Update: The ALI Restatement of Liability Insurance at 1 year

In May 2018, the American Law Institute (ALI) voted to approve the Restatement of the Law of Liability Insurance after nearly eight controversial years of drafting. Despite celebrating its one-year anniversary, the Restatement continues to prove controversial in the insurance industry, and insurers will need to stay up to date on court interpretations and various states’ legislation to address these controversies.

What is the Restatement?

ALI is an independent legal organization producing “scholarly work to clarify, modernize and otherwise improve the law.” The ALI is best known for its restatements, which attempt to state the consensus law for a particular subject, and attorneys and judges often look to the ALI’s restatements as a guide for the law.

ALI began preparing the Restatement in 2010 with the goal of providing “clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might appropriately be stated by a court.”

The Restatement is divided into four chapters: Chapter 1 addresses basic contract law doctrines within the context of insurance, such as interpretation, waiver, estoppel and misrepresentation. Chapter 2 addresses duties of insurers and insureds with respect to the provision of a defense, settlement and cooperation. Chapter 3 addresses 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 and deductibles. Chapter 4 addresses enforceability, remedies, bad faith and insurance broker liability.

ALI Restatement controversies

Throughout the drafting process, the insurance industry and other stakeholders voiced concerns that the Restatement doesn’t reflect existing insurance law and should not be afforded recognition by courts as an authoritative reference regarding majority rules and principles of insurance law. Insurers view many of the provisions of the Restatement as prejudicial to insurers and inconsistent with established case law.

One of the most controversial sections of the Restatement, Section 3, addresses basic principles of insurance policy interpretation. Although Section 3 identifies the “plain meaning rule” as the black letter law, the Comments and Reporters’ Note propose a departure from the “plain meaning rule,” in favor of the “contextual approach,” which is not the majority rule. Many believe the proposed contextual approach will open the door to extrinsic evidence to argue the meaning of the terms of insurance policies. Such interpretation battles would increase the costs and duration of insurance coverage litigation.

Another controversial provision is Section 12, which addresses an insurer’s liability for the acts of retained defense counsel. Section 12 calls for an insurer to be held liable for negligent selection and supervision of defense counsel it hires to represent an insured. However, majority case law does not support the view articulated by the Restatement.

Courts and state legislatures respond

Since the Restatement was approved, courts are considering arguments citing its provisions. Contemporaneously, several state legislatures and insurance commissions have passed resolutions, legislation and regulations in response to the Restatement.

In December 2018, the Supreme Court of Nevada issued a decision in Century Surety Co. v. Andrew ex rel. Pretner citing the Restatement. Some observers note this is the most significant Restatement case to date. In this case, the court addressed a certified question submitted by the U.S. District Court for the District of Nevada asking whether the liability of an insurer that breached its duty to defend, but did not act in bad faith, is capped at the policy limit plus any defense costs incurred by the insured, or whether the insurer is liable for all losses resulting from the breach.

The court adopted the minority view on this issue holding that an insurer’s liability is not capped at the policy limits plus the insured’s defense costs, but it may also be liable for consequential damages, such as an excess judgment. The court further concluded that an insured’s right to recover consequential damages does not require proof the insurer acted in bad faith in committing the breach.

In reaching these conclusions, the court looked to the Restatement for support. Specifically, the court cited Section 48 for the proposition that allowing the insured to recover consequential damages from the insurer is consistent with general contract law. Section 48 addresses damages for breach of a liability insurance policy and provides an insured may recover damages for consequential loss caused by the insurer’s breach of the policy. The Supreme Court of Nevada concluded its opinion holding, “The right to recover consequential damages sustained as a result of an insurer’s breach of the duty to defend does not require proof of bad faith.” However, the court also noted the insurer’s excess liability is not automatic: “[T]he insured is tasked with showing that the breach caused the excess judgment and is obligated to take all reasonable means to protect himself and mitigate his damages.”

Andrew demonstrates how minority views adopted in the Restatement can be used by litigants and the courts to address areas of insurance law where case law is not abundant and serves as a reminder of the Restatement’s influence.

Meanwhile, Arkansas, Michigan, North Dakota, Ohio, Tennessee and Texas passed legislation seeking to curtail or condemn the use of the Restatement under their respective insurance laws. For example, Texas HB 2757 amended Civil Practice and Remedies Code § 5.001 to add the following provision, “In any action governed by the laws of this state concerning rights and obligations under the law, the American Law Institute’s Restatements of the Law are not controlling.”

The Kentucky and Indiana legislatures also passed resolutions stating their opposition to the Restatement. The state insurance commissioners in several states wrote to ALI to express concerns that the Restatement goes beyond “restating” the law and could adversely impact the insurance systems they oversee.

The past year included dueling campaigns to support and undermine the Restatement. Advocates of the Restatement made efforts to promote the credibility of the Restatement as a respected authority in the area of insurance law. For example, ALI held several events to discuss the Restatement. Critics of the Restatement devoted substantial efforts to raise awareness of their concerns regarding what they see as unsupported, anti-insurer positions adopted in the Restatement and downplay the value of the Restatement as persuasive authority in courts.

The Restatement will continue to be newsworthy in the final half of 2019 and into 2020. The Restatement is now in circulation and will be cited by litigants to pursue their interests leaving the courts with the responsibility of deciding the Restatement’s legitimacy. It remains to be seen how much influence the Restatement will have on insurance law.

Lane Finch is a partner in Swift Currie’s Birmingham office advising insurers on first- and third-party claims in Alabama related to construction, personal injury, products and professional liability, property and casualty claims, catastrophic injury, death, bad faith and extra-contractual disputes. Contact Finch at lane.finch@swiftcurrie.com

Brandon Clapp is an attorney in Swift Currie’s Birmingham office practicing in the areas of insurance and commercial litigation where he represents clients in matters related to insurance coverage, professional liability and commercial disputes. Contact Clapp at brandon.clapp@swiftcurrie.com.

Related: Proposed restatement of liability insurance law may be ‘misstatement’