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The Restatement of The Law of Liability Insurance Is Coming~ Ready Or Not!

5/21/18

By: Gretchen Carner
On May 22, 2018, at the annual meeting of the American Law Institute (ALI ) in Washington, D.C., its members are set to vote on final approval of the Restatement of the Law of Liability Insurance (RLLI). The American Law Institute’s RLLI aims, as former Director Lance Liebman said, to seek “the efficient and fair rules that should govern the insurer/insured relationship.” The RLLI has taken eight years to write and has been the subject of much lively debate.
Many of the issues discussed in the Restatement have been hotly contested by insurers.  The RLLI, for the most part, states the majority rule on the vast majority of issues covered. Sometimes, however, the Restatement sets forth what the ALI considers to be the “better rule,” which is a practical approach taking into consideration the law and incentives underlying insurance and claims-handling.
It is anticipated that courts considering coverage issues of first impression, or where the law is not clear, may now turn to the RLLI for guidance.  Because Restatements are developed by learned individuals in their area of expertise at the ALI, and are only approved after a long and painstaking process, it would be reasonable for a court to look at what the RLLI has to say about an unsettled issue. If the Final Draft of the Restatement is approved this month, some of the following hot topics should be high on an insurer’s radar.
Policy Interpretation: Section 3 adopts a presumption in favor of the plain meaning rule for interpretation of “standard-form” policy terms, stating: “an insurance-policy term is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning. That different meaning must be more reasonable than the plain meaning in light of the extrinsic evidence, and it must be a meaning to which the language of the term is reasonably susceptible.”
The “extrinsic evidence exception” in Section 3(2) is a modification of the majority rule that extrinsic evidence is only relevant after the term is found ambiguous (i.e., has another reasonable interpretation).  Under Section 3, consideration of extrinsic evidence is relevant to determine whether there is another more reasonable interpretation of the term.
Insurers’ Duty to Defend: Section 13 defines the applicable duty to defend standard as the traditional “potential for coverage” standard included in the “four corner/eight corners” rule adopted in most jurisdictions. Once the duty to defend applies, “[t]he insurer must defend until its duty to defend is terminated under § 18 by declaratory judgment or otherwise,” unless facts as to which there is no genuine dispute establish that:

(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;

(b) The vehicle involved in the accident is not a covered vehicle under the automobile liability policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;

(c) The claim was reported late under a claims-made-and-reported policy such that the insurer’s performance is excluded under the rule stated in § 36(s); or

(d) There is no duty to defend because the insurance policy has been properly cancelled.

The comments to this Section explain that the reasons behind it are based on public-policy concerns with allowing insurers to consider “an all-the-facts-and-circumstances approach” that extends well beyond the exceptions stated in Section 13 or elimination of the common rule that the insurer must pursue a declaratory-judgment action before rejecting its duty to defend. The comments also warn insurers against trying to include a contractual provision terminating the duty to defend in situations other than those listed in this Section unless it also contains a mechanism protecting the insured’s right to a defense.
Insurer’s Right to Recoupment: Section 25 (2) provides that an insurer defending under a reservation of rights is not relieved of the duty to make reasonable settlement decisions.  If the insurer decides to settle uncovered claims to cap its potential liability down the road, it cannot recoup any portion of the settlement payment unless that is allowed under the terms of the insurance contract.  The comments under this Section make clear that the no-recoupment rule is a default rule, which means that a contrary term in the insurance contract would prevail.
It will be interesting to see how this Section is applied in California where recoupment of uncovered settlement payments is allowed if the insurer complies with the strict requirements set forth in Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 502, and not any specific policy language.  Blue Ridge satisfied the prerequisites for seeking reimbursement for noncovered claims included in a reasonable settlement payment by asserting: (1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when  the insurer and insureds disagree whether to accept the proposed settlement.
The take-away here is that when there is no in-state law on an issue, a court’s resort to the RLLI, in conjunction with other sources, seems likely.  On the other hand, when there is precedent available, it seems unlikely that a court would opt to adopt the RLLI rule if it conflicts with well settled law. Time will tell what the impact and role of the RLLI will be on the cases in jurisdictions where the law is sparse on the topic or ripe for change.
If you have any questions or would like more information, please contact Gretchen Carner at gcarner@fmglaw.com.