Conford, Michels and Pressler. The opinion of the court was delivered by Pressler, J.A.D.
The sole question raised by this appeal is whether the trial judge erred in denying prejudgment interest on the verdict obtained by plaintiffs in this automobile negligence action. More specifically, the question is whether he mistakenly exercised his discretion in having regarded the circumstances here as presenting an "exceptional case" warranting the withholding of pretrial interest within the intendment of the 1975 amendment of R. 4:42-11(b), an amendment not heretofore construed.
The relevant factual context in which the issue arises is undisputed. Plaintiff James Kotzian was seriously injured on June 24, 1973 when his automobile was struck by that of defendant Barr, who had fallen asleep at the wheel. Barr was insured by Government Employees Insurance Company (GEICO) under a liability policy providing a maximum coverage of $15,000, a sum which, in view of the severity of the injury and the virtually incontestable negligence of Barr, was substantially less than the fair value of plaintiffs' claim. Barr himself was conceded to be judgment-proof and there were apparently no special circumstances here in respect of the relationship between the insured and the insurer which could have subjected GEICO to any liability in excess of the policy limit. Rather early in the litigation, which was commenced on January 10, 1974, GEICO offered plaintiffs the policy limit of $15,000, but without any interest thereon, in full settlement of Barr's liability. Plaintiffs refused, making the final counter proposal, rejected by GEICO, of their acceptance of the policy limit plus prejudgment interest on the fair value of the claim, calculated by them to be $100,000. GEICO ultimately applied to the trial court pursuant to R. 4:57-1 for leave to deposit the $15,000 in court. That leave was granted by an order entered on June 25, 1976, which also included, on GEICO's application, the provision that that sum represented the "full extent of the obligation of that insurer including any obligation of the insurer to pay prejudgment interest." The order further provided that all prejudgment interest, "regardless of who
is obligated to pay same, is tolled as of the date of the offering of said policy limits to the plaintiff in settlement of this claim." The action was then tried before a second trial judge to a jury which returned a combined verdict in plaintiffs' favor against Barr in the amount of $100,000. Plaintiffs' application for prejudgment interest was denied by the second trial judge, who regarded himself bound by the entry of the earlier order. It is from that final order of denial that plaintiffs appeal.
R. 4:42-11(b), as originally adopted in 1971, provided that in tort actions covered by the rule, "the court shall * * * include in the judgment interest at 6% per annum*fn1 on the amount of the award from the date of the institution of the action or from a date 6 months after the date of the tort, whichever is later." The prejudgment interest requirement was thus initially drawn in mandatory terms and was intended to have mandatory effect. See Ford v. Garvin , 127 N.J. Super. 391, 392 (App. Div. 1974), certif. den. 65 N.J. 566 (1974); Wicks v. Central R.R. Co. of N.J. , 129 N.J. Super. 145, 147 (App. Div. 1974), certif. den. 66 N.J. 317 (1974). The potential inequity of the mandatory rule had nevertheless been promptly judicially perceived and acknowledged. See the dissenting opinion of Judge Conford in Busik v. Levine , 63 N.J. 351, 376 (1973), app. dism. 414 U.S. 1106, 94 S. Ct. 831, 38 L. Ed. 2d 733 (1973). And see Espin v. Allergan , 127 N.J. Super. 496 (Law Div. 1973). It was in response to that perception that the rule was amended, effective April 1975, to permit suspension of prejudgment interest in "exceptional cases." Our problem then is to define what is meant by an "exceptional case" and to determine whether the circumstances here present
an "exceptional case" justifying the denial of any pretrial interest, both in relation to plaintiff and to his insurer.
We are satisfied that the term "exceptional case" as used by the rule derives its definitional content from the same considerations which underlay its adoption in the first instance and that prejudgment interest can consequently be withheld only where it is demonstrated that the policy, spirit and intent of the rule are patently inapposite to the circumstances at hand. As clearly stated in Busik v. Levine, supra , 63 N.J. at 358-359 (1973), app. dism. 414 U.S. 1106, 94 S. Ct. 831, 38 L. Ed. 2d 733 (1973), the purpose of an award of interest is not punitive. It is essentially compensatory and is intended to indemnify plaintiff for the loss of income he presumably would have earned had the money due him been earlier paid. Conversely, it is also compensatory and not punitive in that defendant presumably himself has had the use of the money on which he has presumptively earned, or at least has had the opportunity to earn, income which is rightfully plaintiff's. The intended effect of the interest award, therefore, is to place both parties in exactly the same position each would have been in, without loss to either, had the plaintiff's claim been promptly paid.
There is, however, an additional dimension to the purpose of the rule beyond the simple economic equation and that, of course, was the Supreme Court's expectation that the prejudgment interest requirement would induce earlier settlement of tort litigation. The reasoning expressed by Chief Justice Weintraub in Busik was that
Delay in the disposition of those cases has an impact upon other litigants who wait for their turn, and upon the taxpayers who support the system. And here there is a special inducement for delay, since generally the claims are covered by liability insurance, and when payment is delayed, the carrier receives income from a portion of the premiums on hand set aside as a reserve for pending claims. See In re Insurance Rating Board , 55 N.J. 19 (1969). Hence prejudgment interest will hopefully induce prompt defense consideration of settlement possibilities. In that meaningful way, prejudgment
interest bears directly upon the judicial machinery and the problems of judicial management. It is this facet, added to the consideration of justice between the litigants, which warrants our holding that prejudgment ...