John Buchanan and David Goodwin are quoted in a Law360 article regarding the final version of the American Law Institute's Restatement of the Law on Liability Insurance. Commenting on Section 3, which addresses foundational principles of insurance law, Buchanan says that a strong presumption rule would already have been more favorable to insurers than the "Corbin rule" adopted by the ALI in its influential second restatement on contract law. Under the Corbin rule, also known as the contextual approach, courts may interpret policy terms in light of "all the circumstances surrounding the drafting, negotiation and performance of the insurance policy."
Goodwin characterizes the current version of Section 3 as a "mishmash" of ideas that "threatens to end up a mess." He says, "The basic rule of insurance policy interpretation in all 50 states is that a court will start with the plain meaning of policy language, and if it is ambiguous, it will then construe the ambiguous language in favor of coverage. What the reporters ended up doing in the comments is giving a lot of weight to custom and practice." In essence, the reporters "turned what has been a question of law in every jurisdiction in the United States into an inquiry that requires the consideration of evidence, if judges take it literally," Goodwin says. "This opens the door to an argument by insurers that they ought to be entitled to discovery," he adds. "If courts were to agree, that could make insurance disputes much more expensive."
According to Buchanan, Section 46's expansion of the known liability rule to defense costs that would otherwise be covered by a policy could have dire consequences for policyholders. He points out that the restatement's authors conceded that no case law supports that notion. "I think it would be an inappropriate legal innovation," Buchanan says. "It would increase the number of cases where insurers would decline to defend their policyholders, which in turn would encourage default judgments against individual and small-business policyholders that cannot afford to defend themselves, even in frivolous lawsuits." Goodwin adds that even if Section 46 is approved in its current form, it is unlikely that any court will opt to apply the known liability rule to defense costs. "No state has adopted this rule in the past, and I have to believe no state would adopt this going forward either," he says.
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