PHILADELPHIA -- Subsequent to an American Law Institute (ALI) conference held in October, the group recently issued its third council draft for its Restatement of the Law of Liability Insurance, and one lawyer questions some of the draft’s material and its relation to both insurance companies and current law.

Laura Foggan, an attorney at Crowell & Moring in Washington, D.C., expressed concerns over the ALI’s Restatement of the Law of Liability Insurance Council Draft No. 3, issued earlier this month, and felt several points contained therein warranted greater attention.

“It’s an interesting process. The new restatement draft definitely has some areas where the reporters have corrected issues that have been a concern to insurers, and, in that respect, I think we’ve seen some progress from the earliest versions of the project,” Foggan said. “On the other hand, there are still fundamentally some key issues for insurers in the draft, and with the perspective of the project, if you will.”

Foggan added she believes the reporters came to the project with the view that a “broad duty to defend” is a good idea, whereas insurers would see the project in a number of ways as “overreaching in imposing a duty to defend,” as well as “imposing penalties that are meant to encourage a duty to defend” in circumstances which Foggan said normally wouldn’t be possible under insurance contractual terms.

Foggan pointed specifically to Section 19 of the draft, which talks about the consequences attached to breaching the duty to defend. While Foggan admitted this section of the third council draft “doesn’t go as far as the first drafts,” she said it still states that in the absence of bad faith, if the insurer does not act reasonably in denying a duty to defend, it loses all of its coverage defenses.

“In that respect, this section essentially imposes a penalty on insurers that goes beyond what the obligations under the policy would be, because they lose defenses they otherwise would have,” she said. “It does so in this grey area where there has been no finding of bad faith by the insurer. From the insurers’ perspective, their obligation should be limited to the obligations provided in the agreed insurance contract, unless there is something extraordinary, like a finding of bad faith. The restatement fundamentally changes that bargain.”

Foggan indicated a similar trend in the draft’s Section 24, which concerns reasonable settlement decisions. Though it also has seen revisions through the course of the project, Foggan said it still provides that if the insurer does not make a reasonable settlement decision, it can be liable in excess of its limits for a judgment entered in to the policyholder.

Foggan remarked the ALI’s restatement project, in general, tends to be “a bit protective” of the insured, beyond the terms of the insurance contract.

Another aspect of the draft Foggan approached with concern was the concept of fee-shifting, or the assignment of which side or party will pay a given case’s legal fees. Typically, each side involved in litigation will pay its own costs -- something Foggan labeled as “the American rule” -- but the attorney added the current council draft has several places that propose different rules if insurers do not prevail in litigation.

“I think the perspective of insurers is that this goes beyond the scope of what the restatement should really be about, which should be about articulating the law concerning the meaning of the insurance contracts; not getting into a policy debate about other provisions or penalties in the law that may be provided by statute in some cases, or by court rule regarding the costs of litigation,” she said.

Foggan said in certain areas, the draft takes a specific position on the question of fee shifting -- a question she feels is better left to legislators or the courts.

Foggan noted this current third draft will be taken up for discussion by the ALI’s council at their meeting in January, where the project could be revised further. If it meets with ALI council approval at that time, the project will be on the table for the organization’s annual meeting in May.

She said though the January council meeting is open only to members of the ALI’s governing body, attorneys like herself would attempt to provide input to ALI council members on remaining issues with the third draft in advance of the meeting -- in addition to being in attendance for the annual meeting.

“The goal would be, at this point, to help to provide enough information to the council, so the council could have live discussion [at the January meeting] of the [insurer’s] concerns,” she said.

Foggan said the restatement project itself is meant to be “the product of scholarly discussion and a reflection of the law as it stands, or should be.”

“The reporters have a view about what the law should be, and I think, if anything, the objection has been that from time to time, that view has been more aspirational than reflective of the existing common law,” she said.

“There has been some give-and-take and some feedback has been provided, and I think the hope is that process will continue, and that the council will really engage with some of the concerns that remain in the draft.”

Foggan said the overall issue with the current draft, from the insurers’ perspective, is whether the law supports all of the rules that are being proposed within it.

“To the extent that there are new proposals, there’s really a need to think more deeply about the impact of new rules on insurers and the insurance system,” she said, calling the market a “sensitive” one.

Foggan termed certainty as “a core criterion for a stable underwriting environment,” and opined if something like the restatement were to inject substantial change -- particularly if it were heavily-oriented towards protection of policyholders and claimants -- the effects could be far-reaching.

“[That] could have a broader impact on the insurance system than a one-off situation where a particular individual policyholder prevails on an issue, versus a general rule that’s being proposed as a uniform rule for all jurisdictions in the United States,” she said.

Tom Baker, a reporter on the restatement project for ALI and a professor at the University of Pennsylvania Law School, previously expressed confidence the draft would meet with council approval in January.

In Baker’s view, attorneys involved with consulting on the project who represent insurers approach the group’s work on the restatement from a certain viewpoint, as opposed to those sitting on the judiciary bench.

“Most of the lawyers personally involved with the project either represent insurance companies regularly or policyholders regularly. It’s a practice where people typically don’t do both sides. They come from a particular perspective. Whereas judges, they just want a good set of rules that they can follow,” he said.

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com.

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