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 third post considers RLLI’s thoughts on the tripartite relationship amongst insurer, defense counsel, and insured. The reimagining of the tripartite relationship is perhaps the part of the RLLI that ventures farthest afield from any “restatement” of existing legal principles.

THE RLLI LANGUAGE

§ 11. Confidentiality

(1) An insurer or insured does not waive rights of confidentiality with respect to third parties by providing to the insured or the insurer, within the context of the investigation and defense of a legal action, information protected by attorney–client privilege, work-product immunity, or other confidentiality protections.

(2) An insurer does not have the right to receive 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.

§ 12. Liability of Insurer for Conduct of Defense

(1) If an insurer undertakes to select counsel to defend a legal action against the insured and fails to take reasonable care in so doing, the insurer is subject to liability for the harm caused by any subsequent negligent act or omission of the selected counsel that is within the scope of the risk that made the selection of counsel unreasonable.

(2) An insurer is subject to liability for the harm caused by the negligent act or omission of counsel provided by the insurer to defend a legal action when the insurer directs the conduct of the counsel with respect to the negligent act or omission in a manner that overrides the duty of the counsel to exercise independent professional judgment.

WHY IT IS PROBLEMATIC

It is not a “restatement”

A restatement should express the majority view of the law, except in rare instances where that majority view has become outdated and there is a clear trend away from it. These changes are not a “restatement” of existing law, but rather a wholesale creation of new law. As noted by DRI in its opposition to the 2017 draft, Section 12 “would create new direct liability on the part of the insurer to the insured for the acts of defense counsel” with no support from the case law.

This is not an entirely insurer-oriented problem. Policyholders, too, should be concerned about greater intrusion into the attorney-client relationship between insured and defense counsel. Facing potential liability for negligent selection or “supervision” of counsel, we would expect insurers to exert greater influence over defense counsel. Moreover, this is in tension with provisions that defense counsel is not permitted to share certain information or communications with the insurer. If these provisions of RLLI are adopted, there would be a new and real conflict of interest between the insurer and the insured, placing defense counsel in an untenable and practically unworkable position.

The insurer faces potential liability but is foreclosed from managing the defense in such a way as to limit its exposure.

These sections of the RLLI propose to render insurers liable to insureds for mistakes by defense counsel, while at the same time preventing the insurer from receiving a full account from defense counsel of any information that defense counsel deems he/she should not share with the insurer. Indeed, as discussed in the above section, if the insurer is defending under a reservation of rights, the insurer is required to pay for independent counsel, and the insured is free to act without the insurer’s consent. It appears that the actions of independent counsel, who are not controlled by the insurer but who might be “selected” by the carrier, could subject the insurer to liability even though the insurer has no meaningful opportunity to supervise or control defense counsel.

Some jurisdictions have case law addressing insurer liability for the professional negligence of insurer-retained defense counsel. However, there is by no means a consensus on this issue such that the RLLI’s approach could be said represent a “restatement” of the law. “The question of whether an attorney appointed to represent an insured to defend a claim is an agent for the insurer is one that has divided courts, and often turns on specific facts.” Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602, 615 (Minn. 2012). Some jurisdictions hold that the insurer does not have the necessary opportunity to control defense counsel’s conduct that would justify rendering the insurer vicariously liable for acts or omissions of the attorney. See, e.g., Ingersoll-Rand Equip. Corp. v. Transp. Ins. Co., 963 F. Supp. 452, 454 (M.D. Pa. 1997) (stating that an attorney's ethical obligations to the insured "prevent the insurer from exercising the degree of control necessary to justify the imposition of vicarious liability"); Lifestar Response of Ala., Inc. v. Admiral Ins. Co., 17 So. 3d 200, 214-18 (Ala. 2009) (imposing no vicarious liability for defense attorney's alleged negligence because insurer could not control attorney's professional judgment).

Others take a compromise approach:

In the typical situation in which an insurer hires an attorney to defend an insured, the relationship of the insurer and its attorney is precisely that of principal to independent contractor. For example, the attorney is engaged in the distinct occupation of practicing law, and this occupation is one in which the attorney possesses special skill and expertise. . . . Finally, and obviously, the practice of law is not, nor could it be, part of the regular business of an insurer.

