Eight years after work on it began, the American Law Institute’s Restatement of Law, Liability Insurance is likely to win final approval when it is debated at the ALI’s Annual Meeting in Washington, D.C. on May 22.   This will be the fourth successive annual meeting where this proposed Restatement has been debated by the membership.  It was expected to have received final approval at the 2017 ALI Annual Meeting but a final vote was postponed by the ALI leadership after a last minute controversy arose with respect to whether certain provisions of Proposed Final Draft No. 1 truly mirrored the common law.

Several significant changes have been made to this draft since May 2017, most notably in the rules of insurance policy interpretation in Section 3.   The Reporters belatedly abandoned their experimental “presumption of plain meaning” and have now largely retreated to conventional “plain meaning” rules.   Controversy remains with respect to several sections of this Restatement, however, and a vigorous floor debate is expected on Tuesday.

Based upon the Motions that have been filed with the ALI as of this weekend, Tuesday’s debate will likely focuson the following proposed Sections:

–Rules of Contract Interpretation:   While Proposed Final Draft No. 2 modified Section 3 to abandon the previously-stated “presumption of plain meaning,” the “plain meaning rule” proposed by the Reporters had a twist, as Comment c. allows courts to consider evidence of “custom, practice and usage” (of both the insured’s industry and the insurer) in determining plain meaning.  Vanita Banks of Allstate and I have separately filed Motions to delete Comment c.

–Misrepresentation:  Vanita Banks has also filed a Motion to amend Section 8’s black letter rule to eliminate language that presently only permits insurers to rescind policy if an insured’s misrepresentation caused them to underwrite a policy with “substantially different terms” than they would have had the truth been known.

–Liability for Defense Counsel—While Section 12’s earlier imposition of vicarious liability for the acts of defense counsel has disappeared in the face of fierce opposition from DRI and other defense bar advocates, it retains an unfortunate and face statement in Subsection (1) that insurers may still be liable if they are negligent in their selection of counsel, especially if the firm does not have “adequate” malpractice insurance.   Malcolm Wheeler of Wheeler Trigger & O’Connell and Harold Kim of the U.S. Chamber of Commerce have both filed motions to strike Subsection (1) so that insurers would only be liable under Section 12(2) if they instructed defense counsel to act improperly.

–Duty to Make Reasonable Settlement Decisions:  Malcolm Wheeler has separately moved to amend Sections 25(3) and 27 to prevent insureds from entering into settlements unless their insurers are given full information and an opportunity to participate in the settlement. The Reporters have said that they will likely accept these proposed changes.

–Consequences of Failing to Settle—Section 27 declares that an insurer is liable for all damages resulting from a failure to make a reasonable settlement decision, including punitive damages that may be awarded against its insured even if punitive damages are otherwise uninsurable.  Victor Schwartz of Shook Hardy & Bacon has filed a motion to strike the Comment to this effect, noting that the only legal support for this contention is a dissenting opinion to the California Supreme Court’s PPG opinion.

–Known Liabilities:   The sole policyholder motion is a Motion that Covington & Burling’s David Goodwin has filed, seeking to eliminate any application of the “known loss” doctrine in Section 46 to indemnity payments.   David contends in his motion that there is no legal support for applying the known loss doctrine to defense costs and that doing so would be contracted to Section 13 of this Restatement, which sets forth four narrow circumstances in which courts may look outside of a Complaint to justify denying a duty to defend.   I have filed a Comment disputing these contentions and citing numerous state and federal decisions that have declined to distinguished between indemnity and defense costs in applying the “known loss” doctrine.