Disciplined in Sophisticated Defense and Insurance Litigation

June 20, 2018 | Publication| Perspectives on the ALI Restatement: The Plain Meaning Rule or Presumption?

Jason M. Seitz

This article is originally a publication of The National Insurance Law Forum, June 2018. Legal opinions may vary when based on subtle factual differences. All rights reserved.

The American Law Institute (ALI) voted to approve the Restatement of the Law of Liability Insurance (Restatement) at its annual meeting on Tuesday, May 22, 2018, with sections of the Restatement being debated until the final vote.[1] The debate had resulted in many different drafts of the Restatement, with the Council of Advisors to the Restatement Reporters approving Proposed Final Draft No. 2 on April 13, 2018.[2] This was the version ultimately approved by the ALI Members during the annual meeting.[3]

One of the more controversial issues regarding policy language interpretation had been the proposed use of a “plain meaning presumption,” rather than the majority “plain meaning” rule. Though the Restatement ultimately adopts the plain meaning rule, the Comment to Section 3 continues to advocate a contextual approach utilizing custom, practice, or usage, implicating the plain meaning presumption.

The Comment to Section 3 begins with a discussion of two opposing approaches to the interpretation of insurance policy language found in the common law of insurance: the “contextual approach,” and the “plain meaning rule.” Under the contextual approach, courts interpret insurance policy terms in light of all the circumstances surrounding the drafting, negotiation, and performance of the insurance policy.[4]This approach was adopted in the Restatement Second of Contracts. Under the plain meaning rule, if a term is unambiguous when applied to the claim in question and in the context of the entire policy, the term is interpreted according to that meaning.[5] This approach has been adopted by a substantial majority of courts in insurance cases.[6] In adopting the plain meaning rule, the Restatement recognizes there is value in the rule’s incentivizing the use of policy terms having a plain meaning, and its promotion of the consistent interpretation of similar terms, which leads to more uniform enforcement of standardized policies.[7]

Comment b to Section 3 addresses “sources of plain meaning,” including dictionaries, court decisions, statutes and regulations, and secondary legal authority such as treatises and law review articles.[8]Noting such sources of meaning “are not ‘extrinsic evidence’ under any definition of that term,” the Restatement presents them as “legal authorities” consulted by the courts when determining the plain meaning of an insurance policy term.”[9]

Likening them to the sources of plain meaning, Comment c asserts “custom, practice, and usage” can inform the court’s determination of the objective meaning of insurance policy terms “in the relevant market.”[10] Distinguishing them from other sources of meaning, such as drafting history, course of dealing, or pre-contractual negotiations (characterized as evidence of the “specific” or “subjective” intent of a particular party), Comment c concludes the use of custom, practice, and usage would not “open the door to extrinsic evidence.”[11] Comment c asserts the use of these sources would be limited to when a party can reasonably be charged with knowledge of the particular custom, practice, or usage.[12] Expecting each party to be knowledgeable in its own trade and business, Comment c anticipates that the costs to consider custom, practice, and usage will be low.[13] Thus, Comment c concludes that when custom, practice, and usage can be discerned from public sources and with limited discovery, it is the better approach.[14]

Comment d permits courts applying the plain meaning rule to utilize the sources of plain meaning described in Comment b, as well as custom, practice, and usage sources of Comment c, to determine whether a term is ambiguous.[15] Similarly, Comment e permits the court to determine the term’s purpose based upon its context in the policy, in conjunction with the sources of meaning set forth in Comments b and c, to assist in determining whether a term is ambiguous.[16] Only after a term is determined to be ambiguous may the court consider extrinsic evidence of meaning such as pre-contractual negotiations or course of dealing.[17]

Comment h asserts the plain meaning rule adopted by Section 3 is “broadly consistent with the principle that insurance policy terms are to be interpreted according to the reasonable expectations of the insured, provided that the understanding of what makes an expectation ‘reasonable’ incorporates the concept of plain meaning.”[18] Though Comment h does not detail how it would work, incorporating the plain meaning rule into a contextual analysis echoes the plain meaning presumption abandoned by earlier drafts of the Restatement.