Givens v. Mullikin, 75 S.W.3d 383, 393-94 (Tenn. 2002). However, “an insurer can be held vicariously liable for the acts or omissions of an attorney hired to represent an insured when those acts or omissions were directed, commanded, or knowingly authorized by the insurer.” Id. at 395.

Even under this approach, however, the insurer can face liability only if it expressly directed the conduct of defense counsel at issue. The RLLI approach would render the insurer liable for “negligent selection of defense counsel,” not for specific actions or omissions that the insurer directed the defense attorney to undertake.

Defense counsel is required to “hide the ball” from the insurer

Defense counsel hired by the insurer is required to keep from the insurer any privileged information if the information could be used to benefit the insurer at the expense of the insured. While there is existing case law in many jurisdictions that prevents an insurer from directing defense counsel to develop a coverage case against the insured, what is new is this notion that defense counsel, who typically does represent the insurer in the tripartite relationship, is obligated to hide from the insurer information that is pertinent to the insurer’s interests.

Unfettered communication with both clients on the subject of the joint representation is therefore a practical necessity. Both are directly interested in the case, its progress and any material developments, counsel's litigation and trial strategy, his assessments of the merits and likelihood of success, his views on whether the case ought to be tried or settled, and myriad other issues, many of which require expression of counsel's strategic judgments and mental impressions. In communicating with the insurer on these matters, the attorney is rendering advice and counsel to a client as a necessary aspect of his representation, both of the insurer and of the insured.

RFF Family P'ship, LP v. Burns & Levinson, LLP, 32 Mass. L. Rep. 88 (2013).

Some jurisdictions expressly hold that both defense counsel and the insured have a duty to disclose to the insurer relevant information regarding the claim and defense. See, e.g., Cont'l Cas. Co. v. St. Paul Surplus Lines Ins. Co., 265 F.R.D. 510, 518 (E.D. Cal. 2010). This is a contractual duty on the part of the insured, and an ethical obligation by the defense counsel. Furthermore, some courts have held that the insured does not have a reasonable expectation that information it communicates to defense counsel will be privileged and withheld from the insurer that has hired defense counsel for the action. Northwood Nursing & Convalescent Home, Inc. v. Continental Ins. Co., 161 F.R.D. 293, 297 (E.D. Pa. 1995).

Notably, there is a significant absence of established case law regarding what information an attorney may ethically withhold from its insurer client in a tripartite relationship, so the RLLI’s position is in no respect a “restatement” of the existing law on this question. A number of courts to have considered the issue have held that the insurer is entitled to be completely informed of information related to the defense of the claim. Obviously, information that is relevant to a coverage issue (such as intent) is likely to be highly relevant to the defense as well. RLLI proposes no practical approach to defending claims here, and fails to recognize that in the ordinary course of the defense facts discovered will bear on both the defense to liability and the insurer’s coverage position.

Moreover, RLLI seeks to intrude upon the individualized ethical obligations imposed upon attorneys by weighing in upon what defense counsel may or may be required to withhold from insurers in a tripartite relationship in which defense counsel is also deemed to represent the insurer. This is not the place of RLLI, and is not a “restatement” of insurance law, but a statement on professional ethics. It would also seem to open the door for plaintiffs’ counsel to seek to discover information communicated to the insurer by defense counsel on the argument that, where the insurer is not permitted to receive the information under § 11, there is no attorney-client relationship between the insurer and defense counsel.

HOW THE COURTS HAVE REACTED

§ 12

The insured’s reliance upon § 12 of the RLLI was found to be “premature.” Progressive Northwestern Ins. Co. v. Gant, No. 15-9267-JAR-KGG, 2018 U.S. Dist. LEXIS 163624, at *16 (D. Kan. Sep. 24, 2018). “[T]he notes to the Restatement acknowledge that ‘there is a dearth of reported cases holding liability insurers directly liable for negligent selection [of defense counsel].’ Accordingly, this Court is not inclined to use a nonbinding Restatement as a means to overturn or expand Kansas law.” Id. at *16-17.