PHILADELPHIA (Legal Newsline) - Business attorneys, state insurance regulators and state lawmakers are so troubled over an impending final vote on a proposed Restatement of law covering liability insurance that they are urging American Law Institute (ALI) officials to delay it, and consider making significant changes to the document.

The vote before the full ALI body is scheduled for Tuesday.

“This Restatement has generated a tremendous level of concern across a wide spectrum,” said Laura A. Foggan of Crowell & Moring in Washington.

Legal experts resistant to change say that rather than a Restatement, an accounting of years of case law, and used by jurists as a guide for decision making, the liability law draft should have remained a “Principles Project”– an aspirational rendering of what the law should be – as it started out seven years ago.

“This is not a Restatement of the law but a 'new statement' of the law,” said Thomas B. Considine, CEO of the National Conference of Insurance Legislators (NCOIL).

“It’s a total abuse of the process.”

In an earlier interview, the lead reporter on the project, University of Pennsylvania law professor, Tom Baker, said that the project morphed into Restatement when they decided it was a reflection of common law.

But Considine and others say that many provisions in the draft do not reflect common law, and some areas are in direct conflict with legislative authority.

Considine cites a section that he says effectively means that insurance contracts do not need to be enforced as written.

“The bedrock principle of insurance contract construction in most states is the ‘plain meaning rule’ – pursuant to which courts give words their plain, ordinary and popular meaning. But Section 3(2) of the proposed Restatement states that ‘[a]n insurance policy term is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder's position would give the term a different meaning,’” he said.

The document also expands the scope of an insurer’s duty to defend. Foggan said that under existing law, an insurer need not speculate about allegations that might be added to a case. There is no duty to defend “phantom” claims.

“Requiring an insurer to speculate about what may happen in the future would create a tremendous amount of uncertainty in determining the duty to defend,” she said.

She added that the language is “especially troubling” because the draft also provides in Section 19 that, if the insurer unreasonably refused to defend, it then loses all coverage defenses as to indemnity.

“That can be a huge penalty,” she said. “It is imposed in addition to contract damages. Courts overwhelmingly have rejected the loss of coverage defenses penalty that is imposed in the draft.”

Considine also cited the punitive provision where insurers in breach of a defense obligation may be forced to pay uncovered claims.

“As per Section 19, an insurer found to have unreasonably failed to defend the policyholder loses all coverage defenses. They face a ‘bad faith’ penalty without any need to demonstrate that an insurer acted in bad faith,” Considine said.

Yet another section allows policy holders, but not insurance carriers, to shift attorneys’ fees. This even though, as Considine points out, the overwhelming majority of states do not permit fee shifting.

Additionally, the Defense Research Institute (DRI) and the Michigan and Idaho Insurance Departments sent letters to ALI officials outlining their concerns.

From DRI: “…in many instances the black letter rules and Comments in this Restatement adopt rules that are entirely new, or have only been adopted in a handful of states, and are not in accordance with the majority rule.”

Idaho’s Department of Insurance: “Not only are the proposed revisions and rules of concern to the insurance industry and policyholders, they may also be of concern to regulators.”

Michigan’s Department of Insurance and Financial Services: “Contrary to promoting uniformity and clarity, this Restatement seems to represent an attempt to impose liability reform on the insurance industry, regardless of existing statutes and case law.”

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