ALI LIABILITY INSURANCE RESTATEMENT
The ALI “Restatement of the Law-Liability Insurance” has recently been the subject of further legislative activity in at least three states:
ARKANSAS – Act 742 (enacted on April 8, 2019) provides that a statement of the law in the Restatement “does not constitute the public policy of this state if [it] is inconsistent or in conflict with, or otherwise not addressed by” a state statute, English common and statutory law as adopted, or Arkansas case law precedent.
NORTH DAKOTA – House Bill 1142 (signed on March 20, 2019) provides in part that a person “may not apply, give weight to, or afford recognition to, the [ALI’s Restatement] as an authoritative reference regarding interpretation of North Dakota laws, rules, and principles of insurance law.”
TEXAS – Proposed Resolution H.C.R. 58 states in part that the “ALI’s most recent Restatement is neither consistent with well-established insurance law nor respectful of the role of state legislators in establishing legal standards and practice for the insurance industry, and it is not worthy of recognition by the courts as an authoritative reference.” It proposes to resolve that the “86th Legislature of the State of Texas hereby condemn the [Restatement] and discourage courts from relying on the Restatement as an authoritative reference regarding established rules and principles of law.” A House Committee report on H.C.R. 58 was distributed on May 2, 2019.
Separately, on June 10, 2019, Texas amended Civil Practice and Remedies Code Section 5.001 (Rule of Decision) to provide that “[i]n any action governed by the laws of this state concerning rights and obligations under the law, the American Law Institute’s Restatements of the Law are not controlling.” A Bill Analysis explains in part that the ALI is “an organization that publishes the Restatements of the Law, which are often considered by courts as dependable descriptions of existing law. Recent concerns have been raised that the document may go beyond summarizing the state of current legal thinking and may be inaccurate or misleading.” The Act takes effect September 1, 2019.
A divided Texas Supreme Court rules that a property insurer’s invocation of an appraisal and payment of an award did not bar policyholder claims under the Texas Prompt Payment of Claims Act (TPPCA), Tex. Ins. Code ch. 542, as a matter of law. The court concluded that payment of an appraisal award is not an acceptance or adjudication of liability and that, to prevail on a prompt pay damages claim under §542.060, a policyholder must prove (1) liability under the insurance policy; and (2) that the insurer failed to comply with the TPPCA in processing or paying the claim. It further held that payment of an award bars the policyholder’s claims for breach of contract (for failure to pay the amount of covered loss) and common law and statutory “bad faith” to the extent the only actual damages sought are lost policy benefits.
A dissenting opinion by the Chief Justice warns that the ruling renders appraisal of “little use”:
“[A]fter praising appraisal’s effectiveness, the Court proceeds to hobble it. By today’s decision, as a practical matter, whenever an appraisal is requested, even by the insured, an insurer is subject to paying 18% interest and attorney fees if the award exceeds what the insurer has found to be due. That certainly discourages use of appraisals, at least by insurers, and may effectively doom the process altogether. I come, then, to bury appraisals, not to praise them.”
Iowa Supreme Court in a closely watched case rules that a common law cause of action for “bad faith” failure to pay comp benefits is not available against a third-party claims administrator (TPA) for a workers’ compensation insurer. The court explained that it is the nature of a comp insurer’s (or self-insured employer’s) relationship with insured employees and statutory duties that give rise to “bad faith” tort liability, and that a TPA does not possess those attributes. That is, a TPA (1) is not in an insurer/insured relationship with anyone; (2) is not the “substantial equivalent” of an insurer; and (3) has no “affirmative obligations” under Iowa comp statutes. Calling it the “majority rule,” the opinion cites cases from other jurisdictions that have considered the issue and declined to recognize “bad faith” claims against TPAs and other entities not in privity with insureds.
South Carolina Supreme Court holds that an insurer does not place privileged communications “at issue” and thus waive the attorney-client privilege in a tort action for “bad faith” refusal to provide coverage merely by denying “bad faith” and/or asserting good faith in its answer. The case emphasizes the “sanctity of the attorney-client privilege” and adopts the “case-by-case” approach in State Farm Mut. Auto. Ins. Co. v. Lee, 13 P.3d 1169 (Ariz. 2000). Lee upheld discovery of an insurer’s files over privilege objections even though it did not expressly raise advice of counsel as a defense. “The court rested its decision on the fact that the insurer defended its denial of coverage based on its agents’ subjective understanding of the law — as informed by counsel — rather than defending exclusively on an objective reading of the disputed policy exclusions.” Waiver thus exists “only when the privilege holder raises and defends on the theory that its mental state was based on its evaluation of the law and the facts show that evaluation included and was informed by advice from legal counsel.” To this, Mt. Hawley imposes the added requirement that the party claiming privilege waiver make a prima facie showing of “bad faith.”
