On May 22, at the annual meeting of the American Law Institute in Washington, D.C., its members are set to vote on final approval of the eight-years-in-the-works Restatement of the Law of Liability Insurance. The RLLI had been scheduled for a final approval vote last May, but it was postponed to address issues raised in the run-up to it. After last year’s postponement, and certain changes made to the draft since then, all signs point to the RLLI being approved at this year’s meeting.

It is no secret that the insurance industry has been no fan of the RLLI and the policyholder-insurer debates over some of its provisions have been spirited. But after a near-decade, a bow is on its way to being tied on the RLLI.

But while one debate over the RLLI may soon be ending, a new one will just be getting underway. After the ALI’s final stamp of approval is put on the RLLI, expect to see it cited by some parties in coverage litigation, using it in an attempt to persuade courts to their side. This will likely result in disputes over the role that the RLLI should play in the court’s decision making.

Nobody can predict the role or impact that the RLLI may have in coverage litigation. But two federal court decisions that have addressed the RLLI – as a draft document – provide some reasonable illustrations.

The Restatement As A Consideration In The Absence Of Judicial Guidance

It is not unusual for a court to come upon a coverage issue of first impression in their state or one in which their law is not clear-cut. When searching for the answer to a coverage question, that otherwise has no answer, or a home-grown roadmap for finding one, courts frequently turn to out of state decisions and/or secondary sources for guidance. Of course these decisions and sources are not binding, but they are instructive to a court in need of an answer.

In the course of doing so, the RLLI may now be included in the list of sources that a court turns to for help in an unchartered territory situation. Knowing that Restatements are developed by learned individuals at the ALI, following a long and painstaking process, it would not be unreasonable that a court would look to what the RLLI has to say about the issue.

Selective Insurance Company of America v. Smiley Body Shop, Inc., 260 F. Supp. 3d 1023 (S.D. Ind. 2017) provides an excellent example of this scenario.

Here an Indiana federal court addressed an insurer’s right to reimbursement of defense costs. The court first noted that there was no Indiana authority that had addressed the issue. So, not surprisingly, the court looked to other decisions for guidance (3rd Circuit, 10th Circuit and Illinois Supreme Court) and noted that these courts found that an insurer did not have a right to recoup defense costs.

Then the court turned to the RLLI (even as a draft) for further guidance, stating: “Additionally, the Draft of Section 21 of the Restatement of the Law of Liability Insurance provides that ‘[u]nless otherwise stated in the insurance policy or otherwise agreed to by the insured, an insurer may not seek recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs.’ Restatement of the Law of Liability Insurance § 21 (Discussion Draft, to be considered by the members of the American Law Institute).”

In the end, the court was not required to answer the reimbursement of defense costs question. However, if it were, the court, using the RLLI for support, was seemingly poised to conclude that the insurer did not have such a right.

In the absence of precedent, or other required-to-be-considered cases, a court in need of an answer to a coverage question may now stir the RLLI into the mix.

Rejection Of The Restatement In The Face Of Judicial Guidance

But what about a court that is addressing a coverage issue that is the subject of precedent in its jurisdiction? Is there a place for the RLLI, in the court’s analysis, in this situation? In other words, will a court eschew its own precedent and instead opt to follow the RLLI if it differs? Based on the recent decision in Catlin Specialty Ins. Co. v. J.J. White, Inc., No. 14-1255 (E.D. Pa. Feb. 27, 2018), the answer is no.

Caitlin is a lengthy decision addressing coverage, under a pollution policy, for wrongful death allegedly caused by exposure to chemicals at a Sunoco refinery. New York law applied. One issue was whether the insurer breached its duty to defend. The court concluded that it did.

Having reached that decision, the court turned to whether the insurer could still contend that it did not have a duty to indemnify the insured. In essence, the court was addressing whether an insurer, that breaches the duty to defend, has waived the right to argue that, even if it owes a defense, it still may not owe coverage for indemnity.

In arguing in support of the so-called “waiver rule,” the insureds pointed to the March 28, 2017 draft of the RLLI, section 19, which provided that “an insurer that breaches the duty to defend without a reasonable basis for its conduct must provide coverage for the legal action for which the defense was sought, notwithstanding any grounds for contesting coverage.” The court also noted that a comment to section 19 stated that the rule “encourages insurers to fulfill their duty to defend by providing a consequence for a wrongful breach of that duty,” and that “[o]rdinary contract damages may not provide an adequate incentive for insurers to defend.”

The waiver rule was the RLLI provision that caused the most contention between insurers and policyholders during the drafting process.

Despite the insureds pointing to the RLLI (draft), in support of the waiver rule, the court did not go down that road. And, as the court saw it, why would it? After all, as the court noted, the waiver rule was rejected by the New York Court of Appeals in K2 v. American Guarantee (N.Y. 2014). J.J. White stands as a court unwilling to toss out its own precedent and follow the RLLI.

In a way, Smiley Body Shop and J.J. White are easy examples. When there is no in-state law on an issue, a court’s resort to the RLLI, in conjunction with other sources, seems likely in some cases. And when there is precedent available, it seems unlikely that a court would opt to adopt the RLLI if it were different. The hard cases regarding the impact and role of the RLLI will be the ones in the middle.

Early Decision: First Winner Of The Insurance Coverage Haiku Contest

The Insurance Coverage Haiku Contest is scheduled to end on May 15. However, with the final vote on the RLLI approaching, and with writing this piece, I couldn’t help but announce one early winner. [There will still be two more winners as originally advertised.]
I was very impressed by this entry from Lance D. Meyer of O’Meara Leer Wagner &Kohl, P.A., in Minneapolis:

At first, Principles.

But they’re aspirational.

Restatements change law.

I never imagined a haiku entry based on the RLLI, not to mention one that addresses the history of the project and the question over its impact. Really well done. Congratulations Lance. Because it’s spring, the CO Prize Patrol will deliver a copy of the 4th edition of Insurance Key Issues to your office. If it were winter you’d be waiting for it.