The “plain meaning presumption” was a hybrid approach to policy interpretation that relied upon the plain meaning of the provision unless extrinsic evidence established the policyholder’s interpretation was more reasonable, as follows:

An insurance policy is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning. That different meaning must be more reasonable than the plain meaning in light of the extrinsic evidence, and it must be a meaning to which the language of the term is reasonably susceptible.[19]

The presumption did not give rise to a factual question. Rather, it was the framework for the court’s interpretation of the policy language at issue:

In other words, for the plain meaning to be displaced, the court must conclude that the plain meaning is a less reasonable meaning. If, after considering the extrinsic evidence, the court cannot determine which interpretation is more reasonable in the circumstances, the plain meaning of the term prevails. This presumption in favor of the plain meaning is not a factual presumption, because interpretation of the term is a question of law. The presumption therefore does not refer to a burden of proof, which pertains only to factual issues. Rather, the presumption in favor of the plain meaning is a rule of decision that defines the deference that courts should give the plain meaning of insurance policy terms.[20]

The presumption in favor of plain meaning represented a clear departure from the current state of the law governing policy interpretation. Indeed, an earlier draft of the Restatement acknowledged that the presumption did not follow the plain meaning rule or the contextual approach.[21] Instead, as indicated by Comment h, the presumption reflects an expansion of the “reasonable expectations” doctrine. Under this doctrine, the insured’s expectation as to the scope of coverage is upheld provided that such expectations are objectively reasonable.[22] The analysis of the insured’s expectations, according to both the presumption and Comment h, would incorporate the concept of plain meaning.

How much influence is ultimately exerted by the contextual approach advocated by the Comment to Section 3 will depend in large part upon where it is asserted, and the state of the law governing policy interpretation in that jurisdiction. For instance, a court applying Florida law may reject the application of the contextual approach based upon the Florida Supreme Court’s rejection of the reasonable expectations doctrine in Deni Associates of Florida, Inc. v. State Farm Fire & Cas. Ins. Co.[23]

In Deni, the Court declined to adopt the doctrine, finding “[t]here is no need for it if the policy provisions are ambiguous because in Florida ambiguities are construed against the insurer. To apply the doctrine to an unambiguous provision would be to rewrite the contract and the basis upon which the premiums are charged.”[24] The Court also noted:

The Florida Department of Insurance categorically opposes the adoption of the doctrine of reasonable expectations. According to its answer brief: “Adopting the reasonable expectations doctrine will negate the traditional construction guidelines and create greater uncertainty. This Court should not resort to the reasonable expectations doctrine because it will only spawn more litigation to determine the parties’ expectations.”[25]

Ultimately, the Court rejected the doctrine, concluding that an interpretation of an insurance policy based upon a determination as to whether the insured’s subjective expectations are reasonable, can only lead to uncertainty and unnecessary litigation.[26]

A profile photo of Jason M. SeitzJason M. Seitz

A Partner at Butler Weihmuller Katz Craig LLP, in Tampa, FL. Jason practices in our Construction, Extra-Contractual, First-Party Coverage, and Third-Party Property Coverage departments.

July 24, 2018 PublicationAttorney-Client Privilege and Work Product Protection: Brief Overview

This article was originally published for the National Insurance Law Forum on July 24, 2018. 

Claims investigations involving counsel often include communications relating to his or her understanding of the facts, opinions of relevant law, and recommendations. Oftentimes, claim notes or other claim file materials reference all or portions of such communications. Due to their sensitive nature, it is important to be aware of what materials may ultimately be discoverable. Though the work product protection and the attorney-client privilege are generally understood to limit discovery of certain materials, the devil is in the details.

Read More »
April 30, 2018 PublicationAllocating Responsibility for Defense and Indemnity Costs Among Multiple Insurers

It is not necessary that the policies provide identical coverage in all respects in order for … each insurer [to be] entitled to contribution from the other; as long as the particular risk actually involved in the case is covered by both policies, the coverage is duplicate, and contribution will be allowed.

Read More »
March 20, 2018 PublicationIdentity Restoration Insurance: Why Would I Need That?

When retired nurse Helen Anderson flew to visit her sick daughter, she let her niece, Samantha, housesit. Though she had instructed her niece that no friends were allowed over, Helen found Samantha in the house with her friend, Alice Lipski, when she returned. After asking Alice to leave, Helen didn’t think more about her friend being in her house.

Read More »
February 01, 2018 PublicationA Theoretical Safety on the Trigger of the Duty to Defend

The Eleventh Circuit of the United States Court of Appeals recently decided Selective Insurance Company of the Southeast v. William P. White Racing Stables, Inc., et al., 2017 WL 6368843 (December 13, 2017), a case addressing limits upon what facts and legal theories may give rise to a duty to defend. In an unpublished opinion,[1] the court held the district court erred in finding a duty to defend based upon a theory of liability which was not pled, even though it agreed the facts alleged in the complaint could support a claim apparently within the scope of coverage provided by the liability policy.

Read More »
September 06, 2019 PublicationAs Florida Goes

One of the most challenging topics in first-party property insurance over the last decade has been the increase in assigned claims. They are often called “assignments of benefits” or just AOBs...

