Restatement of the Law of Liability Insurance approved, but controversy remains

On May 22, 2018, the American Law Institute (“ALI”), approved a final draft of the Restatement of the Law of Liability Insurance (“RLLI”), which is the ALI’s first venture into the field of liability insurance. The RLLI covers a broad range of topics: (Chapter 1) basic contract-law relating to insurance interpretation, waiver, estoppel, and misrepresentation; (Chapter 2) duties of insurers and insureds in the management of potentially insured liability actions, including defense, settlement, and cooperation; (Chapter 3) general principles relating to the risks insured that are common to most forms of liability insurance, including coverage provisions, conditions, and the application of limits, retentions, and deductibles; and (Chapter 4) enforceability and remedies. The approval comes after eight years of controversy among advocates for insurers and policyholders, and twenty-nine drafts.

ALI’s Restatements of the Law, in general, have factored in state and federal court decisions around the country, having been cited in over 200,000 published cases. However, some jurists, particularly Justice Antonin Scalia, have called into question their value, noting that the authors’ mission in drafting Restatements has changed from “presenting an orderly statement of the general common law” to now “set[ting] forth their aspirations for what the law ought to be.” See Kansas v. Nebraska, 135 S. Ct. 1042, 1064 (2015) (Scalia, J. concurring in part, dissenting in part). That said, it appears that the RLLI has already gained some traction with the courts. No fewer than eight courts around the country have cited to drafts of the RLLI before its approval this week.

It is also significant that this latest compilation by the ALI began its journey in 2010 and was intended to be a “Principles of the Law of Liability Insurance.” According to the ALI, “Principles” are “primarily addressed to legislatures, administrative agencies, or private actors;” i.e., aspirational statements detailing what the ALI believes the law should be in a given area. Restatements, in comparison, are designed to contain clear formulations of common law and reflect the law as it currently stands or might appropriately be stated by a court. For over four years, multiple drafts of the RLLI were approved under the ALI’s Principles of the Law standards.  Then, in late 2014, the ALI took the controversial and unprecedented step of transforming the project into a Restatement and, in doing so, essentially adopted the Principles as if they were the majority law rather than merely aspirational points from the perspective of the ALI.

A final vote on the draft RLLI was initially scheduled for May 2017. In advance of that vote, insurers, attorneys, regulators and lawmakers voiced concerns about numerous sections of the document, arguing that they go beyond summarizing current legal thinking and adopt minority opinions on certain issues. In an apparent response, the ALI indicated that it would take another year to continue working on the draft.

Also in the spring of 2017, and in response to mounting criticism, the Reporter and Associate Reporter of the Restatement, who are regarded as policyholder advocates, authored a paper entitled “In Defense of the Restatement of Liability Insurance Law.” The paper challenged the insurance industry to “provide disinterested empirical legal studies researchers with access to the data needed to test [the] belief” that the RLLI could have a negative impact on the insurance market. The paper concluded with the proposition that policyholder-friendly rules are needed to protect insured and could, in some cases, benefit the insurance industry. While the paper discusses the obvious contrary position – that a pro-policyholder slant of the RLLI could serve as a disruption to the insurance market – its authors gave the insurer criticism little credence.

With this background, we turn to highlight RLLI provisions that are of particular impact for the insurance industry.

First, the RLLI proposes a departure from the “plain meaning rule” of policy interpretation, to allow consideration of extrinsic evidence in the absence of any ambiguity to reconcile the insured’s expectations of coverage.  In a similar vein, the RLLI seeks to broaden an insurer’s duty to defend in that it provides that “[f]or the purpose of determining whether an insurer must defend, [the insurer must consider] [a]ny information not alleged in the complaint … that a reasonable insurer would regard as a basis for adding an allegation to the action.” In essence, an insurer is called upon to hypothesize what may be added to the complaint in the future, rather than focus on what is actually pled, in determining whether there is a duty to defend.

Next, the new RLLI calls for an insurer to be held liable for negligent selection and supervision of the defense counsel it hires to represent an insured. Under RLLI’s formulation, an insurer may be liable for any claimed harm caused to its insured by a defense attorney’s negligence if the insurer took steps to “override” the lawyer’s “independent professional judgment.”

Finally, the RLLI seeks to depart from the traditional “American Rule” that each party is responsible for its own attorney’s fees and includes an endorsement of one-way fee shifting: “[w]hen the insured substantially prevails in a declaratory judgment action … an award of a sum of money to the insured for the reasonable attorneys’ fees and other costs incurred in that action” shall be provided. While some states presently allow an insured to recover the costs of defense when it is determined that coverage was improperly denied, the new RLLI proposes to shift fees whenever a declaratory judgment action establishes a duty to defend. 

In sum, the RLLI is an expression of viewpoints, considered biased by many, rather than an accurate reflection of the law in the realm of liability insurance. Even with the approval of the final draft of the RLLI, it will be essential to continue to advocate for the resolution of coverage disputes based upon policy language and applicable state law.