CONTRACTUAL LIABILITY EXCLUSION
West Virginia Supreme Court applying Tennessee law concludes that contractual liability exclusions* in the liability policies at issue barred coverage for breach of contract, warranty and indemnity claims against a GC-insured involving faulty work and materials on a construction project. The court found that the claims “fit squarely within the purview” of the exclusion since the insured would not be liable in the absence of the construction contracts at issue (no torts were alleged). This is reinforced, the court said, by Tennessee authority that “[CGL] coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.” It rejected the insured’s argument that the exclusion only applies where the insured has contractually assumed the liability of a third party: “[I]f the entire contractual liability exclusion was only meant to apply to third party indemnity agreements, there would be no reason to have the second exception to the exclusion, which provides coverage for liability ‘[a]ssumed in a contract or agreement that is an ‘insured contract’.’”
* One of the exclusions at issue provides, for example, that the insurance does not apply to
“Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an “insured contract”, provided the “bodily injury” or “property damage” occurs subsequent to the execution of the contract or agreement[.]
DEFENSE COSTS – CONTRIBUTION (FLORIDA)
A new Florida statute (Section 624.1055) establishes a right of contribution among liability insurers for defense costs. It provides in part:
“A liability insurer who owes a duty to defend an insured and who defends the insured against a claim, suit, or other action has a right of contribution for defense costs against any other liability insurer who owes a duty to defend the insured against the same claim, suit, or other action, provided that contribution may not be sought from any liability insurer for defense costs that are incurred before the liability insurer’s receipt of notice of the claim, suit, or other action.”
Defense costs are to be apportioned by the court in accordance with the terms of the policies; “equitable factors” may be used in the allocation. The section covers liability policies (other than motor vehicle and medical professional liability insurance) issued for delivery in Florida or under which an insurer has a duty to defend against claims brought in the state and includes surplus lines insurance. It applies to any claim, suit or other action brought on or after January 1, 2020.
DUTY TO DEFEND – EXTRINSIC EVIDENCE
Ohio appeals court holds that Ohio law permits an insurer to withdraw from the defense of underlying asbestos lawsuits where there is “indisputable, reliable evidence” that the date of injury clearly occurred outside the policy period. The court emphasized that the duty to defend cannot be “extended without limitation because the clear terms of the policy dictate finite timeframe [sic] in which the insurance coverage may be triggered,” and that “[n]othing prevents the insurer, once the defense is accepted, from utilizing discovery to attempt to clarify the nature of the claim against the insured.”
Second Circuit applying New York late notice law affirms dismissal of claims by policyholder New York State Electric & Gas Corporation (NYSEG) for coverage under excess liability policies for alleged environmental pollution at numerous former manufactured gas plant (MGP) sites. The opinion concludes that NYSEG reasonably should have known of occurrences likely to implicate the policies at all its MGP sites by July 1991 at the latest. “All of NYSEG’s MGP sites had historically engaged in the production of manufactured gas and produced the same contaminating wastes. Evidence of contamination at a number of MGP sites should have alerted NYSEG to the likelihood of contamination at others.” Its November 1991 notice to insurers was therefore “untimely as a matter of law.” The court rejected NYSEG’s argument that it could not have reasonably known the policies would be implicated under a pro rata allocation noting in part that the New York Court of Appeals did not establish pro rata until long afterwards in its 2002 decision in Con Ed.
Note: White and Williams LLP is co-counsel for Century Indemnity Company. See the May 2018 Coverage Reporter for discussion of the trial court’s rulings dismissing NYSEG’s claims.
Montana Supreme Court concludes that a stipulated settlement entered into between an insured and a third-party claimant, without the consent or participation of an insurer that has provided a defense to the insured, will not be presumed reasonable as to the defending insurer. According to the court, an insurer that breaches the duty to defend “loses its right to invoke insurance contract defenses or to assert policy limits,” and the amount of the insured’s settlement is deemed reasonable. That is not the case when an insured alleges other breaches (e.g., failure to settle underlying litigation). “It is the failure to provide a defense — which is not addressed in the [Unfair Trade Practices Act (UTPA)] — that constitutes improper abandonment, justifying an insured to take steps limiting its personal liability through a settlement that the law recognizes as presumptively reasonable,” the court said. An insured’s potentially valid UTPA or contract claims thus do not render its unilateral settlement reasonable when an insurer is defending. The burden of proof remains with the insured and a court cannot find a stipulated settlement “fair and reasonable” for purposes of presuming damages on such a claim.