 940. Of note, however, is the language in Geremia that may have added to the confusion surrounding the computation of prejudgment interest in cases like the case at bar. In Geremia, we recognized that, although the Trenn and Tanasio formulas for computing prejudgment interest were similar, we previously had not required those formulas to be applied in the context of UM arbitration claims. Geremia, 798 A.2d at 941. We affirmed the judgment in Geremia, (notwithstanding that it did not comport with Trenn ), but we took the opportunity to declare that in future cases the Trenn method of calculation of prejudgment interest should apply: We now require that the interest calculation formula outlined in Trenn be applied in all pending and future underinsured/uninsured motorist cases of this kind. Id. If this had been the extent of our holding in Geremia, the present case may not have found its way to the Supreme Court. However, we went on to declare in Geremia: In those cases, prejudgment interest at the statutory rate hereafter will begin to accrue on the date that the UM carrier denies the claim or fails to pay the same within a reasonable period after receiving notice from the claimant thereof. Id. We issued our decision in Geremia on the heels of Tavarez II, in which, less than one month before, we declared that the wrongful denial of the UM claim started the interest clock running, not the tragic death of the decedent. Tavarez II, 797 A.2d at 487. Thus, although the Court required that the Trenn formula apply in all pending and future UM arbitration cases, Geremia, 798 A.2d at 941, we deviated from Trenn and Tanasio with respect to when interest begins to accrue. However, the computation of prejudgment interest in an arbitration case, as in any civil action, should be a ministerial act capable of being carried out by an arbitrator without judicial intervention. Barbato, 794 A.2d at 471. We thus are convinced that a mandatory, clear and uniform rule is long overdue. Our holdings in Tanasio, Trenn and Tavarez II reflect important policy considerations and an attempt to provide fairness to all interested parties. In Tanasio, we recognized that it was not unreasonable to require that prejudgment interest be computed on the total award from the date of injury until the first payment and then on the difference between the total award and the payment until the date of judgment. Tanasio, 703 A.2d at 1103-04. In such a situation, the injured insured's recovery would most approximate the tortfeasor's payment, as if he or she was adequately insured. See Tanasio, 703 A.2d at 1103. In Trenn, the focus was on fairness to a party who enters into an early settlement agreement while at the same time protecting a nonsettling tortfeasor from over-compensating the injured party. See Trenn, 706 A.2d at 1312-13. Equally significant, in Tavarez II, at least with respect to prejudgment interest in excess of the policy limits, we held that the UM carrier was responsible for prejudgment interest from the time it denied the claim or from a reasonable point in time after receiving notice of the claim. Tavarez II, 797 A.2d at 487. Although these policy considerations are appropriate and represent an attempt to balance the rights of all interested parties (the injured insured, an early settling tortfeasor, a judgment tortfeasor and, in the UM context, the UM carrier), we conclude that they cannot be reconciled. Accordingly, in answer to the first question in the Court's order of April 22, 2004, Barry, 857 A.2d at 761-62, it is apparent to us that it is not possible, in cases such as the case at bar in which the injured insured receives a partial payment from the tortfeasor, to apply the interest-calculation formula outlined in Trenn and Tanasio that is computed from the date of injury, yet still adhere to our holdings in Tavarez II and Geremia, that prejudgment interest against the UM carrier shall begin to accrue on the date that the UM carrier denies the claim or fails to pay the same within a reasonable period after receiving notice from the claimant[.] Barry, 857 A.2d at 761 (quoting Geremia, 798 A.2d at 941). Because we cannot harmonize these cases we proceed to address the next question in our order of April 22, 2004, what is the fairest and best way to calculate prejudgment interest in cases such as this in which the tortfeasor's carrier pays the policy limits before the UM carrier denies the claim and elects to proceed to arbitration to determine the total amount of damages suffered by the injured insured? To do so, however, we first must address the remaining questions in the above-noted order: (3) Does an injured party's claim for UM benefits over and above any amount received from the tortfeasor or the tortfeasor's insurer include the amount of prejudgment interest (beginning on the date of the injury) that accrued on the underlying claim for damages against the tortfeasor(s) through the date of any settlement with the tortfeasor(s)? Does it also include the underlying claim for damages itself, less any payment received from the tortfeasor and/or the tortfeasor's insurer, see Tanasio, 703 A.2d at 1104, with interest accruing on this net damages claim from the date that the UM carrier either denies the claim or should have granted it? Barry, 857 A.2d at 762 (citing Geremia, 798 A.2d at 941). We approach this analysis mindful of the need for a prejudgment interest formula in UM cases that is certain and fair and lends itself to a ministerial computation.