Sallie Lux of Brouse McDowell shares an in-depth look at the American Law Institute’s Restatement of Law regarding liability insurance.
- Section 12 provides that an insurer may be held liable for the conduct of an attorney hired to represent the policyholder where the insurer did not use “reasonable care” in selecting counsel (section 12(1)) and the insured suffers harm resulting from the negligent conduct of the counsel selected by the insurer. Further, an insurer is also liable for harm resulting to a policyholder if the insurer directs counsel’s negligent conduct or omission in a manner that essentially “overrides” the independent professional judgment owed by defense counsel to the policyholder (section 12(2)).
- Sections 14 describes the basic obligations of the insurer to defend a claim against a policyholder. Those include the obligation to defend all causes of action, “including those not covered by the insurance policy.” Section 14(1)(a). The Section further specifically provides that counsel selected to defend the insured may not disclose “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.” Section 14(1)(b). Finally, under Section 14(3), an insurer’s costs in defending the policyholder in the underlying action are in addition to the limits of the policy, unless the policy otherwise provides.
- As discussed above, Section 19 directs that where there is a breach of the duty to defend the insurer forfeits any control over the defense or settlement.
- Section 21 concerns whether or not an insurer may recover defense costs where a claim is against a policyholder is ultimately determined to be not covered by the policy. This section states that an insurer may not recover from the insured fees and costs paid on behalf of a policyholder even for claims that are determined to be not covered, unless it is so stated in the policy or “otherwise agreed to” by the policyholder.
- Section 48 describes the damages due an insured for breach of a liability policy. Specifically, if there is a breach of the duty to defend, “all reasonable costs of the defense of a potentially covered legal action,” subject to limits, deductibles or SIRs, are included as damages. “While insurers are obligated only to pay reasonable defense costs, what is reasonable in the case of a breach of defense duties is judged from the perspective of an insured forced to defend a liability action without the timely assistance of its insurer. In that circumstance, the negotiated rates that liability insurers pay their regular defense counsel are unlikely to provide a useful guide to what is reasonable.” Section 48, Comment (b).
The entirety of the Sections referenced above, as well as the other Sections in the RLLI relating to attorneys’ duties and obligations, insurers’ defense obligations, and the costs of defense, as well as principles of contract interpretation, trigger, allocation, settlement, bad faith, and broker liability, among others, contain a myriad of other relevant provisions which will be of great interest to the insurance industry, insurance consumers, and insurance practitioners.
As discussed above, the RLLI is comprehensive and covers the virtual universe of insurance law. As they examine the RLLI, insurance scholars and practitioners continue to disagree on the whether the RLLI accurately reflect the law or the trend of the law on various discrete topics. Thus, there are many Sections of interest in the RLLI which warrant closer study and scrutiny.
Stay tuned to future editions of Your Coverage Advisor (found under Insights at www.brouse.com) for a more detailed look, examination, and analysis of additional insurance law topics of interest as restated in the newly adopted Restatement of Law, Liability Insurance.