Shook, Hardy & Bacon Partner Victor Schwartz and Associate Christopher Appel published an article in the Rutgers Law Review examining the American Law Institute’s development of a first-of-its-kind Restatement of the Law of Liability Insurance. The article, titled “Encouraging Constructive Conduct by Policyholders in the Restatement of the Law of Liability Insurance,” is part of a symposium edition of the law review on the ALI project.
The article discusses concerns generated by the project’s development of novel liability rules that fail to provide proper incentives for policyholders to “follow the rules” with respect to insurance claims handling. Instead, several of the project’s provisions would, if adopted by courts, incentivize misconduct by policyholders by providing them with new avenues to enhance potential liability against an insurer.
The article analyzes three specific areas where this Restatement, at least as initially crafted, made significant departures from traditional common law rules, and did so in a way designed to operate to the detriment of insurers. These areas include: 1) a policyholder’s misrepresentation in his or her policy agreement; 2) a policyholder’s potential manipulation of its insurer’s duty to make “reasonable settlement decisions”; and 3) the policyholder’s duty to cooperate with his or her insurer.
The article further explains how such attempts to tip the scales in favor of a small group of errant policyholders ultimately harms the majority of honest policyholders through increased insurance costs. It concludes that the current project “creates unsound avenues for policyholders to engage in gamesmanship and improper conduct that subverts the fair and efficient handling of liability insurance claims.