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September 04, 2019 PublicationThe Challenges of Adjusting Pipe Breaks and Sewer Back-ups

In January of this year, we published an article entitled "The Challenges of Adjusting Long-Term Water Losses." That article focused on the "constant or repeated leakage or seepage" exclusion that appears in many insurance policies. The article chronicled three court decisions named Hoey, Price, and Hicks and how they affect coverage determinations.

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February 04, 2019 PublicationThe Challenges of Adjusting Long-Term Water Losses

Partner Timothy Engelbrecht, Esq. was featured in the latest edition of the Southern Loss Association newsletter! His article "The Challenges of Adjusting Long-Term Water Losses" discusses important exclusions in residential and commercial property insurance policies.

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August 21, 2018 PublicationJohn Garaffa "Business Interruption and Damage Claims"

Partner John Garaffa wrote a chapter titled "Business Interruption and Damage Claims" for the 5th Edition of The Complete Guide to Economic Damages.

Read More »
July 24, 2018 PublicationAttorney-Client Privilege and Work Product Protection: Brief Overview

This article was originally published for the National Insurance Law Forum on July 24, 2018. 

Claims investigations involving counsel often include communications relating to his or her understanding of the facts, opinions of relevant law, and recommendations. Oftentimes, claim notes or other claim file materials reference all or portions of such communications. Due to their sensitive nature, it is important to be aware of what materials may ultimately be discoverable. Though the work product protection and the attorney-client privilege are generally understood to limit discovery of certain materials, the devil is in the details.

Read More »
June 13, 2018 PublicationGood-Faith Claim Handling in Florida - Part II

This article is a continuation of the "Good-Faith Claim Handling in Florida" article that appeared in the Southern Loss Association Newsletter in February 2018. That article discussed the history and background of Florida Statute § 624.155, which is commonly referred to as Florida's bad-faith statute. The statute provides the exclusive remedy for people who believe they have been damaged by bad-faith claim handling practices in the first-party insurance context in Florida.

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April 30, 2018 PublicationAllocating Responsibility for Defense and Indemnity Costs Among Multiple Insurers

It is not necessary that the policies provide identical coverage in all respects in order for … each insurer [to be] entitled to contribution from the other; as long as the particular risk actually involved in the case is covered by both policies, the coverage is duplicate, and contribution will be allowed.

Read More »
April 30, 2018 PublicationAllocating Responsibility for Defense and Indemnity Costs Among Multiple Insurers

It is not necessary that the policies provide identical coverage in all respects in order for … each insurer [to be] entitled to contribution from the other; as long as the particular risk actually involved in the case is covered by both policies, the coverage is duplicate, and contribution will be allowed.

Read More »
March 20, 2018 PublicationIdentity Restoration Insurance: Why Would I Need That?

When retired nurse Helen Anderson flew to visit her sick daughter, she let her niece, Samantha, housesit. Though she had instructed her niece that no friends were allowed over, Helen found Samantha in the house with her friend, Alice Lipski, when she returned. After asking Alice to leave, Helen didn’t think more about her friend being in her house.

Read More »
March 20, 2018 PublicationIdentity Restoration Insurance: Why Would I Need That?

When retired nurse Helen Anderson flew to visit her sick daughter, she let her niece, Samantha, housesit. Though she had instructed her niece that no friends were allowed over, Helen found Samantha in the house with her friend, Alice Lipski, when she returned. After asking Alice to leave, Helen didn’t think more about her friend being in her house.

Read More »
February 01, 2018 PublicationA Theoretical Safety on the Trigger of the Duty to Defend

The Eleventh Circuit of the United States Court of Appeals recently decided Selective Insurance Company of the Southeast v. William P. White Racing Stables, Inc., et al., 2017 WL 6368843 (December 13, 2017), a case addressing limits upon what facts and legal theories may give rise to a duty to defend. In an unpublished opinion,[1] the court held the district court erred in finding a duty to defend based upon a theory of liability which was not pled, even though it agreed the facts alleged in the complaint could support a claim apparently within the scope of coverage provided by the liability policy.

Read More »
February 01, 2018 PublicationA Theoretical Safety on the Trigger of the Duty to Defend

The Eleventh Circuit of the United States Court of Appeals recently decided Selective Insurance Company of the Southeast v. William P. White Racing Stables, Inc., et al., 2017 WL 6368843 (December 13, 2017), a case addressing limits upon what facts and legal theories may give rise to a duty to defend. In an unpublished opinion,[1] the court held the district court erred in finding a duty to defend based upon a theory of liability which was not pled, even though it agreed the facts alleged in the complaint could support a claim apparently within the scope of coverage provided by the liability policy.

Read More »
January 12, 2018 PublicationCoverage Even When An Insured Does Not Own the Property?

