Restatement of Liability Insurance Update

By Amy R. Paulus

Since our last update on the Restatement project, two important developments occurred.  First, the Council of Advisors to the Restatement Reporters recently approved Draft No. 4, except for §3 (the presumption in favor of the plain-meaning of standard form policy terms), §4 (ambiguous terms and extrinsic evidence), and §12 (liability of the insurer for the conduct of defense), and conforming changes to §§47 and 48 (insurance for known liabilities and remedies).  The Reporters will present their proposed revisions to the Council in March 2018, and the final Draft is still scheduled to be presented for approval at the ALI Annual Meeting in May 2018.

Further, another court was presented with the Draft Restatement by a policyholder but this time the policyholder swung and missed.  In Catlin Specialty Ins. Co. v. J.J. White, 2018 U.S. Dist. LEXIS 31189 (Feb. 27, 2018), the U.S. District Court for the Eastern District of Pennsylvania found that under applicable New York law, Catlin breached its duty to defend the policyholder under a pollution liability policy.  The policyholders then argued that the insurer should be estopped from challenging whether indemnity coverage was owed for the underlying settlement as a consequence of its breach of the duty to defend.  The policyholders cited to the Draft Restatement, §19 (Draft Mar. 28, 2017), which advocates that “an insurer that breaches the duty to defend without a reasonable basis for its conduct must provide coverage for the legal action for the which the defense was sought, notwithstanding any grounds for contesting coverage.”  The court notes that a comment to this draft section contends that “this rule encourages insurers to fulfill their duty to defend by providing a consequence for a wrongful breach of that duty,” and that “[o]rdinary contract damages may not provide an adequate incentive for insurers to defend.”  Id.

However, the Catlin court relied instead on K2 Inv. Grp. v. Am. Guar. & Liab. Ins. Co., 6 N.E.3d 1117, 1119-1121 (N.Y. 2014), which reaffirmed existing New York Court of Appeals precedent in the Servidone case that previously considered and rejected such arguments and “policy concerns.”   The Servidone and K2 courts both concluded that the duty to indemnify is determined by the actual basis for the insured’s liability, not the broader duty to defend standard based on the allegations in the pleadings.  Thus, “to hold the insurer liable to indemnify on the mere ‘possibility’ of coverage perceived from the face of the complaint – the standard applicable to the duty to defend – the court [would] enlarge[] the bargained for coverage as a penalty for the breach of the duty to defend, and this it cannot do.”  Servidone Construction Corp. v. Sec. Ins. Co. of Hartford, 477 N.E.2d 441, 442-445 (N.Y. 1985).

CM’s Restatement Task Force will continue to report on all significant developments, while maintaining its proprietary database to track the issues, jurisdictions/courts, rulings, briefs and other aspects of how the Restatement is used to alter the current state of insurance law.  Our Task Force is positioned to provide consulting services, amicus briefing, and generally to assist insurers in setting the record straight.  Should you have any questions or wish to discuss any issues relating to the Restatement or our Task Force, please contact Task Force Chair Amy Paulus at [email protected],  or the Senior Members of the Task Force:  Colleen Beverly at [email protected], Ilene Korey at [email protected], or Mark Zimmerman at [email protected].