Restatement of the Law of Liability Insurance - Independent Counsel
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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 fourth post considers RLLI’s thoughts on an insurer’s obligation to provide independent counsel to defend the insured.

THE RLLI LANGUAGE

§ 16. The Obligation to Provide an Independent Defense

When an insurer with the duty to defend provides the insured notice of a ground for contesting coverage under § 15 and there are facts at issue that are common to the legal action for which the defense is due and to the coverage dispute, such that the action could be defended in a manner that would benefit the insurer at the expense of the insured, the insurer must provide an independent defense of the action.

§ 17. The Conduct of an Independent Defense

When an independent defense is required under § 16:

(1) The insurer does not have the right to defend the legal action;

(2) The insured may select defense counsel and related service providers;

(3) The insurer is obligated to pay the reasonable fees of the defense counsel and related service providers on an ongoing basis in a timely manner;

(4) The insurer has the right to associate in the defense of the legal action under the rules stated in § 23; and

(5) The rules stated in § 11 govern the insured’s provision of information to the insurer.

WHY IT IS PROBLEMATIC

Right to independent counsel upon issuance of reservation of rights

The majority rule is that an insurer has a duty to defend a liability claim if there is even an arguable basis for coverage. The accepted approach, where the insurer must defend but reasonably questions coverage, is to issue a reservation of rights letter. The insurer is at a clear disadvantage, as compared to the parties embroiled in the dispute, regarding the underlying facts of the claim. RLLI suggests that there is something nefarious about an insurer’s reservation of rights, but insurers are routinely obligated to undertake a defense on short notice with minimal knowledge of the facts.

Even in jurisdictions that provide for Cumis counsel, there is rarely any absolute requirement to provide independent counsel at the insurer’s expense merely upon the issuance of a reservation of rights letter. California does not require provision of Cumis counsel upon issuance of a reservation of rights. See, e.g., Dynamic Concepts v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1006-07, 71 Cal. Rptr. 2d 882 (1998); Gafcon, Inc. v. Ponsor & Associates, 98 Cal. App. 4th 1388, 1421, 120 Cal. Rptr. 2d 392 (2002) (“a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights”). If the insurer must provide independent counsel, and surrender control of the defense as suggested by RLLI, the insurer is precluded from exercising its contractual right to control the defense if it asserts its contractual rights to disclaim coverage. This is an outlier position, not a “restatement.”

Communications with the insurer are not shielded by attorney-client privilege

Where counsel is independent, he/she does not have an attorney-client relationship with the insurer. Accordingly, communications with the insurer are not protected by the attorney-client privilege. Instead, the RLLI assures us that these communications would be protected by a “common interest” doctrine. However, many jurisdictions do not have a well-developed body of law on the common interest doctrine. Where such law exists, often the interests must be identical for the common interest to apply. See, e.g., Ayers Oil Co. v. Am. Bus. Brokers, Inc., 2009 U.S. Dist. LEXIS 111928, *5 (E.D. Mo. Dec. 2, 2009). The RLLI establishes, by virtue of the provisions on reservations of rights and the supposed resulting need for independent counsel, as well as by the tripartite provisions discussed above, that the interests of the insured and insurer are not identical.

The insurer must provide independent counsel, but the insured “may” select that counsel.

Under § 16, if the insurer issues a reservation of rights, it “must” provide independent counsel. However, under § 17, the insured “may” select that counsel. The gap here anticipates that there will be circumstances in which the insurer is obligated to supply independent counsel, but the insured leaves that selection up to the insurer. Under other provisions of the RLLI discussed above, the insurer would, presumably, then face potential liability for the conduct of the defense by the counsel that it selected, all the while being precluded from controlling the defense and existing in a tenuous environment with respect to attorney-client privilege for its communications. Liable for failing to supervise defense counsel, but unable to do so.

HOW THE COURTS HAVE REACTED

§ 16

Rejected:

Outdoor Venture Corp. v. Phila. Indem. Ins. Co., No. 6:16-cv-182-KKC, 2018 U.S. Dist. LEXIS 167986, at *55 (E.D. Ky. Sep. 27, 2018). The insured cited a 2016 draft of the RLLI, instead applying Kentucky law.