Following a vigorous two hour debate, the American Law Institute voted on May 22 to give final approval to the Restatement of Law, Liability Insurance.  Eight years in the making, this Restatement is the first one devoted to a specific industry.  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.

Tuesday’s debate focused on Sections 3, 8, 12, 25, 27 and 46.

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 focus on 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.  Motions to delete Comment c. that I filed and that was submitted Vanita Banks of Allstate were voted down.  The Reporters did prove amenable to a suggestion by John Buchanan of Covington & Burling that the legal authority that they had deleted after abandoning the “presumption of plain meaning” approach earlier this year be restored to the Reporters’ Notes for Section 3 as reflecting the “spectrum” of views in this area.

–Misrepresentation:  A Motion filed by Vanita Banks 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 was defeated from the floor. The Reporters responded that this was needed to avoid insurers from rescinding a policy based on a trivial misstatement

–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.  Concerns were also expressed that the illustrations used by the Reporters, many of which involved an insurer’s knowledge of substance abuse or other personal problems, were problematic or would place insurers in the position of intruding into the privacy of defense counsel.  A motion to delete Subsection (1) by Brackett Denniston of Goodwin LLP and Harold Kim on the Chamber of Commerce was defeated.  Reporters did state that they were open to revising the illustrations, particularly with respect to privacy concerns, and might clarify the Comments to cite the lack of case support for this proposition.

–Duty to Make Reasonable Settlement Decisions:  Prior to the meeting, the Reporters accepted a proposal by Malcolm Wheeler of Wheeler Trigger to amend Sections 25(3) and 27 to require that insureds give full notice and information to insurers before being permitted to enter into settlements over the insurer’s objection in cases where the insurer is defending under a reservation  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.  Despite the fact that the only legal support for this contention are a few dissenting opinions in cases where the majority had refused to require coverage, a motion by Victor Schwartz of Shook Hardy & Bacon to strike this aspect of the Comment was defeated.

–Known Liabilities:   The only Motion that prevailed today also the only motion filed by a  policyholder lawyer.   David Goodwin of Covington & Burling sought to delete Section 46(a)(2), which extends the “known loss” doctrine to defense costs.  The Motion argued that there was 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 had argued in earlier-filed Comment that there were citing numerous state and federal decisions that have declined to distinguished between indemnity and defense costs in applying the “known loss” doctrine and that there was no logical research for distinguish between defense costs and indemnity where a law suit or demand for damages had been received by the insured before the policy in question was issued.   Despite the lack of authority supporting David’s motion, the Reporters quailed and decided to accept Goodwin’s argument a a “friendly” motion.

Shortly before Noon, the ALI voted to approve the full Restatement.  For the next few months, the Reporters will continue to fine tune the wording of various provisions and various areas where Comments and Reporters’ Notes need to be revised to reflect the debate.  It is therefore unlikely that the Reporter will finally be published by the ALI before the Fall of 2018.