January 16, 2018
Richard Revesz Stephanie Middleton
Director Deputy Director
American Law Institute American Law Institute
4025 Chestnut St. 4025 Chestnut St.
Philadelphia, PA, 19104 Philadelphia, PA, 19104
Dear Director Revesz and Deputy Director Middleton:
Thank you for your willingness to engage in a continued dialogue regarding the American Law Institute’s (ALI) Proposed Restatement of the Law of Liability Insurance (Proposed Restatement). Per your request, below are some examples of where the National Council of Insurance Legislators (NCOIL) believes the Proposed Restatement directly conflicts with existing State statutory law.
Section 8 – Materiality Requirement
Section 8 of the Proposed Restatement provides:
A misrepresentation by or on behalf of an insured during the application for, or renewal of, an insurance policy is material only if, in the absence of the misrepresentation, a reasonable insurer in this insurer’s position would not have issued the policy or would have issued the policy only under substantially different terms. (emphasis added)
This section imposes a new “substantiality” requirement for determining whether an insured’s misrepresentation was material. This is at odds with existing statutory law governing misrepresentations and rescission. Existing law asks whether or not — but for the misrepresentation — a policy would have been issued on the same terms, not whether it would have been issued only on substantially different terms. Examples of such statutes include:
• Delaware Code Ann. Tit. 18 § 2711
• Florida Stat. Ann. Title 37, § 627.409
• Ga. Code Ann. § 33-24-7
• S.D. Codified Laws § 58-11-44
• Wyo. Stat. Ann. § 26-15-109; Wyo. Stat. Ann. § 26-35-202
Section 27 – Damages for Breach of the Duty to Make Reasonable Settlement Decisions
Section 27 of the Proposed Restatement provides:
An insurer that breaches the duty to make reasonable settlement decisions is subject to liability for any foreseeable harm caused by the breach, including the full amount of damages assessed against the insured in the underlying legal action, without regard to the policy limits.
Comment (e) to Section 27 and its corresponding Reporter’s Note specifically reference punitive damages as among the type of damages that an insurer can be required to pay for a breach of settlement duties.
States have different approaches to the insurability of punitive damages. Some States expressly prohibit insuring punitive damages by statute: Ohio Rev. Code § 3937.182 precludes coverage for punitive damages under UIM policies and policies of casualty or liability insurance. Other States permit insurers to write coverage for punitive damages only in certain instances: Kansas Stat. Ann. § 40-2,115 states that it does not violate public policy to provide coverage for punitive damages that are assessed against an insured on the basis of vicarious liability without the actual prior knowledge of such insured.
Other States regulate the circumstances under which coverage written for punitive damages will be recognized. Montana Code Ann. § 33-15-317 provides that “[i]nsurance coverage does not extend to punitive or exemplary damages unless expressly included by the contract of insurance.” Hawaii Rev. Stat. § 431:10-240 provides that “[c]overage under any policy of insurance issued in this state shall not be construed to provide coverage for punitive damages unless specifically included.”
Section 35(2) – Notice and Reporting Conditions
Section 35(2) of the Proposed Restatement provides:
With respect to claims first reported after the conclusion of the claim-reporting period in a claims-made-and-reported policy, the failure of the insured to satisfy the claim-reporting condition in the policy excuses an insurer from performance under the policy without regard to prejudice, except when:
(a) The policy does not contain an extended reporting period;
(b) The claim at issue is made too close to the end of the policy period to allow the insured a reasonable time to satisfy the condition; and
(c) The insured reports the claim to the insurer within a reasonable time. (emphasis added).
Legislation addressing whether and to what extent extended reporting periods are required in claims-made-and-reported policies has been adopted in AK, CO, CT, HA, NY, NC and VA. While some States require the inclusion of an extended reporting period in the policy, or require the insurer to allow for the purchase of such additional coverage, none relieve the insureds from the terms of its policy.
Sections 47, 48, 50 – One-way attorneys’ fee-shifting
Section 47(3) provides that available remedies include court costs or attorneys’ fees to a prevailing party “when provided by legislation.” However, other proposed Restatement sections override the legislative determination and expand fee recovery to additional situations. Section 47(4) calls for insurers to pay an insured’s coverage litigation costs when an insured “substantially prevails in a declaratory-judgment action brought by an insurer.” Section 48(3) calls for insurers to assume the insured’s attorneys’ fees if the insured successfully establishes that the insurer breached its duty to defend or pay defense costs with respect to an underlying claim. Section 50(1) calls for the award of “attorneys’ fees and other costs incurred by the insured in the legal action establishing an insurer’s breach” as damages upon a finding of bad faith. Thus, instead of endorsing fee-shifting “when provided by legislation,” the proposed Restatement supplants the legislature by seeking to establish its own rules regarding fee-shifting.
As the Reporters acknowledged in Section 47(3), several States have statutes that provide for recovery of attorneys’ fees in coverage litigation, but said statutes differ in important ways. Some statutes are drafted broadly: N.H. Rev. Stat. Ann. § 491-22-b states “In any action to determine coverage of an insurance policy pursuant to [Section] 491:22, if the insured prevails in such action, he shall receive court costs and reasonable attorneys’ fees from the insurer.” Other statutes are drafted differently: Va. Code Ann. § 38.2-209 permits recovery only in cases in which an insurance company, not acting in good faith, failed to make payments to the policyholder; La. Rev. Stat. Ann. § 22:1220 entitles a policyholder to recover attorneys’ fees if the insurer has acted in bad faith, for example, “[m]isrepresenting pertinent facts or insurance policy provisions relating to any coverage at issue.”
Furthermore, some States which typically do not permit shifting of attorneys’ fees allow policyholders to recover but only under specific circumstances: Del. Code Ann. Tit. 18, § 4102 provides for reasonable attorney fees for “property insurance” coverage actions.
This list likely is illustrative, not exhaustive, as I have not had the opportunity to compare the proposed Restatement to the insurance legislative framework in all fifty states. I also wish to note that in addition to the abovementioned statutory examples, NCOIL is very concerned with the provisions in the proposed Restatement that go beyond established common law. Developing a body of aspirational common law, particularly from a group as influential as the ALI, is extremely problematic and can lead to State legislatures across the country stepping in to codify their relevant liability insurance law, as was done previously with premises liability law and the ALI’s Restatement Third of Torts: Liability for Physical and Emotional Harm (2012).
NCOIL hopes that the abovementioned conflicts will be considered during the upcoming meeting of the ALI Council and the necessary changes will be made.
If you have any questions or wish to discuss this matter further, please do not hesitate to contact me.
William D. Melofchik
National Council of Insurance Legislators
cc: Hon. Thomas B. Considine
Chief Executive Officer
National Council of Insurance Legislators