The Restatement of the Law of Liability Insurance (“RLLI”) passed in May 2018 after a one-year delay in voting, following strong negative reactions from practitioners, insurers, and states. Indeed, following the release of the 2017 draft, several governors sent letters of protest – Iowa, Maine, Nebraska, South Carolina, Texas and Utah – stating that the ALI was usurping the state legislatures and the RLLI was at odds with their states’ common law.
Although changes were made to that draft, the version that was eventually passed remains extremely policyholder-oriented and not a “restatement” of existing legal principles in any real sense of the word. This is not surprising, as it began as a Principles of Law project – aspirational rather than reflecting settled legal holdings. Following its passage, the State of Ohio passed a law specifically to prevent its adoption, providing that the RLLI “does not constitute the public policy of Ohio.” Ohio Revised Code of Insurance, Title XXXIX, Chapter 3901.82.
In this series of blog posts regarding provisions of the RLLI, we will examine how it is not a “restatement” of settled common law, but instead adopts minority or even entirely novel principles. The RLLI reflects a profound lack of insight into practical claims handling practices, and in many respects is internally inconsistent or unworkable. We will periodically update these posts as a type of “scorecard,” tracking how various jurisdictions have responded to the RLLI.
Our second post considers RLLI’s thoughts on the duty to defend.
THE RLLI LANGUAGE
§ 13. Conditions Under Which the Insurer Must Defend
(1) An insurer that has issued an insurance policy that includes a duty to defend must defend any legal action brought against an insured that is based in whole or in part on any allegations that, if proved, would be covered by the policy, without regard to the merits of those allegations.
(2) For the purpose of determining whether an insurer must defend, the legal action is deemed to be based on:
(a) Any allegation contained in the complaint or comparable document stating the legal action; and
(b) Any additional allegation known to the insurer, not contained in the complaint or comparable document, stating the legal action that a reasonable insurer would regard as an actual or potential basis for all or part of the action.
(3) An insurer that has the duty to defend under subsections (1) and (2) must defend until its duty to defend is terminated under § 18 by declaratory judgment or otherwise, unless facts not at issue in the legal action for which coverage is sought and as to which there is no genuine dispute establish that:
(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;
(b) The vehicle or other property involved in the accident is not covered property under a liability insurance policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;
(c) The claim was reported late under a claims-made-and-reported policy such that the insurer’s performance is excused under the rule stated in § 35(2);
(d) The action is subject to a prior and pending litigation exclusion or a related claim exclusion in a claims-made policy;
(e) There is no duty to defend because the insurance policy has been properly cancelled; or
(f) There is no duty to defend under a similar, narrowly defined exception to the complaint-allegation rule recognized by the courts in the applicable jurisdiction.
§ 14. Duty to Defend: Basic Obligations
When an insurance policy obligates an insurer to defend a legal action:
(1) Subject to the insurer’s right to terminate the defense under § 18, the insurer has a duty to provide a defense of the action that:
(a) Makes reasonable efforts to defend the insured from all of the causes of action and remedies sought in the action, including those not covered by the liability insurance policy; and
(b) Requires defense counsel to protect from disclosure to the insurer any information of the insured that is protected by attorney–client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured;
(2) The insurer may fulfill the duty to defend using its own employees, except when an independent defense is required; and
(3) Unless otherwise stated in the policy, the costs of the defense of the action are borne by the insurer in addition to the policy limits.
§ 18. Terminating the Duty to Defend a Legal Action
An insurer’s duty to defend a legal action terminates only upon the occurrence of one or more of the following events:
(1) An explicit waiver by the insured of its right to a defense of the action;
(2) Final adjudication of the action;
(3) Final adjudication or dismissal of parts of the action that eliminates any basis for coverage of any remaining parts of the action;
(4) Settlement of the action that fully and finally resolves the entire action;
(5) Partial settlement of the action, entered into with the consent of the insured, that eliminates any basis for coverage of any remaining parts of the action;
(6) If so stated in the insurance policy, exhaustion of the applicable policy limits;
(7) A correct determination by the insurer that it does not have a duty to defend the legal action under the rules stated in § 13; or
(8) Final adjudication that the insurer does not have a duty to defend the action.
§ 19. Consequences of Breach of the Duty to Defend
An insurer that breaches the duty to defend a legal action forfeits the right to assert any control over the defense or settlement of the action.
§ 21. Insurer Recoupment of the Costs of Defense
Unless 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.
§ 33. Timing of Events That Trigger Coverage
(1) When a liability insurance policy provides coverage based on the timing of a harm, event, wrong, loss, activity, occurrence, claim, or other happening, the determination of the timing is a question of fact.
(2) A liability insurance policy may define a harm, event, wrong, loss, activity, occurrence, claim, or other happening that triggers coverage under a liability insurance policy to have taken place at a specially defined time, the timing of which is also a question of fact, even if it would be determined for other purposes to have taken place at a different time.
§ 45. Insurance of Liabilities Involving Aggravated Fault
(1) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for defense costs incurred in connection with any legal action is enforceable, including but not limited to defense costs incurred in connection with: a criminal prosecution; an action seeking fines, penalties, or punitive damages; and an action alleging criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.
(2) Except as barred by legislation or judicially declared public policy, a term in a liability insurance policy providing coverage for civil liability arising out of aggravated fault is enforceable, including civil liability for: criminal acts, expected or intentionally caused harm, fraud, or other conduct involving aggravated fault.
(3) Whether a term in a liability insurance policy provides coverage for the defense costs and civil liability addressed in subsections (1) and (2) is a question of interpretation governed by the ordinary rules of insurance policy interpretation.
WHY IT IS PROBLEMATIC
Duty to defend continues until the insurer has made a “correct determination” that it has no duty to defend under § 13, or “final” adjudication that it has no duty to defend.
