Current Issue

Volume 68, Fall 2015, Issue 1

Restatement of the Law of Liability Insurance

Introduction

THE RESTATEMENT OF THE LAW OF LIABILITY INSURANCE AS A RESTATEMENT: AINTRODUCTION TO THE ISSUE 

Jay M. Feinman

This Introduction first describes the articles in the Issue, the topics into which they fall, and those speakers who participated in the Conference but who were unable to write for this Issue. Many participants in the Conference framed their analysis in light of the project’s new status as a Restatement. In addition to conceptual and technical analysis of insurance law issues, participants discussed whether the project’s drafts accurately represented the state of the law and the extent to which, as elements of a Restatement, they were required to do so. Part II of the Introduction highlights this feature of the articles and briefly discusses the nature of a Restatement and the ALI process that produces Restatements.


Articles

RESERVING THE RIGHT TO CONTEST COVERAGE UNDER THE PROPOSED RESTATEMENT OF THE LAW OF LIABILITY INSURANCE

Timothy P. Law & Lisa A. Szymanski

This Article will focus on section 15 of the Restatement, how it interacts with other sections, and how it reflects and advances the trends of the common law. Read holistically, the Restatement presents a concise guide for carriers and courts about how insurance companies can properly reserve their rights to contest coverage and the consequences of failing to do so.


THE DRAFT ALI RESTATEMENT OF THE LAW OF LIABILITY INSURANCE: CONSEQUENCES OF BREACH OF THE DUTY TO DEFEND ARE NOT AND SHOULD NOT BECOME THE AUTOMATIC FORFEITURE OF COVERAGE DEFENSES 

Laura M. Foggan & Karen L. Toto

The American Law Institute’s 2014 announcement that the proposed Principles of Liability Insurance would be revised into a Restatement of the Law of Liability Insurance was met with optimism by insurers, who hoped that the new text would offer a comprehensive and even-handed statement of key rules of liability insurance law. However, many insurers view the early proposed drafts of the Restatement, in which every word or phrase will carry a significant meaning, as unnecessarily prejudicial to insurers and in tension with a number of established common law insurance rules. One flashpoint in particular has been the section addressing “Consequences of Breach of the Duty to Defend,” in which the Reporters advocate a distinct minority view that an insurer who breaches the duty to defend thereby loses, inter alia, the right to contest indemnity coverage for a claim.


THE TREATMENT OF INSURERS’ DEFENSE-RELATED RESPONSIBILITIES IN THE PRINCIPLES OF THE LAW OF LIABILITY INSURANCE: A CRITIQUE

Charles Silver & William T. Barker

In this essay, we focus on the sections in Tentative Draft No. 2 of the Principles that address liability carriers’ rights and duties relating to the defense of lawsuits against the people and businesses they insure. Although we find much to admire in these sections, we find much to criticize as well. At the highest or most abstract level, we believe that these sections are under-theorized. On parsing them with care, one sees that the Reporters often disregard the contractual logic of insurance for reasons that are obscure.


LIABILITY OF INSURERS FOR DEFENSE COUNSEL MALPRACTICE

George M. Cohen 

In a previous draft of the Restatement, the Reporters endorsed vicarious liability of liability insurers for all defense counsel malpractice. In part based on an earlier draft of this Article, the current Restatement draft opts instead for vicarious liability only for “inside” defense counsel, and a direct liability standard with respect to “outside” defense counsel. The question of the appropriate standard of liability for liability insurers with respect to defense counsel malpractice is an important one, which has split the courts in different jurisdictions, but which has not received sufficient academic attention. I support the current Restatement approach, and in this Article I will discuss the reasons I think the Reporters were correct to switch from a vicarious liability rule in all cases to a direct liability rule for non-employee defense counsel.


THE RESTATEMENT OF THE LAW OF LIABILITY INSURANCE AND THE DUTY TO SETTLE

Leo P. Martinez

More than sixty years ago, Judge Robert Keeton authored what has come to be the definitive exegesis on the insurer’s duty to settle. Judge Keeton was followed some twenty-five years later by Professor Kent Syverud with what has come to be the second definitive work on the insurer’s duty to settle. Since that time, a scattering of articles have addressed the duty to settle but none have done so in Syverud’s comprehensive way. The occasion of the American Law Institute’s (“ALI”) project, the Restatement of the Law of Liability Insurance, initiated five years ago, provides the opportunity to revisit the insurer’s “duty to settle.”


