Restatement of the Law of Liability Insurance Makes Its Mark Prior to Approval
Amy R. Paulus
Clausen Miller PC
 The views expressed herein are solely those of the author. Ms. Paulus is the Liability Coverage and Reinsurance Practice Group Leader, a senior shareholder and member of the Board of Directors of Clausen Miller. Amy has built a national reputation in all areas of liability insurance coverage law, professional liability, employment practices, transportation, claims handling issues and best practices, bad faith, excess insurance, intellectual property, cyber losses, and reinsurance matters and arbitrations.
As we reported last month, Clausen Miller’s Restatement of Liability Insurance Law Task Force assists insurers in understanding, monitoring, and responding to the Restatement’s unprecedented “rewriting” of the common law on a broad array of issues. In a dramatic departure from the historic purpose of a Restatement, the Restatement of Liability Insurance Law is largely an advocacy piece, unabashedly promoted by its lead authors as a tool to change existing law to favor policyholders. The Restatement drafts have been met with sustained objections and criticism since inception, and the American Law Institute deferred a final vote on this Restatement until its next annual meeting in May 2018.
Numerous sections of the draft Restatement contain extremely controversial proposals that seek to fundamentally alter availability of insurance coverage and the ability of insurers to conduct business pursuant to existing contracts. For example, the draft Restatement proposes replacement of the “plain meaning rule” for determining the meaning of a policy term with a “plain meaning presumption” that can be refuted by the policyholder with extrinsic evidence of a contractual intent. Further, even if a policy term is unambiguous on its face, that plain meaning can be overcome if a court determines that a reasonable person would clearly give the term a different meaning in light of extrinsic evidence. The draft Restatement proposes that a policyholder be allowed to rely on broad array of extrinsic evidence to support its proposed interpretation of a claimed ambiguous policy provision. Conversely, the draft Restatement restricts the ability of insurers to present extrinsic sources of meaning to support the insurers’ proposed interpretation to defeat a claim of ambiguity. Obviously, this proposal rewrites the black-letter “plain meaning” rule of contract interpretation.
The draft Restatement suggests an expansion of the insurer’s duty to defend, and broadens the “four corners” analysis by also requiring insurers to consider not only the facts alleged but also facts that become known through the insurer’s investigation. However, extrinsic facts will only defeat a duty to defend that otherwise exists when the issue concerns whether the claimant is an insured or whether a vehicle is covered under an auto policy. The Restatement also advocates for the imposition of severe penalties for an insurer’s “unreasonable” failure to defend, including waiver of all coverage defenses, and an expansion of consequences for a breach of a duty to settle a claim, including a waiver of policy limits.
The draft Restatement seeks to impose liability on insurers for selecting defense counsel that commit legal malpractice. Further, the draft Restatement proposes that insurers pay legal fees of policyholders in coverage disputes beyond the current standards contained in statutes or court rules — an obvious abrogation of the American Rule.
With respect to trigger and allocation, the draft Restatement proposes a default “injury in fact” trigger, but suggests a minimal burden of proof for the policyholder, which would allow a policyholder to trigger coverage under multiple policies based on evidence of exposure only. Then, the burden would shift to the insurer to show that no injury or damage actually occurred in its policy period. The draft Restatement adopts a time-on-the-risk allocation standard, but will likely add an exception to pro rata allocation for periods of time when insurance is allegedly “unavailable” for risks such as asbestos liability or when absolute pollution exclusions were added to CGL policies.
Other controversial provisions include commentary on when excess policies are implicated and whether excess insurers must “drop down” following the insolvency of a primary insurer. The draft Restatement also proposes restrictions on the “known loss” doctrine, limiting it solely to situations in which the policyholder is subjectively aware than an adverse judgment with regard to its liability is substantially certain.
Should the aspirational, pro-policyholder advocacy aspects of the Restatement take hold within the courts, the practical implications for insurers may be dramatic. For example, the punitive measures advocated for breach of the duty to defend or to settle a claim may result in insurers undertaking the defense of many uncovered claims, and filing an increased number of declaratory judgment actions to obtain a judicial imprimatur for the termination of its defense. Further, with increased claim costs, at least one scholarly commentator has posited that the Restatement will ultimately increase insurance premiums and reduce the availability of insurance, especially for the low income. See George L. Priest, A Principled Approach Toward Insurance Law: The Economics of Insurance and the Current Restatement Project, Geo. Mason L. Rev. Vol. 24:635 (2017).
