There is a pending legal development in Illinois that would greatly impact retail and hospitality companies.  I recently received this update from the Illinois Associate of Defense Trial Counsel, of which I am a member, and I wanted to share it (in part) to ensure everyone knows what is going on and acts according.  Please take the time to read:

RE: The American Law Institute’s (ALI) draft Restatement of the Law: Liability Insurance

By way of background, ALI promulgates model statutes, Restatements of the Law and Principles of the Law that are respected and that wield enormous influence with reviewing courts. Restatements distill black letter law as it is and identify emerging trends in the law—the “better view”—that a majority of jurisdictions support. Principles of the Law serve a different purpose and are not subject to the same constraints as Restatements. Principles of the Law are intended to promote changes to make the law as the drafters believe the law should be. The Liability Insurance project started in 2010 as a Principles of the Law project rather than as a Restatement. After it went through drafts and revisions, with portions adopted under standards applicable to a Principles project, ALI converted the Principles project into a Restatement project in 2014—the first time that ALI had done so in its long history.  ALI retained the aspirational standards of a Principles project when ALI converted the project into a draft Restatement. The final draft is less a straightforward Restatement of the law than a Statement of what the drafters would like the law to be.

The law of liability insurance depends on a set of clearly formulated rules that govern the insurance contract. ALI released its most recent draft on August 4, 2017. Like previous drafts, this draft proposes to depart from these rules in important respects. Among the proposed changes:

• Plain meaning: Section 3 of the draft reduces the “plain meaning” rule to a presumption and allows a court to authorize discovery and consider extrinsic evidence, absent any ambiguity in the terms, conditions, and limitations in the liability insurance contract, to show that the insured’s understanding “is more reasonable than the plain meaning” and meets the insured’s reasonable expectations of coverage. If widely adopted, section 3 may increase the cost of insurance coverage, make litigation more expensive, and place insurance producers in the middle of coverage disputes between insureds and insurers over conflicting interpretations of policies. Illinois courts have never adopted the “reasonable expectations” doctrine to modify the plain meaning of an insurance provision.

• Duty to defend: Section 13 of the draft provides: “if the insurer knows or reasonably should know of information that, under existing pleading rules, could reasonably be expected to be added…, and that, if so added, would require the insurer to defend, then the insurer has a duty to defend the action.” Contrary to the language of the draft, Illinois courts rely on the allegations and true but unpled facts within the insurer’s knowledge—not hypothetical claims—to determine the insurer’s duty to defend.

• Vicarious and Direct liability: Section 12 proposes a rule under which an insurer would face a new direct liability for negligently selecting or supervising outside defense counsel, including instances where defense counsel has inadequate professional liability coverage. Section 12 would impose vicarious liability if defense counsel were an employee of the insurer (i.e., staff counsel). Section 12 would also hold the insurer liable for the acts and omissions of outside defense counsel, contrary to Illinois law. Section 12 invites confusion over what is considered “supervision” by an insurer—if a mere engagement letter would not suffice, would litigation management guidelines or consultation between defense counsel and insurance claims professionals over strategy constitute “supervision”? While insurers typically require panel counsel to provide proof of professional liability coverage, how much coverage is adequate?

• Failure to settle: Section 24 of the draft imposes a new affirmative obligation on the insurer to “make reasonable settlement decisions” or risk liability beyond the policy limits, despite the substantial protections against unfair claims practices that are already in place, including the well-developed law regarding an insurer’s implied duty of good faith and fair dealing that is inherent in every insurance contract. Illinois law does not require the insurer to initiate settlement negotiations, but the draft equivocates on whether an insurer must make an offer in the absence of a demand from plaintiff. The draft further eliminates the requirement that there be a likelihood of recovery beyond the policy limit and creates liability even when a plaintiff’s probability for success is slight. The draft encourages plaintiffs to make exorbitant settlement demands and forces insurers to pay inflated settlements to avoid extra-contractual liability.

• Failure to settle damages: Section 27 of the draft authorizes damages for an insurer’s failure to make reasonable settlement decisions. These damages include the full amount of the damages assessed against the insured in the underlying action, without regard to policy limits, as well as other foreseeable harm caused by the insurer’s breach of the duty. These damages also include punitive damages awarded at the underlying trial—even when the insurance policy excludes punitive damages. The effect of section 27 would transfer to the insurer a punitive damage award that may not be insurable as a matter of Illinois public policy.

• Fee Shifting: Sections 48 and 49 authorize fees to be awarded to insureds after substantially prevailing in coverage disputes with insurers, contrary to Illinois law. Section 48 applies where the insurer loses a suit that it filed when it is defending the underlying action, whereas section 49 applies if the insurer is not defending and the insured obtains a ruling that the insurer owes a duty to defend. If adopted, this rule would penalize insurers for filing declaratory judgment suits to avoid breaches of the duty to defend and estoppel, contrary to Illinois law and procedure which encourage insurers to seek clarification of their coverage obligations before the underlying action is settled or the entry of judgment.

See, RESTATEMENT OF THE LAW: LIABILITY INSURANCE (Proposed Final Draft 2017). The overall approach of the draft Restatement, contrary to Illinois law, treats insurance contracts differently from other commercial contracts.

Adoption of the Restatement depends on two remaining scheduled votes: ALI Council approval in January 2018 and a vote by ALI membership at its annual meeting in May 2018.

If you do not agree with these changes, please contact ALI leadership and the ALI Council if you are in ALI membership or the ALI Council.