Initially, the insurer cannot make its own “correct determination” that it has no duty to defend where there is no “occurrence,” offense, “wrongful act,” etc., even though it is the insured’s burden to prove that the claim is within the scope of the insuring agreement under the default rule of the common law. Similarly, § 13 does not identify the insured’s failure to satisfy the policy’s conditions for coverage, including, significantly, the duty to give notice and to cooperate, as bases upon which the insurer may deny or terminate a defense. Many jurisdictions hold that it is the insured’s burden to prove compliance with the policy’s conditions, including the duty to cooperate. See, e.g., Steadfast Ins. Co. v. Purdue Frederick Co., No. X08CV020191697S, 2005 Conn. Super. LEXIS 3286, at *8 (Super. Ct. Nov. 29, 2005). There is ample case law supporting the proposition that not only does pre-suit conduct by the insured in breach of its obligations under the policy obviate a duty to defend, the duty to defend may be terminated by the insured’s breach during the course of the claim. See, e.g., Arton v. Liberty Mutual Ins. Co., 163 Conn. 127, 302 A.2d 284 (1972). RLLI simply abrogates the insurer’s contractual rights under the policy, with no firm support in well-established case law.
The RLLI proposes that the insurer must also litigate the applicability of any exclusions other than the prior/pending litigation exclusion. This would include exclusions such as the sexual molestation, criminal acts, “your work,” professional liability, and many similar commonly-applicable exclusions. One of the most common coverage questions presented is the contractor seeking coverage under a CGL policy for faulty work, and under the RLLI the insurer would apparently have a duty to defend these claims to the bitter end despite clear case law in most jurisdictions that CGL policies do not afford coverage for professional errors and omissions by contractors in the performance of their contracts. See, e.g., Owings v. Gifford, 237 Kan. 89, 94, 697 P.2d 865 (1985) (“the [CGL] insurance policy is not a performance bond or a guarantee of contract performance. A house built or being constructed by an insured builder is the work product of the builder and under the exclusion clause of the policy no coverage is provided the insured for damages due to faulty construction.”).
“Final adjudication” means the exhaustion of all appeals. Because the appellate process can reasonably be expected to take longer than the course of litigation of the underlying civil claim, this proposition effectively negates the insurer’s contractual right to deny a defense for uncovered claims. RLLI also proposes that the insurer has no right to recoupment of defense costs. Moreover, the RLLI’s position is inconsistent with the position of a significant number of jurisdictions (including what are regarded as policyholder-friendly jurisdictions) that an insurer may terminate its defense upon its discovery of facts placing the claim outside of coverage. See, e.g., Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 661, 31 Cal. Rptr. 3d 147, 115 P.3d 460 (2005); Certain Underwriters at Lloyd's London v. Mestmaker, No. F066016, 2014 Cal. App. Unpub. LEXIS 3021, at *27 (Apr. 29, 2014).
Requires the insured’s consent to settlement of covered claims
Where the insurer is defending without a reservation of rights, it has the contractual right to control the investigation, defense, and settlement of claims under the policy. The RLLI cites no legal authority for the proposition that a majority of courts have held, as the ALI suggests in § 18(5), that the insured’s consent is required to settle covered claims under the policy, leaving uncovered claims unresolved. Why would the presence of uninsured claims in the action give the insured veto power over the insurer’s contractual right to control settlement of covered claims?
Whether there was an occurrence within the policy period becomes a fact question that precludes summary disposition.
One of the most remarkable positions taken by the RLLI is in § 33, which suggests that it is a fact question whether there is a trigger of coverage. In describing this language, Comment a, expressly discusses this “trigger” in terms of whether there is an occurrence within the policy period. In Comment b, “Because all liability insurance policies are issued for a defined policy period, all liability insurance policies have some trigger of coverage.” Comment d expressly suggests that, “Determining whether the required event took place during the required period involves the application of the policy, as interpreted by the court, to the facts,” and suggests that unless the facts are undisputed the matter cannot be resolved with a trial.
HOW THE COURTS HAVE REACTED
- Catlin Specialty Ins. Co. v. J.J. White, Inc., 309 F. Supp. 3d 345, 363 (E.D. Pa. 2018) discusses the insured’s argument that the 2017 draft of § 19, which then 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 declined to adopt such a position, and the language changed substantially from the 2017 draft to the 2018 final.
Adopted or cited with approval:
- Nationwide Mut. Fire Ins. Co. v. D.R. Horton, Inc., Civil Action No. 15-351-CG-N, 2016 U.S. Dist. LEXIS 160148, at *20 n.6 (S.D. Ala. Nov. 18, 2016) cited a 2015 draft of § 19 RLLI and a Florida federal opinion for “the longstanding principal of law that an insurer which ‘breaches its duty to defend or unjustifiably refuses to defend its insured . . . forfeits control of the suit to the insured and may be held liable to its insured for costs incurred in providing its own defense.’”
- Catlin Specialty Ins. Co. v. CBL & Assocs. Props., No. N16C-07-166 PRW CCLD, 2018 Del. Super. LEXIS 342, at *8 (Super. Ct. Aug. 9, 2018) (applying Tennessee law) declined to adopt § 21. “Restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law. And this Restatement itself acknowledges that ‘[s]ome courts follow the contrary rule[.]’”
Adopted or cited with approval:
- Selective Ins. Co. of Am. v. Smiley Body Shop, Inc., No. 1:16-cv-00062-JMS-MJD, 2017 U.S. Dist. LEXIS 215904, at *15-16 (S.D. Ind. July 28, 2017) cites the 2017 discussion draft of the RLLI, specifically § 21, in support of its holding that an insurer may not seek recoupment of defense costs for uncovered claims unless the policy provides for recoupment.