Insurable interest is a legal concept which requires an insured to have

a financial or other interest in the claimed, damaged property before being entitled to coverage. Although this concept is easy to grasp, it can be troublesome in application, such as when an insured does not own the claimed property. Below are two case studies-one from Georgia and one from North Carolina-which show how an insurable interest may arise and how these States treat this concept. Also below are several suggestions a party may utilize when assessing the presence (or absence) of an insurable interest.

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July 14, 2017 PublicationFlorida Water Loss Claims: What's Owed, And When?

Water loss lawsuits have spiked dramatically in Florida during the past few years. Insurers simply cannot resolve the unusually large differences in water damage estimates. Scope of estimated matching work usually explains the disparity. And litigation ensues over this hypothetical question: Can the water-damaged or tear out items be replaced and then matched to undamaged adjoining items; and if not, what is the proper scope of the matching work?
 

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February 06, 2017 PublicationThe Confession-of-Judgment Doctrine: No Good Deed Goes Unpunished

Virtually every jurisdiction in the United States has a statute on the books that provides for prevailing-party attorney fees in favor of insureds when they are successful in coverage suits against insurers.

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November 23, 2016 PublicationAwash in AOBs

Hurricane Matthew lashed Florida’s eastern coast in early October causing significant damage to both residential and commercial property.  While Hurricane Matthew is gone, Florida insurers are now bracing for another type of storm, namely a flood of assigned insurance claims in the wake of Hurricane Matthew’s destruction.  Over the past few years, assigned insurance claims – often referred to assignments of benefits or AOBs – have been particularly challenging for first-party property insurers in Florida.  AOBs raise unique issues, including fraud concerns.

Read More »
October 18, 2016 PublicationFollow Up on Assignment of Benefits Litigation in Florida

In the summer of 2016, SLA published an article titled "Assignment of Benefit Litigation in Florida." The article was an introduction to the topic of assignments of benefits ("AOB") in Florida and how they are being used in insurance claims and litigation. Many readers asked for a follow up article that would provide some additional information and analysis on certain AOB topics. This article will spotlight four of those topics and give the reader some additional information and analysis on each of them.

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June 24, 2016 PublicationAssignment of Benefits Litigation in Florida

Over the past five years, first-party property insurers in Florida have been experiencing a wave of claims and lawsuits by contractors who obtain insurance rights from insureds through document called an assignment of benefits ("AOB"). This article is intended to introduce the reader to this topic and explain some of the challenges facing insurers in dealing with AOBs in Florida. The reader is welcome to contact the author to learn more.

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May 01, 2015 PublicationDefining Structual Damage: The Eleventh Circuit Rules

Section 627.706, Florida Statutes, has not always required "structural damage" as part of a "sinkhole loss." Until 2005, the statute required "actual physical damage to the property." The 2005 amendment to section 627.706 narrowed the damage requirement to "structural damage to the building" but left "structural damage" undefined. In 2011, the legislature codified five criteria that individually define "structural damage." See § 627.706(2)(k), Fla. Stat.

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November 24, 2014 PublicationThe Coverage Action 'Fixed' Bad Faith Damages: Are The Total Damages Binding?

Florida state and federal courts struggle with excess damage verdicts in first-party bad-faith actions arising out of uninsured motorist/underinsured motorist (UM) coverage. Recent case decisions produce mixed results for insurers. But mention UM coverage, bad faith, and total damages, and Florida Statute Section 627.727(10) immediately comes to mind. Comments by two judges framed the Section 10 debate.

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October 27, 2014 PublicationThree Is A Crowd: Revisiting The Third Party Beneficiary Doctrine

This article examines the third party beneficiary doctrine in conjunction with the approaches courts follow with regard to the collection of an excess judgment from a liability insurer.

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June 26, 2014 PublicationUninsured Motorist Bad-Faith Claims: Separate Action, Separate Trial, Separate Damages

First-party bad-faith claims arising from uninsured motorist (UM) coverage are separate and independent actions, too. If the uninsured motorist coverage action is truly separate and distinct from bad faith, one naturally expects a separate trial on bad-faith liability and extracontractual damages. However, there is a unique problem confronting first-party bad-faith claims arising from uninsured motorist coverage under Florida Statute Section 627.727(10). One decision characterizes the problem as a ‘‘conundrum'' created by Florida law.

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June 26, 2014 PublicationUninsured Motorist Bad-Faith Claims: Separate Action, Separate Trial, Separate Damages

First-party bad-faith claims arising from uninsured motorist (UM) coverage are separate and independent actions, too. If the uninsured motorist coverage action is truly separate and distinct from bad faith, one naturally expects a separate trial on bad-faith liability and extracontractual damages. However, there is a unique problem confronting first-party bad-faith claims arising from uninsured motorist coverage under Florida Statute Section 627.727(10). One decision characterizes the problem as a ‘‘conundrum'' created by Florida law.

Read More »