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 fifth post considers RLLI’s thoughts on the insured’s duty to cooperate.
§ 29. The Insured’s Duty to Cooperate
When an insured seeks liability insurance coverage from an insurer, the insured has a duty to cooperate with the insurer. The duty to cooperate includes the obligation to provide reasonable assistance to the insurer:
(1) In the investigation and settlement of the legal action for which the insured seeks coverage;
(2) If the insurer is providing a defense, in the insurer’s defense of the action; and
(3) If the insurer has the right to associate in the defense of the action, in the insurer’s exercise of the right to associate.
§ 30. Consequences of the Breach of the Duty to Cooperate
(1) An insured’s breach of the duty to cooperate relieves an insurer of its obligations under an insurance policy only if the insurer demonstrates that the failure caused or will cause prejudice to the insurer.
(2) If an insured’s collusion with a claimant is discovered before prejudice has occurred, the prejudice requirement is satisfied if the insurer demonstrates that the collusion would have caused prejudice to the insurer had it not been discovered.
§ 25. The Effect of a Reservation of Rights on Settlement Rights and Duties
(1) A reservation of the right to contest coverage does not relieve an insurer of the duty to make reasonable settlement decisions stated in § 24, but the insurer is not required to cover a judgment on a non-covered claim.
(2) Unless otherwise stated in an insurance policy or agreed to by the insured, an insurer may not settle a legal action and thereafter demand recoupment of the settlement amount from the insured on the ground that the action was not covered.
(3) When an insurer has reserved the right to contest coverage for a legal action, the insured may settle the action without the insurer’s consent and without violating the duty to cooperate or other restrictions on the insured’s settlement rights contained in the policy if:
(a) The insurer is given a reasonable opportunity to participate and is kept reasonably informed of developments in the settlement process;
(b) The insured makes a reasonable effort to obtain the insurer’s consent or approval of the settlement;
(c) The insurer declines to withdraw its reservation of rights after receiving prior notice of the proposed settlement; and
(d) The settlement agreed to by the insured is one that a reasonable person who bears the sole financial responsibility for the full amount of the potential covered judgment would make.
WHY IT IS PROBLEMATIC
Initially, the recognition that collusion with a claimant would constitute a breach of the duty to cooperate is useful, though why the insurer must still demonstrate that such “collusion” would be prejudicial (rather than such prejudice being implied) is questionable. Notable is how the duty to cooperate is conceived of as very much bare-minimum conduct by the insured – even collusion is not a breach unless it is or, if completed would have been, prejudicial to the insurer. The RLLI thus conceives of the obligations under an insurance policy as almost entirely running in one direction, from the insurer to the insured.
Allowing the insured to settle a claim without the insurer’s consent merely because it has issued a reservation of rights letter is not a “restatement” of the law. This is the bad faith set up, in many ways worse than the Missouri problem. Missouri allows this because it treats a reservation of rights as an inherent, unwaivable conflict of interest between the insurer and insured. But Missouri does not provide for independent counsel. RLLI requires provision of independent counsel, not controlled by the insurer, if there is a reservation of rights, to address the perceived conflict, then still allows the insured to settle/submit to judgment. The insurer has no meaningful right to control the defense/settlement if it issues a reservation of rights. RLLI proposes that an insurer can only exercise its contractual right to control the defense and settlement of claims if it waives its contractual rights to limit or deny coverage based on its policy language.
HOW THE COURTS HAVE REACTED
Adopted or cited with approval:
Mid-Continent Cas. Co. v. Petroleum Solutions, Inc., No. 4:09-0422, 2016 U.S. Dist. LEXIS 182174, at *11 n.28 (S.D. Tex. Dec. 16, 2016) (citing the 2016 discussion draft, along with case law, for the proposition that “the substantive test for breach of the duty to cooperate is whether the conduct was ‘reasonable and justified under the circumstances.’”).