HARTFORD, Conn. - The industry should be wary of more than just the main points in the American Law Institute's project on insurance liability law, because danger also lurks in the comments section, said several panelists at a University of Connecticut Law School conference.
Insurers last year beat back part of the Restatement of the Law, Liability Insurance that would have made it harder for them to deny coverage and easier for policyholders to sue them for failing to settle cases promptly.
But the Philadelphia-based ALI's stance remains the source of controversy that erupted in 2017 after the ALI “reporters,” mostly academics who study insurance law, proposed changing the so-called “Plain Language Rule” defining how insurance contract terms should be interpreted, to allow courts to consider “extrinsic evidence” such as previous contract language or the subjective expectations of customers.
Other changes could increase liability for insurers that fail to make reasonable settlement offers – a proposal popular with plaintiff lawyers – and expose them to greater liability over alleged bad-faith decisions to deny coverage or pay defense costs.
Critics called the proposed revisions “litigation fuel." The plain meaning rule ultimately was pared back to its original form before ALI members approved the Restatement at their May meeting last year. The debate over other sections continues, however, with legislators in Ohio and North Dakota passing laws stating the Restatement doesn’t reflect existing law in their state and Texas and Arkansas considering similar statutes.
Courts in Delaware and Kansas have also ruled parts of the insurance Restatement conflict with state law.
“I don’t view it as a restatement of the law …as much as a revision of the law,” said Matthew Shiroma, a partner with Day Pitney who spoke on a panel at the April 5 conference.
Restatements aren’t binding law like statutes and court decisions, but judges frequently cite them as an authority on what the law is in a specific area such as torts or insurance. The term “Restatement” historically was understood to mean a compilation of existing state law across the country.
The insurance Restatement drew criticism from insurers and corporate defense lawyers, partly because of the way it came about. It started as a so-called “principles” project, intended to generate proposals for discussion among ALI members, but the reporters switched it to a full Restatement in 2014 over the objections of some critics who feared they would introduce substantive changes to the law.
The proposed Restatement went through some 30 revisions under the leadership of University of Pennsylvania Law School Professor Tom Baker, a well-known expert on insurance law. He declined to comment on the revision process, although the final version of Section 3 governing the plain meaning rule and proposals regarding settlement duties changed significantly before the final version was approved.
The title of the UConn Law conference, “Was the World Turned Upside Down,” reflected the difference of opinion over the importance of the Restatement’s changes. Professor Jay Feinman of Rutgers Law School dismissed the uproar as unnecessary and said the ALI’s mission was to guide the law in the proper direction.
The ALI reporters identify a clear majority of judicial decisions, Feinman said, “but also look at trends over time, decisions from jurisdictions that are more important, and determine what fits with overall principles of law.”
“Is the fuss justified?” he said. “Yes, the fuss is justified.”
The Restatement creates an affirmative duty by insurers to make a “reasonable” settlement offer even when plaintiffs haven’t made a demand, he said, by imposing draconian liability on insurers if the case goes to trial and the policyholder loses.
Under the new rules, insurers also face tougher decisions on how to deal with policyholders who may not want to settle a case for reasons unrelated to that specific claim, such as concern settling one case quickly will inspire many more plaintiffs to sue.
“What is reasonable depends upon context,” Shiroma said. The net effect of the new settlement rules is insurers may have to raise rates to compensate for increased risk, he said.
Insurers and their lawyers also see trouble lurking in the comments attached to each Restatement, which judges frequently cite to illustrate the thinking behind a particular rule.
Section 3 of the Restatement preserves the “plain meaning” rule, for example, stating “if an insurance policy term has a plain meaning when applied to the facts of the claim at issue, the term is interpreted according to that meaning.” That is existing law in a majority of states.
But in the comments section, the reporters write about a “contextual” approach, where judges interpreting insurance contract language may consider extrinsic evidence such as the “drafting, negotiation, and performance” of the policy.
The comments also suggest accepted sources of meaning include dictionaries, law review articles, statutes and regulations.
“There was a belief by insurers and others that plain meaning is plain meaning,” said Laura Foggan, a partner with Crowell & Moring in Washington and insurance industry liaison to the ALI.
Webster’s Dictionary lists definitions in historical order, she said, so “sudden” might be equivalent to “unexpected” even though the modern understanding of the word is closer to “abrupt,” an important difference when coverage depends upon how rapidly something happened, such as the collapse of a building foundation.
“We’re nervous because if we consult dictionary definitions and there are conflicting definitions, we’re sunk,” Foggan said. “Dictionary definitions always conflict.”
The Restatement comments also encourage courts to consider “custom and usage” to determine the meaning of a term, and using experts to help out. That could lead to a battle of the experts early in an insurance dispute over the plain meaning of terms that shouldn’t be ambiguous, she said.
“One of the things about plain meaning is it allows for easy and appropriate resolution of insurance disputes at the summary judgment stage, without a lot of discovery and debate,” she said.
As more states react to the insurance Restatement by passing laws renouncing it, the ALI has encouraged lawmakers to remain patient until the final text is available.
“As I think the insurers would agree, there have been significant changes in each of the drafts — that is the nature of the drafting process and it is not productive to take issue with aspects of the draft that already have been changed,” said Stephanie Middleton, deputy director of the ALI, in an op-ed in the Pennsylvania Record.
“During the many drafts and meetings, the insurance industry’s positions on points of controversy were fully considered and many times adopted.”