MANASQUAN, N.J. – Weeks away from the American Law Institute’s annual meeting in Washington D.C., where the group’s controversial Restatement of the Law of Liability Insurance will once again be up for approval, a representative from the group recently said the ALI is trying to "stay in our lane."

ALI deputy director Stephanie Middleton was one of several speakers invited by the National Council of Insurance Legislators (NCOIL) to voice their thoughts on the proposal last week.

Last year, extended back-and-forth discussion and disagreement at the ALI meeting resulted in final approval of the organization’s Restatement being tabled for one year, with the issue being taken up again at the group’s 2018 meeting, to be held once again in D.C. from May 21-23.

Those same contrasting viewpoints were expressed during NCOIL’s May 2 conference call.

On the call from NCOIL were its CEO Tom Considine, its president and Arkansas Sen. Jason Rapert, its vice president and Vermont Rep. Bill Botzow, its Treasurer and Indiana Rep. Matt Lehman and its secretary and California Assemblyman Ken Cooley.

In addition to Middleton, others taking part in the conversation were Lorie Masters (partner, Hunton & Williams), Victor Schwartz (chairman of Public Policy Group, Shook Hardy & Bacon), Peter Kochenburger (associate clinical professor, University of Connecticut School of Law) and Laura Foggan (partner, Crowell & Moring).

Middleton opened the formal discussion on behalf of the ALI, expressing her thanks for being invited to participate in the teleconference and explaining that the institute is open and receptive to feedback, even when it comes in the form of criticism.

“We’re just trying to get [the Restatement] right. We don’t have an agenda. We try to stay in our lane. We do know that statutes and legislatures trump the common law and we try to be sensitive to legislative process. We focused the project on judge-made law, common law,” Middleton said.

Among several changes to the draft made at the ALI’s January Council Meeting, Middleton added that a key one was the Restatement’s “presumptive plain meaning rule” was modified to simply the “plain meaning rule”, as it related to insurance contract interpretation. Under the original “presumptive” standard, a plaintiff could use extrinsic evidence to argue against a contractual term.

“This change came about as a result of the many comments, but also the judges. The judges basically said, ‘You know, this presumptive plain meaning rule, it was just too complicated. It’s very academic, the long discussions we had [about it] and we don’t know how to apply it,” Middleton said.

Masters, an advisor to the ALI’s Restatement, opened by sharing some of her background in representing policyholders in insurance coverage disputes and writing two insurance texts, including one on general liability insurance and coverage litigation.

As to the process of crafting the Restatement document, she said she believes in the process and considers it important.

“I don’t consider myself a ‘proponent’ of the Restatement. I am certainly an advisor, and I am a proponent of the process and of the ALI. I firmly reject any criticism that somehow the ALI has lost its way, or gone astray. I have been involved in one Restatement during my years as a member of the ALI and in this Restatement, I’ve been involved since day one,” Masters said.

Masters expressed hope there wouldn’t be “an attack” on the ALI during the annual meeting’s discussion session on the Restatement, but if there were to be, she said she and others would feel “compelled” to defend the institute’s integrity and governing process.

Masters added to Middleton’s initial point that a huge area of controversy with the Restatement was its interpretation principles, such as the aforementioned “presumptive plain meaning” rule.

“I believe there has been a dial-back on these, and I would oppose a further dial-back on them, because I don’t believe that a further retrenchment on these principles of plain meaning is really consistent with the law. I think you can justify the current revisions as simpler, as Stephanie said, and at a general level, I do support them,” Masters said.

Masters remarked that a comment she wanted to formally submit on the Restatement involved expressing support for the current draft’s discussion on extrinsic evidence and use of custom and practice, commonly used in coverage litigation.

“It is not something that is off the reservation. I think it’s important in order to protect policyholder interests, which should be, from my perspective, an important part of the discussion – not the only part of the discussion, but certainly, an important part of the discussion,” Masters stated.

“That kind of evidence should always be admissible, if it’s not adhering [to] the terms of the plain meaning [rule]. That’s classic, black-letter law that you can always talk about ‘extrinsic evidence’, as long as it does not vary or contradict the terms of the contract.”

Masters further expressed concerns over the Restatement’s Section 27, calling it “a muddle” and one which “compares apples to oranges” in its discussion of damages for breach of the duty to make reasonable settlement decisions – through raising two different issues in assessed damages on one hand, and coverage and the law of insurability as it relates to punitive damages on the other.

