THE BEGINNING: ALI'S RESTATEMENT AND BAD FAITH BEHAVIOR, OR NOT?

*Author's Note:  The American Law Institute is set to adopt the Restatement of the Law of Liability Insurance next week in Washington, D.C.  A certain controversy continues to be furthered by opponents of Section 24 concerning settlement behavior by liability carriers that may lead to bad-faith, extracontractual damages exposure.  In light of these recent statements including about the following article, republication of the following article is timely.  And those statements make  republication appropriate.  Here, readers can read what was actually written and review research actually done on this important issue.  Originally published in October, 2017 at Insurance Litigation Reporter, the following article is republished here in its entirety over the next several days with the permission of Thomson Reuters which holds the copyright to it.

Page numbers have been inserted by hand in this article to correct software transfer errors and to avoid breaking up paragraphs.

SECTION 24 OF THE LAW OF LIABILITY INSURANCE RESTATEMENT DRAFT NO. 4 (AUGUST 4, 2017), REPORTER'S NOTES F AND H, AND THE DECIDED CASES

by Dennis J. Wall

Dennis J. Wall, Attorney at Law, A Professional Association

Member of the American Law Institute. Trial lawyer, appellate practitioner, and Expert Witness. Author or coauthor of numerous articles on insurance law and of four books including “Litigation and Prevention of Insurer Bad Faith” (Third Edition Thomson Reuters West, in Two Volumes, with 2018 Supplements in process, analyzing over 5,000 cases and statutes and other authorities); "Lender Force-Placed Insurance Practices" (American Bar Association 2015); "Insurance Claims and Issues" (Thomson Reuters West); and co-author, "Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters" (Thomson Reuters West July 2017 ed. in publication).

Contents.

            I.  THE ROLE OF INITIATING SETTLEMENT

                 NEGOTIATIONS, OR NOT,

                 UNDER  RESTATEMENT SECTION 24

                 AND THE DECIDED CASES.

              II.  INITIATE SETTLEMENT:              

A. How the Courts line up on a liability carrier’s exposure to extracontractual liability for not initiating settlement negotiations in the absence of a settlement demand.          476
	476
1. Pro                 476	476
a. Arizona        476	476
b. Florida          476	476
c. Kansas          477	477
d. Michigan     477	477
e. New Jersey  477	477
f. New Mexico  477	477
g. Oklahoma   477	477
h. Oregon       477	477
i. State of Washington      477	477

                                                         

 

j. Louisiana, Tennessee, West Virginia, and Wisconsin 477	477
"Maybe, but not in this case"     478                                                                   478	478
a. California                                  478                                                              478	478
b. Idaho                                          478                                                          478	478
c. Illinois                                         478                                                          478	478
d. Ohio                                            478                                                           478	478
e. Pennsylvania                             478                                                             478	478
f. Texas                                            479                                                          479	479
Con                                                  479                                                      479	479
a. Alaska                                         479                                                               479	479
b. Perhaps Mississippi                 480	480
c. Texas.                                          480	480
d. Probably Kentucky                  480	480
4.  Submitting the Lineup           480	480
5.  The Conclusion Regarding Initiating  481                                                                                                       III.  THE REQUIREMENT OF A SETTLEMENT DEMAND,	481
OR NOT, UNDER RESTATEMENT SECTION 24 AND THE DECIDED CASES                                   481
IV. CONCLUSION             481	481
	481

I. THE ROLE OF INITIATING SETTLEMENT NEGOTIATIONS, OR NOT, UNDER RESTATEMENT SECTION 24 AND THE DECIDED CASES

There are many views among the Courts on the nature of the liability carrier’s duty to settle.   What you are about to read was not written to set out all the possible ways of expressing a liability carrier’s duty to settle claims. Nor was it written to align all the cases in the United States, or even within a given jurisdiction. There were and still are majority and minority views on the nature of a liability carrier’s duty to settle claims. It is enough to recognize that there is a split of authorities, even as the existence of a split of authorities is recognized in the Comments and Notes to the Restatement of the Law of Liability Insurance, which concisely and accurately condenses the dispute into a single notion in Section 24 of the Restatement: "[T]he insurer has a duty to the insured to make reasonable settlement decisions."

475

There is clearly turmoil over whether Section 24 allows, or even imposes, a specific duty to initiate settlement negotiations. I understand that this turmoil bubbled to the surface at the 2017 Annual Meeting of the ALI when many insurance company advocates asked to relitigate Section 24, which had been around for about five years at that time. Parenthetically, I have searched through my own copies of past drafts of the Restatement and apparently substantially the same version of what is now numbered Section 24 was introduced in 2012.

Judging by comments left online at the American Law Institute, concerns about a mandate have continued after the Annual Meeting ended.

The language of Section 24 permits Courts to fashion a liability carrier’s duty to initiate settlement negotiations, but its clear terms do not mandate any such duty.   Full disclosure: I argued that the Restatement should impose a duty to initiate settlement negotiations, and I proposed additional language to that effect.

Nonetheless, the language of Section 24 remains unchanged.

Even though I personally would prefer a Restatement that expressly mandates a liability carrier’s duty to initiate settlement negotiations where the insured’s likely liability is clear and the likely damages are great (meaning in excess of policy limits), I do not find it appropriate to relitigate that matter.

Further, I also support and, more importantly, the case law supports the Restatement in refusing to include an (erroneous) declaration that a demand for settlement within policy limits is required before liability carriers are exposed to extracontractual liability for bad faith in settlement.

In the end, the case law supports Section 24 as it stands. And as it has stood for several years. The purpose of this article is to illustrate that the decided cases support Section 24 in its current form. With one request, which is that citations quoting a seemingly contrary source in Reporters’ Notes f and h be deleted. This request is because although the quoted material is cited in the Notes on the first issue, it does not address the first issue, initiation of settlement negotiations in the absence of a demand. Further, it does not support the supposed condition precedent of a demand within policy limits before a liability carrier can be exposed to the risk of extracontractual liability for bad faith in settlement.

 

This selection, "Section 24 of the Law of Liability Insurance Restatement, Draft No. 4 (August 4, 2017), Reporter’s Notes F and H, and the Decided Cases," 39 No. 17 Insurance Litigation Reporter 473 (October 5, 2017), is reprinted here with permission of Thomson Reuters.  Any further reproduction without the express consent of Thomson Reuters is prohibited.

 NEXT:  THE CASES AND THE JURISDICTIONS ON THE "PRO" SIDE OF THE QUESTION.  TO BE CONTINUED ON CLAIMS AND BAD FAITH LAW BLOG .......