INSURER RECOUPMENT OF DEFENSE COSTS: WHY THE RESTATEMENT ADOPTS THE WRONG APPROACH 

Laura A. Foggan

The default rule that the April 30, 2015 Discussion Draft of the American Law Institute’s (“ALI”) Restatement of the Law of Liability Insurance adopts, with respect to insurer recoupment of defense costs, is one of the more controversial provisions in the draft, having taken a view that is at odds with the majority of courts and with another ALI Restatement, the Restatement (Third) of Restitution and Unjust Enrichment.


DUTY TO SETTLE: WHY PROPOSED SECTIONS 24 AND 27 HAVE NPLACE IN A RESTATEMENT OF THE LAW OF LIABILITY INSURANCE 

Kim V. Marrkand

Inasmuch as many key sections of the Principles reflected the views of the Reporters as to how courts should apply policy provisions rather than how most courts had applied them, with acknowledged innovations and pronouncements not based on established authority, the new Restatement of the Law of Liability Insurance cannot simply adopt the Principles formulations. Instead, it must revisit and revise the earlier pronouncements to fit within the constraints of a Restatement, and where it “declines to follow the majority rule, it should say so explicitly and explain why.”


THE STANDARD FOR BREACH OF A LIABILITY INSURERDUTY TO MAKE REASONABLE SETTLEMENT DECISIONS: EXPLORING THE ALTERNATIVES 

Jeffrey E. Thomas

This Article considers the standard to be applied to determine whether an insurer has breached its duty to make reasonable settlement decisions. It focuses primarily on two standards: the disregard the limits (“DTL”) standard endorsed by section 24 of the Restatement of the Law of Liability Insurance (hereinafter “Restatement” or “Discussion Draft”), and the equal consideration (“EC”) standard, which I consider to be the primary competitor to DTL. The DTL standard says an insurer’s behavior is evaluated from the standpoint of a person who faces the full exposure of potential liability from a claim; to do this, the insurer (and the court) must “disregard the limits” of the applicable insurance policy. The EC standard requires that in making settlement decisions, an insurer must give equal consideration to the interests of the insured as it gives to its own interests. This Article will analyze these two standards in light of the case law applying them, and how the standards are and might be used in section 24 of the Restatement.


A NO-FAULT APPROACH TO THE DUTY TO SETTLE 

Bruce L. Hay

This Article takes another look at an old question: whether liability insurers’ “duty to settle” should be governed by a fault standard, as it presently is, or should instead be governed by a no-fault standard. Under the current law, an insurer breaches its duty to settle, and is liable for any resulting damage award exceeding policy limits, only if it unreasonably (or in “bad faith”) refuses a claimant’s offer to settle for an amount within those limits. Over the years, however, courts and commentators have occasionally suggested that an insurer’s rejection of a within-limits settlement offer should trigger liability without proof of fault, meaning that the insurer would have to pay any resulting judgment above policy limits regardless of whether its decision not to settle was reasonable (or in “good faith”). In this Article, I revisit the issue from an economic point of view, setting forth what I think is an underappreciated case for the no-fault approach.


THE LIABILITY INSURER’S DUTY TO SETTLE UNCERTAIN AND MIXED CLAIMS 

Kenneth S. Abraham

In the sections that follow, I first define a conceptual baseline by analyzing the functions of the duty to settle in “conventional” cases—that is, the cases in which the claim is definitely covered and there is therefore no coverage issue. Then, by reference to the functions of the duty to settle in these conventional cases, I address the duty to settle uncertain and mixed claims. Although I do not refrain from recommending what I regard as the best solution when there is one, my aim throughout is principally analytical. I want to describe the conceptual terrain on which the issues arise, identify the advantages and disadvantages of possible approaches to the liability insurer’s duty to settle uncertain and mixed claims, and explain how these advantages and disadvantages interact.