While we await the final version and vote in a few months, at least two courts have seen fit to cite to the draft Restatement as authority supporting their opinions on the issues of reimbursement of defense costs for uncovered claims, and to support a jury instruction on the definition of “cooperation” within the meaning of a liability policy.
In Selective Ins. Co. of Am. v. Smiley Body Shop, Inc., 260 F. Supp .3d 1023; 2017 U.S.Dist. LEXIS 81007 (May 26, 2017), the District Court for the Southern District of Indiana considered whether Selective was entitled to recoup the costs it paid to defend a policyholder up to the point that the policyholder obtain summary judgment in its favor in the underlying lawsuit. The court denied Selective’s motion, noting that Selective did not point to any provisions in its policy that would support recoupment, and in the absence of Indiana law on the issue, referred to three reported decisions from other jurisdictions. In addition, the court cited to Section 21 of the Draft of the Restatement, which provides that “[u]less otherwise stated in the insurance policy or otherwise agreed to by the insured, and insurer may not seek recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs.” Restatement of the Law of Liability Insurance §21 (discussion draft, to be considered by the members of the American Law Institute).
In July 2017, the District Court for the Southern District of Texas also cited at length to the draft Restatement, despite the fact that it is not final. In Mid-Continent Cas. Co. v. Petroleum Solutions, Inc., 2017 U.S.Dist. LEXIS 107603; 2017 WL 2964933 (July 12, 2017), the court considered Mid-Continent’s motion for a new trial based in part on its argument that the court erroneously charged the jury on the meaning of the cooperation clause in its CGL policy. Mid-Continent contended that the court’s instruction that the policyholder “complied with the cooperation clause if PSI’s conduct was reasonable and justified under all the circumstances that existed,” improperly defined “cooperate,” thereby casting doubt on whether the jury was properly guided in its deliberations. Mid-Continent argued that the court should have directed the jury to use the plain meaning of the wording of the cooperation clause. Mid-Continent proposed a jury instruction defining “cooperate” as “to be helpful by doing what someone asks or tells you to do.”
The Mid-Continent court found that there was no basis in the policy language for Mid-Continent’s proposed instruction, nor did the proposed instruction correctly state Texas law. The court found that the long-standing test articulated in Texas for “cooperation” described the insured’s conduct as “reasonable and justified under the circumstances.” The court also relied on Couch on Insurance for the principle that “[a]n insured cannot arbitrarily or unreasonably decline to assist in making a fair and legitimate defense or refuse to permit any defense to be made in his or her name.”
Significantly, the Mid-Continent court then cited to Comment b. of the Restatement, tentative draft No.1, Section 29, dated March 21, 2016 – note this is not even the most current draft of the Restatement. Comment b. in this 2016 draft provides:
b. Reasonable Assistance.
The duty to cooperate should take into account the position of the particular insured whose conduct is at issue, as well as the needs of the insurer. What is reasonable depends on, among other things, the knowledge and experience of the insured, the extent of the risks presented by the legal action, the complexity of the action, the ability of the insurer to obtain the information or other object of cooperation from sources other than the insured, the good-faith effort of the insured, and the extent to which cooperation is needed to reduce the insurer’s exposure.
Additionally, the Reporter’s Note b. states that “[c]ourts have consistently subjected the duty to cooperate to a reasonableness test.” Id.
With this lengthy footnote citation, the Mid-Continent court bolstered its decision to deny Mid-Continent’s motion for a new trial. What is particularly surprising about this decision is that the court did not need to cite to the 2016 tentative draft of the Restatement because Texas case law directly on point fully supported the court’s ultimate ruling. Thus, one must ask why the court went further than required to include a lengthy discussion of a non-final draft of the Restatement. One must also consider whether this signals the potential willingness of other courts to unnecessarily adopt or give credence to the Restatement in circumstances in which it is clearly unnecessary to do so.
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 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@example.com, or the Senior Members of the Task Force: Colleen Beverly at firstname.lastname@example.org, Ilene Korey at email@example.com, or Mark Zimmerman at firstname.lastname@example.org.