What’s Next Now That The Restatement Of Liability Insurance Was Approved?
By: Colleen A. Beverly
Lawyers must stand up for the integrity of the law. Both the insurance industry and policyholders must fight any court’s inclination to rely upon the final Restatement of the Law of Liability Insurance (the Restatement) to the extent it contravenes the common law, is out of sync with majority rules, or “creates” rather than “restates” liability insurance law. A “restatement” traditionally has been a summary of existing common law. However, the Restatement of Liability Insurance is an advocacy piece, not a summary of the common law.
After much controversy and criticism, the long-criticized Restatement was approved during the ALI Annual Meeting held on May 22, 2018. As previously reported by our Restatement Task Force, insurer and policyholder advocacy groups have vehemently argued over many provisions of the Restatement since this project began back in 2010. This controversy led to many different drafts of the Restatement, with the Council of Advisors to the Restatement Reporters approving Proposed Final Draft No. 2 on April 13, 2018. The ALI Members voted to approve this version during the Annual Meeting.
As lawyers, we have an obligation to ensure that the law is properly applied and that courts follow the law, not the ALI’s aspirations as to what the law ought to be. The ALI’s approval of the Restatement calls into question its credibility and reveals the potential bias of its members. Before the Restatement was finalized, Professor George Priest highlighted the pro-policyholder beliefs of the two key reporters of the Restatement, Tom Baker and Kyle Logue. 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 (2017). Although most criticism has come from the insurance industry, policyholders’ counsel have also criticized the Restatement. See, Cox & Konkel, ALI Restatement Misstates Law on Long-Tail Harm Claims, Law360 (March 29, 2018), www.law360.com/articles/1027687/ali-restatement-misstates-law-on-long-tail-harm-claims. Lawyers on both sides of the “v” must ensure that the law is applied as written.
The Clausen Miller Restatement Task Force continues to track data in our proprietary database regarding the bias that is inherently written into the Restatement and how the Restatement is and will continue to alter the current state of insurance law. Our Task Force is ready and able to use this data to fight against reliance in the courts on the Restatement throughout the country.
The final Restatement is similar to previous versions. The most significant revisions in the Final Restatement are to §§ 3 and 4 of Chapter 1, §§ 12 and 19 of Chapter 2 and the old §§ 48 and 49 (now §§ 47 and 48) of Chapter 4. Below is a brief description of these sections in comparison to prior versions.
One of the most controversial aspects of Restatement drafts was the proposal to replace the “the plain meaning rule” for determining the meaning of a policy term with a “plain meaning presumption” that could be refuted by extrinsic evidence of contractual intent. In the end, the ALI reverted back to the “plain meaning rule” based on the fact that the vast majority of courts adopt the “plain meaning rule”. ALI Reporter Tom Baker stated that the ALI was ultimately persuaded by the judges to adopt the “plain meaning” rule instead of the “plain meaning presumption” rule that it initially proposed. The judges felt that the “plain meaning presumption” was too complicated.
One of the nuances of “plain meaning” addressed in the Restatement is what happens when there is a meaning of a word in a trade. The Restatement follows the approach that the “plain meaning” is the “plain meaning” as it would be understood by someone who is knowledgeable in that trade. See §3 Comment c.
With respect to whether a term is ambiguous, the Restatement is careful in deciphering “sources of meaning” from “extrinsic evidence”. In Comment c to §3, the Restatement reporters note that the term “extrinsic evidence” does not include all sources of meaning that are extrinsic to the policy. Specifically, the Restatement states that facts of the claim at issue and custom, practice and usage are extrinsic to the policy but are often considered by courts when determining the “plain meaning” of a term. In Comment d, the Restatement identifies the “sources of meaning” that can be used in determining whether a term is ambiguous are the same forms a court can use in determining the “plain meaning” but a court cannot use sources beyond that such as precontractual negotiations or courses of dealing.
Liability of Insurer for Conduct of Defense
The original version of this section imposed vicarious liability on an insurer if defense counsel was an employee of the insurer and direct liability if the insurer retained defense counsel with inadequate professional liability insurance. This section was extensively revised to align with the Restatement Third, The Law Governing Lawyers.
Despite the revisions, the final version of §12 is still troubling. It imposes liability on the insurer for the conduct of the defense and for negligent selection of defense counsel. As the Restatement comments admit, whether an insurer is negligent in the selection of defense counsel is a fact-specific question. According to Comment b, this question “turns on the insurer’s efforts to assure that the lawyer had adequate skill and experience in relation to the claim in question, as well as adequate professional liability insurance”. As critics have pointed out, what is the standard for “adequate” insurance and how are insurers to objectively determine if outside counsel have such “adequate” insurance? This requirement in the Restatement will result in much confusion and controversy in future cases. This section goes well beyond the reach of a Restatement and instead attempts to usurp the legislative process regarding negligent selection of defense counsel.
Consequences of Breach of the Duty to Defend
The ALI removed problematic subsection 2 of the draft §19 which provided that an insurer that breaches a duty to defend must provide coverage for the action for which the defense was sought regardless of any coverage defenses it may have. This is not the majority law of this country and the Restatement again went too far in putting such a provision in the draft. The final Restatement §19 simply states that an insurer that breaches its duty to defend forfeits the rights to assert any control over the defense.
The final Restatement eliminates the highly controversial subsection (4) in previous drafts which abrogated from the American Rule and allowed fee shifting to an insurer when it did not prevail in a declaratory judgment action it brought to determine its obligations under a policy. As critics pointed out, this provision was illogical in that it sought to punish insurers for doing what courts recommended they do to determine the scope of their obligations – file declaratory judgment actions. With the risk of having to pay the insurers’ legal costs if it failed in its declaratory judgment action, such a rule would incentivize insurers to not defend and not file a declaratory judgment action. The ALI must have understood this concern by eliminating this provision from the final Restatement. The final Restatement §47 mirrors the common law remedies available to prevailing policyholders. It also specifically states that fees are awarded to a prevailing party “when provided by state law or the policy”. See §47(3).
Damages for Breach of a Liability Insurance Policy
Similar to §47, the final Restatement eliminated subsection (3) in previous drafts which diverted from the American Rule with respect to fee shifting. State legislators have carefully considered and decided this issue as critics have repeatedly pointed out to the Restatement Reporters. It appears that such criticism convinced the ALI to take out this section.
The revisions to these sections do not eliminate the problems of the Restatement. Although the revisions may put certain sections more in line with the common law, as a whole, the Restatement overreaches and creates new standards of liability that are contrary to both statutory and common law. These new standards lack clarity and invite litigation. It is up to the lawyers to demonstrate to the courts in this inevitable litigation to come, the problems with the Restatement’s vague terminology, the dangers to impose new standards of liability that have no basis in the law and the ethical issues that arise from the reliance on a Restatement that runs counter to the majority rule. Judges should not rely on an advocacy pieces that disguises itself as a “restatement”.
CM’s Restatement Task Force will continue to report on all significant developments, while maintaining our 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. As previously reported, courts cited to the Restatement even before it was finalized. We expect to see even more courts citing to it now that it has been approved. Our Task Force is positioned to provide consulting services, amicus briefing, and generally to assist insurers in dealing with the Restatement. Should you have any questions or wish to discuss any issues relating to the Restatement or our Task Force, please contact the Task Force Members: Amy Paulus at email@example.com; Colleen Beverly at firstname.lastname@example.org; Ilene Korey at email@example.com; or Mark Zimmerman at firstname.lastname@example.org.