A draft legal document that could have a profound impact on American law involving liability insurance has some critics and the document’s authors in near total disagreement over whole sections of the draft, and even its overall objective.

Some legal experts say the proposed Restatement, Law of Liability Insurance by the American Law Institute (ALI) will upend the insurance market and lead to dramatic increases in pricing.

“It (draft Restatement) is written with the idea of adding more consumer protections but some of the provisions in it could be so disruptive to the market that it might very well have the opposite effect,” said Eric R. Dinallo, Debevoise & Plimpton LLP., who along with his colleague, Keith J. Slattery, recently wrote an article outlining the potentially damaging provisions in the draft restatement.

Dinallo also said that document should have remained a “Principles Project,” an aspirational rendering of what the law should be, rather than a more influential Restatement, a clarification of where the law is based on years of case law decisions. Judges look to Restatements for guidance on the law.

But the project’s Reporter, Tom Baker, professor at the University of Pennsylvania Law School, said that the project was converted to a Restatement in 2014 precisely because it is a clarification of the law.

“We found that as a Principles Project it was already largely tracking prevailing law,” Baker said. “Sections that didn’t were changed. So saying this will have any short term impact on the market is completely false. Even if it did change the law, and it doesn’t, it would take years for the courts to implement the changes.”

Slattery said that one of their biggest concerns lies with the broadening of what constitutes bad faith on the part of an insurer.

He said that a provision in the draft subjects insurers to excess damages beyond policy limits for failure to “make reasonable settlement decisions.”

“What they’re doing here is moving from a traditional bad faith standard to one of quasi-strict liability,” he said. “This effectively removes negotiated policy limits, one of the most fundamental protections for an insurer.”

Here, Baker said that the Restatement distinguishes bad faith, where the action is ill intentioned, from instances where it’s deemed the insurer did not make a reasonable attempt to settle.

“An insurer can always avoid liability for a judgment in excess of the policy limits by showing that its settlement decision was reasonable,” he said. “Reasonable is defined in this context to mean a reasonable insurer that issued the same kind of policy at issue. So, all that is required is that the insured adhere to the standard of the industry.”

Dinallo said that another section expands the insurer’s duty to defend beyond case law precedent by requiring the insurer to defend any claim if the insurer should know of information that would require the insurer to defend.

Baker said that in this instance the Restatement correctly reflects current law in many states.

Noted business defense attorney Victor E. Schwartz, partner at Shook Hardy & Bacon, said that over the course of the nearly seven year project, the Reporters of the liability law Restatement have added some balance, “especially where there has been no existing case law support for their position.”

“But there is still a long way to go to achieve a project that all would agree treats insurers equitably, is sensitive to the cost of insurance, and follows the most sound legal rules,” he said.

The Restatement, now in its final draft, is scheduled for a final vote before the ALI membership at the Annual Meeting in May.

This piece first appeared on Legal NewsLine.

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W.J. Kennedy

Legal NewsLine

W.J. Kennedy is a journalist who has covered legislative and regulatory issues for 20 years and is a graduate of St. Joseph's University.

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