RI Court Holds No Coverage for Criminal Proceedings Involving Nightclub Tragedy

In its recent decision in Derderian v. Essex Insurance Company, 2012 R.I. LEXIS 54 (R.I. Apr. 27, 2012), the Supreme Court of Rhode Island had occasion to consider whether under a general liability policy, an insured was entitled to coverage for defending against underlying criminal prosecutions.

The Derderian coverage litigation arose out of the tragic February 2003 fire at The Station nightclub West Warwick, Rhode Island: one of the deadliest nightclub fires in the history of the United States.  The fire resulted in the death of one hundred patrons and left hundreds others injured.  The owners of the club, the Derderians, were indicted on charges of criminal negligence as a result of the incident, and they sought coverage under their general liability policy for their costs in defending the criminal proceedings.  Their insurer, Essex, denied coverage on the basis that the policy only provided coverage for “suits,” specifically defined as “civil proceedings.”

That a general liability policy provides coverage only for civil actions is hardly a novel concept, and the Derderians’ argument that their policy should respond as a matter of course to the underlying criminal matters merited only a limited response from the court.  The court readily agreed that “on its face, the criminal indictments, which cited charges of involuntary manslaughter, do not comport with the term ‘suit’ as it was used and defined in the policy.”  More challenging for the court was the Derderians’ argument that Rhode Island General Law §12-28-5 required Essex to provide a defense.  This statute, referred to as the “Victim’s Rights” statute, states:

 (a) 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.  (Emphasis supplied.)

Thus, the insured argued that because under Rhode Island law a criminal conviction results in an automatic civil judgment establishing liability, a criminal proceeding under Rhode Island law must be considered a civil proceeding as well.  Essex argued, in response, that because the underlying criminal proceedings did not specifically seek damages for bodily injury, they could not be considered “suits” for the purpose of the policy’s coverage.  Essex further argued 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 court observed generally that criminal proceedings based on involuntary manslaughter could not be considered civil proceedings for damages.  More pertinently, the court explained that the purpose of §12-28-5 “is to ensure that all victims of crime are treated with respect and receive financial compensation for their losses.”  The criminal proceeding, however, does not establish the losses.  Rather, the court agreed that the statute is merely a “proceed mechanism” that fixes civil liability, but that still requires a separate proceeding to establish damages. The court concluded, therefore, 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.”