Hunton Insurance Recovery Blog

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.

On December 14, 2015, a federal court in California denied Evanston Insurance Company’s motion to dismiss Uber’s breach of contract and breach of the implied covenant of good faith and fair dealing claims. Evanston Insurance Company v. Uber Technologies, No. 15-cv-03988-WHA (Dec. 14, 2015). The case concerns Evanston’s duty to indemnify Uber for claims arising from two car accidents during which drivers were allegedly logged on to the Uber App.

A federal judge in Indiana recently found that an insurer is not entitled to control the defense of its insured because a conflict of interest exists where the insurer is in litigation with the insured over an alleged policy breach arising out of the manner in which underlying litigation would be defended. Valley Forge Insurance Co. v. Hartford Iron & Metal Inc., et al., No. 1:14-cv-00006-RLM-SLC, N.D. Ind. (Dec. 7, 2015).

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

The Georgia Court of Appeals held on November 20, 2015, that compliance with an excess liability policy’s notice provision is not a precedent to coverage. Plantation Pipe Line Co. v. Stonewall Insurance Co., No. A15A1359 (Nov. 20, 2015 Ga. App., 3rd Div.). In Plantation Pipeline, the insured sought coverage for ground contamination originating from a 1976 pipeline leak. The leak was fixed and remediated shortly after it was discovered. In 2009, Plantation discovered further contamination at the site, which it again remediated. Plantation sought coverage for the remediation. Stonewall denied coverage based on the policy’s notice provision, contending that notice of the leak and remediation was untimely. The parties cross-moved for summary and the trial court granted Stonewall’s motion. On appeal, the Georgia Court of Appeals affirmed, finding that Plantation’s notice was not timely as it did not report the claim to Stonewall for more than two years. However, the majority agreed with Plantation that the notice provision does not “expressly stipulate that compliance with the notice provision is a condition precedent to coverage.” The panel further found that “the policy does not even contain a general provision that no action will lie against Stonewall unless, as a condition precedent thereto, Plantation shall have fully complied with all terms of the policy.” Thus, the panel found it was error for the trial court to preclude coverage based on a failure to provide timely notice.