Masters also noted Section 24’s potential introduction of a new defense for the issue of bad faith, as to whether claimants are willing are settle and whether that can be a defense in coverage actions.

“That is something that we on the policyholders’ side don’t support, or perhaps we think needs clarification in this draft,” Masters said.

More Weigh In

Schwartz raised several objections, first specifically pointing out the use of the word “substantiality” with respect to misrepresentation of material facts in Section 8 of the Restatement draft on rescission, referring to it as “litigation fuel.”

“Any law professor worth five cents knows ‘substantiality’ is a weasel word. It is a litigation driver, and it shouldn’t be there, period. But it’s there,” Schwartz said.

Another “litigation driver” Schwartz pointed out in Section 12 of the draft, where the insurer is not only under a duty to select good counsel for its insured, but also required to provide “adequate” malpractice insurance to their insured’s outside counsel.

“Who in the heck knows if it is, or if it isn’t [adequate]? That’s a driver for the carrier to sort of flutter around with their outside counsel and how much insurance they have. Disturbing. That shouldn’t be there, and that shouldn’t be a duty on the part of insurers,” Schwartz commented.

Schwartz also raised the subject of Section 27, and its applicability of punitive damages.

“Under this Section 27, that burden is lifted from the reckless person and the insurer has to pay punitive damages that the reckless insured engaged in, even if the policy expressly excluded punitive damages,” Schwartz said.

Kochenburger, a tenured law professor, came from both an academic background and 11 years working in the areas of coverage and bad faith for Travelers Insurance Company, and noted the importance of common law in filling gaps in contract law.

“Almost always, the legislature can trump and frequently does, or agree or modify a common law decision. ALI is meant to take those areas of gaps and areas of significant difference, and put forth what they think is the best statement of the law,” Kochenburger said.

Kochenburger said as to the Restatement, it was his view that insurance groups and their counsel wanted it both ways, in that they want to hear when a rule they believe is contrary to and violates common law contract principles – such as shifting of attorney’s fees – but when a rule is consistent with contract principles and may be at odds with common law, they’ll point to that as being a minority opinion.

“You can’t have it both ways,” Kochenburger said.

Foggan spoke to the core idea of the Restatement as expressed by Middleton.

“The goal of the Restatement is to get it right, and my hope in working on the Restatement throughout, has been to advance that goal. It hasn’t been to just seek an outcome that is favorable to insurers or just negotiate or compromise between outcomes that might be, in some instances, favorable to policyholders and in others, favorable to insurers,” Foggan said.

“Really, it’s a question of reflecting the existing law or maybe determining a jump-ball. That is what the ALI ought to be about here, not going into areas where there is not common law to support the positions that are taken. Some of the comments that have been made reflect the fact that there are some sections [of the Restatement] that still do that, and carry with them very troubling potential consequences.”

Foggan said continued effort was necessary to get the Restatement right and/or expressing concerns as to the sections of the documents with remaining issues.

Foggan seconded Schwartz’s point on misrepresentation and rescission, with respect to the use of the word “substantiality”, and agreed to its function as both a “litigation driver” and being “at odds with existing statutory and common law of governing misrepresentation and rescission.”

“It’s a magnet for expensive litigation and it’s a change in the law as it exists, that isn’t supported by existing law and existing approaches to the law. Although it’s been stated silently that the legislature trumps the ALI Restatement, it’s problematic to suddenly have a Restatement proposing something different from what statutory law provides in the majority of jurisdictions. And it’s very problematic to have where what’s being proposed is at odds with statutory law and common law,” Foggan said.

In citing Section 12 on liability of the insurer for conduct of defense, Foggan explained her view that the Restatement goes “too far” in taking on substantial legislative and public policy determinations, for negligent selection of defense counsel.

“There is no evidence uninsured lawyers pose a substantial problem, and there’s no evidence that this is a preferable solution to other solutions that are available and have been considered by state legislatures and state licensing boards,” Foggan said.

Making a separate point, Kochenburger explained that the presentation of the prior issue of materiality which was raised is “nothing new” and “not a radical routine”, but rather, it’s the law in many states.

Schwartz clarified from his previous discussion that his only inquiry was as to why the “weasel word” of “substantiality," which he said is not law in any state, was used in the Restatement’s language.

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

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