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Vol. 12 - Issue 8

November 14, 2023


Appeals Court Hands Insurers A Significant Loss: Adopts The Draconian “Waiver Rule” And Discusses The ALI Insurance Restatement  


The Utah Court of Appeals decision in Farm Bureau Mut. Ins. v. Weston, No. 20180699 (Utah App. Ct. Nov. 9, 2023) -- involving a case with a very long procedural history and a car accident from 20 years ago -- is exceptionally long and complicated.  I’m going to focus on the parts that matter here. 

The court addressed the consequences for an insurer’s breach of the duty to defend.  That alone makes the decision a significant one.  And then, while it did not affect the decision, the opinion includes discussion – nuanced in fact – of the drafting history of the American Law Institute’s Restatement of the Law of Liability Insurance.

On February 15, 2004, Jared Weston was involved in a motor vehicle accident and the other driver was killed.  Weston sought coverage under a policy issued by Farmers.  Farmers maintained that the policy had been cancelled. 

The driver killed in the accident was insured by Farm Bureau.  Farm Bureau paid $111,000 to the heirs of its insured for property damage, PIP and UM.  Farm Bureau then filed a subrogation action against Weston.   Farmers, maintaining that the policy had been cancelled, did not defend Weston against the Farm Bureau action.  Farm Bureau obtained a judgment against Weston.

Somewhere in all the complexity a coverage action was filed on the issue whether Farmers had breached its duty to defend Weston.  Following pages and pages of eye glazing discussion, the court concluded that the Farmers policy had in fact been cancelled.  However, the court still concluded that Farmers breached its duty to defend Weston -- as Farmers should have defended him until there had been a judicial determination that the policy had been cancelled.

Now the court turned to the damages to be awarded for Farmers’ breach of the duty to defend.  Remember, while Farmers may have breached the duty to defend, the policy was found to have been cancelled.  So even if, in hindsight, a defense should have been provided, no coverage for damages would be available under the policy.  Right?

No.  The court adopted the “waiver rule” (which it referred to as the “Illinois Rule”): An insurer that breaches the duty to defend is precluded from raising coverage defenses and otherwise challenging the judgment entered against the party that it failed to defend.  The court addressed other potential consequences/damages that could also be assessed against the breaching insurer.

There are going to be consequences for an insurer that breaches the duty to defend.  They vary in severity.  But the waiver rule is the king of the hill, top of the heap.  This draconian sanction is surely why so few states have adopted it.  And, in fact, both the majority and dissenting opinions invited the Utah Supreme Court to address whether that is really where the state’s law should go.   

All of this will sound very familiar to those who followed and were involved in the drafting process of the American Law Institute’s Restatement of the Law of Liability Insurance.  An early draft (before the project was even a Restatement, but, rather, a Restatement-lite Principles Project) called for the adoption of the waiver rule.  Of all the issues that caused serious debate between insurers and policyholders during the Restatement drafting, the possible adoption of the “waiver rule” was the loudest -- and testiest.  Not surprising given its seriousness.    

Indeed, it was the feared adoption of the waiver rule that brought the ALI Restatement into the open for insurers as a product that could cause serious damage to the scope of coverage.  It all started in 2013 with the New York Court of Appeals decision in K2 Investment Group v. American Guarantee that adopted the waiver rule -- and then the high court’s agreement to rehear the case after it was argued that precedent going the other way had been overlooked   (This is real inside baseball and memory lane stuff for those involved in the Restatement drafting process.).

Prior to the attention that K2 brought to the waiver rule, the ALI Restatement was a project that some insurers were aware of, but it was definitely not a cause for concern nor top of mind for the industry.  The ALI Restatement was generally seen as something going on in the academic space.  But now, seeing the waiver rule writing on the wall, insurers coalesced around the Restatement, went to battle and succeeded in getting the waiver rule eliminated from the final Restatement (not to mention other draft provisions that were not in its interests).

[The actual impact on insurers to date of the ALI Restatement has ben benign, on its worst day.  But that’s a whole separate discussion.  I did a webinar on the subject a while back if anyone is interested.]    

Anyway, back to the long and winding road of Weston.  A dissenting judge, following a lengthy review of the waiver rule on a national basis, concluded that it is a minority view and not the law in Utah. The judge’s discussion included the following summary of the ALI drafting history on the issue:

“The propriety of adopting the Illinois Rule (over the majority rule) is one that turns on, among other things, one’s sense of policy and related factors. Commentators have provided cogent arguments on both sides of the question. Compare Richmond, supra note 42, at 614, and Weiss, supra note 42, at 149, with Stanley C. Nardoni, Estoppel for Insurers Who Breach Their Duty
to Defend: Answering the Critics, 50 J. Marshall L. Rev. 53 (2016), and Stempel, supra note 42, at 614-15. Even the authors of the Restatement of Liability Insurance have gone back and forth on the question. In 2014, the drafters decided to align the Restatement with the Illinois Rule, see Restatement of Liab. Ins. 21 (Am. L. Inst., Tentative Draft No. 2, 2014), taking the position that an insurer that breaches the duty to defend loses ‘the right to contest coverage for the claim.’ See
id. 19(1) (Am. L. Inst., Discussion Draft, 2015). In a subsequent draft, however, the drafters sought a middle ground and suggested an estoppel rule that would apply only to an insurer who breaches ‘the duty to defend without a reasonable basis for its conduct.’ See id. 19(2) (Am. L. Inst., Tentative Draft No. 1, 2016). But in 2019, the drafters rejected the Illinois Rule altogether and adopted the majority rule.”

The ALI Restatement’s rejection of the waiver rule did not preclude the Utah Court of Appeals from adopting it.  But, again, both the majority and dissenting opinions invited the Utah Supreme Court to take up the issue.  In that context, the ALI rejection of the waiver rule could be influential.





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