19/10/2018
In May of 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 approval of the RLLI came after eight years of controversy among advocates for insurers and policyholders, and twenty-nine drafts.
The ALI is an independent organization in the United States, producing scholarly work to, in the words of its mission statement, “clarify, modernize, and improve the law.” ALI drafts and publishes Restatements of the Law, Model Codes, and Principles of Law that are often looked to by courts and legislators. ALI’s Restatements of the Law have been cited in over 200,000 published state and federal cases.
The RLLI began its journey in 2010 as 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 of what the ALI believes the law should be. Restatements, in comparison, are designed to contain clear formulations of the law as it currently stands. Multiple drafts of the RLLI were approved under the Principles standards. Then, in 2014, the ALI took the controversial 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 ALI’s aspirational statements.
A final vote on the draft RLLI was initially scheduled for May 2017, a year before it actually took place. 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. In an apparent response, the ALI indicated that it would take another year to work on the draft. The final draft, however, did not significantly depart from the preceding versions with respect to several provisions that impact the insurance industry.
As an example, the RLLI departs from the “plain meaning rule” of policy interpretation to allow consideration of extrinsic evidence in the absence of ambiguity to reconcile the insured’s expectations of coverage. Similarly, the RLLI seeks to broaden an insurer’s duty to defend by providing 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 asked to hypothesize what may be added to the complaint, rather than to focus on what is actually pled, in determining whether there is a duty to defend.
Next, the RLLI calls for an insurer to be held liable for the negligent selection and supervision of the defense counsel that 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” in which each party is responsible for its own attorney’s fees and includes an endorsement of one-way fee shifting. Specifically, RLLI states that “[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 allow an insured to recover the costs of defense when it is determined that coverage was improperly denied, the RLLI proposes to shift fees whenever a declaratory judgment action establishes a duty to defend.
In light of the concerns that the RLLI does not accurately portray the current state of liability insurance law in the United States, there has been swift action on the legislative and judicial fronts to dissuade any potential reliance on the RLLI.
As a pre-emptive measure, in March of 2018, Kentucky’s House of Representatives passed a resolution, by a vote of 90-0, to “[u]rge the [ALI] to materially change the proposed [RLLI], and if meaningful change is not made prior to the final approval of the Restatement, that the Restatement not be afforded recognition by courts as authoritative reference.” That same month, and in response to the RLLI, Tennessee passed House Bill No. 1977 which legislatively limits an insurers’ duty to defend to the allegations included in a complaint.
More recently, the Ohio legislature passed an amendment to the Ohio Revised Code of Insurance, R.C. 3901.82, reading: “The [RLLI] that was approved at the 2018 annual meeting of the American Law Institute does not constitute the public policy of this state and is not an appropriate subject of notice.” By passing this amendment, Ohio became the first state to reject the RLLI in its entirety.
The newly-approved RLLI also received a lukewarm response from the judiciary. Delaware’s Superior Court held, in reference to the RLLI, that “the restatements are mere persuasive authority until adopted by a court; they never, by mere issuance, override controlling case law.” Catlin Specialty Ins. Co. v. CBL & Assocs. Props., 2018 Del. Super. LEXIS 342, at *8 (Super. Ct. Aug. 9, 2018). Historically, some jurists, particularly the United States Supreme Court Justice Antonin Scalia, have called into question the value of Restatements generally, 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.” Kansas v. Nebraska, 135 S. Ct. 1042, 1064 (2015).
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.
This article was first published by Insurance Day on 15 October 2018
