Andrea DeField’s update, and her original post discuss portions of the proposed Restatement of the Law on Liability Insurance and how they may alter the consequences for breaching the duty to defend. The proposed Restatement contains many other provisions that may prove relevant to future coverage disputes, particularly ones governed by state law that is less developed than in states like New York, California, and Florida.
In addition to sections on the consequence for a breach of the duty to defend, the current draft of the Restatement contains sections related to the policyholder’s duty to cooperate. The draft recognizes a duty to cooperate that obligates the policyholder to “provide reasonable assistance to the insurer” in investigating, defending, and settling the underlying case. However, the draft makes clear that a breach of the duty to cooperate will bar coverage “only if the insurer demonstrates that the failure caused or will cause prejudice to the insurer.” Thus, the draft rejects the minority rule that a breach of the duty to cooperate allows the insurer to avoid its obligations, regardless of whether the breach prejudiced the insurer. That same section addresses collusion between a policyholder and a claimant, stating that if such collusion is discovered before prejudice occurs, “the prejudice requirement is satisfied as long as the collusion would have caused prejudice to the insurer had it not been discovered.”