The American Law Institute recently adopted the Restatement of the Law: Liability Insurance (the Restatement). The general goal of restatements is to clearly formulate the common law and reflect the law as it presently stands or as it might appropriately be stated by courts.

The Restatement has created some controversy. Below are some of the most controversial provisions:

1. Reservation of rights and other coverage letters: Section 15 of the Restatement states that insurers are required to update reservation of rights and other coverage letters within a reasonable period of time after learning of facts that would provide additional bases to contest coverage. Carriers, who typically provide a coverage position letter at the outset of litigation have argued that this provision would create a significant burden throughout the life of a case as new facts and allegations arise.

2. Attorney malpractice: Section 12 of the Restatement states that insurers may be liable for malpractice by defense counsel retained by the insurer if they negligently selected the attorney. Furthermore, insurers may be liable for attorney malpractice if the carrier overrides defense counsel’s judgment, leading to a poor outcome for the insured.

3. Claims settlement:

• Section 24 of the Restatement states that insurers are required to make reasonable settlement decisions if there is a risk of an excess judgment.

• Section 25 of the Restatement states that a reservation of rights letter does not relieve the insurer of this reasonable settlement duty, but it does authorize the insured to settle without the carrier’s consent.

• Section 27 of the Restatement states that if an insurer breaches the duty to reasonably settle, it may be liable for the resulting, foreseeable harm caused to the insured, including excess judgments and punitive damages, even if excluded by the express terms of the policy.

4. Confidentiality: Section 11 of the Restatement states that insurers do not have the right to receive information concerning the insured from defense counsel, if that information is protected by the attorney/client privilege, the work product doctrine, or other duties of confidentiality, if the information could be used to benefit the insurer at the expense of the insured. Insurers are concerned about this provision because they depend upon the status reports received from defense counsel to keep abreast of the case and to inform their settlement and defense strategy.

5. Recoupment of defense costs: Section 21 of the Restatement states that insurers cannot recoup defense costs following judicial determinations of no coverage, unless the right to recoup defense costs is expressly provided in the insurance policy. This is consistent with current law in Wisconsin.

6. Bad faith: Section 49 of the Restatement sets forth a two-part test for bad faith – (1) the insurer had no reasonable basis for denying coverage; and (2) the insurer knew it was obligated to provide coverage or recklessly disregarded its obligation.

7. Continuous injury: Section 41 of the Restatement states that where the harm to the claimant is continuous or indivisible over several policy periods (environmental contamination, for example), courts should apportion the liability on a pro rata basis using policy limits; not based on the “all sums” approach. This provision purports to create a national rule in “continuous trigger” cases where, currently, the law differs from jurisdiction to jurisdiction.