INTERPRETING THE RULES OF INSURANCE CONTRACT INTERPRETATION 

Mark A. Geistfeld

As I will argue, courts should interpret standard-form insurance policies to protect the ordinary policyholder’s reasonable expectations of coverage, and there are ample reasons for concluding that the Restatement honors this principle. The difficulty stems from ambiguities involving both policyholder expectations and the Restatement’s interpretive rules. By relying on a rigorous specification of the ordinary policyholder’s reasonable expectations of coverage, courts can resolve the ambiguities in the Restatement’s rules, yielding an appealing method for interpreting insurance contracts.


PATCHWORK CONTEXTUALISM IN THE ANGLO-CANADIAN LAW OF INSURANCE POLICY INTERPRETATION: IMPLICATIONS FOR THE PRINCIPLES OF THE LAW OF LIABILITY INSURANCE 

Erik S. Knutsen

The Principles attempts to straddle the bipolar textualist and contextualist camps of American insurance jurisprudence by providing a set of interpretive principles that draw on the best of both legal traditions. By understanding how the law of Canadian insurance policy interpretation operates–and fails–those charged with the task of drafting the Principles may be able to draw some comparative assistance in achieving this delicate balance that Canadian law has, for decades, sought to achieve. At the very least, the Canadian experience may operate as a useful foil for how many of the issues tackled in the proposed Principles may actually play out in American insurance law disputes.


ENCOURAGING CONSTRUCTIVE CONDUCT BY POLICYHOLDERS IN THE RESTATEMENT OF THE LAW OF LIABILITY INSURANCE 

Victor E. Schwartz & Christopher E. Appel

The potential impact of this new Restatement makes an understanding of the project’s objectives and ideology, as well as its specific provisions, essential for courts deciding whether a particular Restatement rule represents the best public policy for their state to follow. This Article provides important context for that analysis by examining how the Restatement, which is still a work in progress, addresses several key issues that implicate a policyholder’s incentives to “follow the rules” and behave in a constructive manner. Such incentives, or the lack thereof, are telling with respect to the RLLI project’s core objectives and guiding philosophy: is the project designed to balance and protect the interests of both parties that enter an insurance transaction—policyholders and insurers—or does the project propose to tip the scales to enable greater recoveries for policyholders?


Notes

INMATE ORGAN DONATION: UTAH’S UNIQUE APPROACH TO INCREASING THE POOL OF ORGAN DONORS AND ALLOWING PRISONERS TO GIVE BACK

Jaclyn M. Palmerson

In Utah, with the passing of a new law,  the state is seeking to give its incarcerated population the chance to help minimize the gap between those waiting for transplants and those willing to provide them by allowing inmates to become posthumous organ donors. The law allows both general population inmates to sign up to become organ donors if they die while in the prison system as well as, by implication, the death row inmate population if they die while in custody or as a result of the carrying out of their death sentence.  This law is the first of its kind and signals a departure from the previous policy in Utah. This Note will explore the contours of the Utah law, analyzing its benefits and drawbacks, responding to criticism, and addressing both the ethical and practical barriers facing the implementation of the law.


LAVISH SPENDING AS EVIDENCE OF “WILLFUL TAX EVASION”: HOW THE NINTH CIRCUIT’S REQUIREMENT OF “SPECIFIC INTENT” IN HAWKINS CREATES A CIRCUIT SPLIT AND FACILITATES ABUSE OF THE BANKRUPTCY SYSTEM

Matthew Williams

This Note will advocate for the United States Supreme Court to grant certiorari in order to resolve the circuit split. In doing so, the Court should adopt the test used by the Tenth Circuit in In re Vaughn, which held that the “mental state requirement” of willful tax evasion is satisfied when the following three elements are present: “1) the debtor had a duty under the law; 2) the debtor knew he had the duty; and 3) the debtor voluntarily and intentionally violated the duty.”  The policy of providing distressed debtors with a “fresh start” through bankruptcy should not extend to allowing wealthy taxpayers who have become financially insolvent to continue living the lifestyle they are accustomed to while at the same time abusing the bankruptcy system to escape their known and substantial tax obligations.

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