Hunton Insurance Recovery Blog

Andrea DeField’s update, and her original post discuss portions of the proposed Restatement of the Law on Liability Insurance and how they may alter the consequences for breaching the duty to defend. The proposed Restatement contains many other provisions that may prove relevant to future coverage disputes, particularly ones governed by state law that is less developed than in states like New York, California, and Florida.

After our December 15, 2015 post about the Discussion Draft of the Restatement of the Law on Liability Insurance, the American Law Institute released Council Draft No. 2 on December 28, 2015. Relevant to my last post, Council Draft No. 2 contains revisions to §19 of Chapter 2, addressing the duty to defend. While the Reporters’ Memorandum notes that no substantive changes have been made to the black letter law of this section, the comments section has been revised to reflect a proposed intermediate approach. ALI Restatement of the Law: Liability Insurance, Council Draft No. 2 (not approved), Dec. 20, 2105 p. xiv. These revisions reflect a more moderate position than that taken in the previous Discussion Draft.

At present, the general rule is that an insurer that breaches its duty to defend still may contest coverage. Signature Dev. Companies, Inc. v. Royal Ins. Co. of Am., 230 F.3d 1215, 1222 (10th Cir. 2000). However, the tides may soon change. The Discussion Draft of the Restatement of the Law on Liability Insurance proposes that “[a]n insurer that breaches the duty to defend a claim loses the right to assert any control over the defense or settlement of the claim and the right to contest coverage for the claim.” See § 19, “Consequences of Breach of the Duty to Defend, ALI Restatement of the Law: Liability Insurance, Discussion Draft (April 30, 2015), p. 147. The proposed Restatement explains, “[t]he forfeiture-of-coverage-defense rule discourages insurers from attempting to convert a duty-to-defend policy into an after-the-fact defense-cost-reimbursement policy.” Id. at 148. The Restatement further explains that insurers should be wary to outright deny a defense. Rather, it suggests that “[t]he proper procedure is to provide a defense subject to a reservation of rights and then, if appropriate, institute a declaratory-judgment action to terminate the duty to defend…If the insurer cannot, or does not choose to, file a declaratory-judgment action, it can preserve its coverage defenses by refusing to settle the claim while continuing to provide a defense (subject to the risks attendant to breach of the duty to make reasonable settlement decisions).” Id. at 149.¹

On July 28, 2015, the New York Supreme Court in Navigators Insurance Company v. Sterling Infosystems, Inc., Index No. 653024/2013, (N.Y. Sup. Ct. July 28, 2015), held that Navigators Insurance Company must defend and indemnify its policyholder for claims seeking statutory damages under the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., despite a policy exclusion for claims involving “[f]ines, penalties, forfeitures or sanctions.”  The decision may have broad implications for policyholders pursuing coverage for the defense of lawsuits seeking statutory damages under privacy and consumer credit statutes, as well as other statutes that have traditionally been viewed to be punitive in nature.