Insurance Liability Project Exemplifies American Law Institute’s Mission Drift

scales of justiceIn an April 28, 2015 post, Will the American Law Institute “Restate” or Try to Rewrite U.S. Copyright Law?, we questioned whether ALI had strayed from its mission of summarizing and clarifying specific areas of common law. Two years later, concerns over ALI’s drift toward lawmaking have grown. Not only has ALI continued to develop a wayward “Restatement of the Law, Copyright,” it is also taking an ambitious, aspirational approach in addressing other critical areas of common law. With its May 22 annual meeting rapidly approaching, now is the time for ALI’s members and the main consumers of its work—judges—to assess how the organization’s recent penchant for rewrites, rather than Restatements, is tainting its brand.

ALI is a private group of academics, lawyers, judges, and other legal professionals that prepares treatises which “clarify, modernize, and otherwise improve the law.” Courts and legislatures look upon ALI’s restatements as authoritative summaries of state common law—i.e. legal principles derived from judicial decisions.

The organization is cognizant of its limited place in lawmaking, acknowledging in its Style Manual, “An unelected body like The American Law Institute has limited competence and no special authority to make major innovations in matters of public policy.” Such self-awareness, however, has not prevented ALI from releasing Restatements reflecting what the law should be, rather than what it is.

For instance, § 51 of the Restatement of the Law (Third) of Torts: Liability for Physical and Emotional Harm suggested, contrary to prevailing common law, that property owners owe a duty of care to everyone that enters their premises, even flagrant trespassers. In response to § 51’s call for judicial expansion of premises liability, 22 states have passed laws rejecting the Restatement and its approach to trespassers.

ALI is on the verge of finalizing another project that appears to be a “Restatement” mostly in name only: the Restatement of the Law, Liability Insurance. The project began in 2011 as a “Principles project,” a type of ALI endeavor in which the Reporters and other participants identify and promote changes that are needed in an area of law. The drafts produced from 2011 to 2014 recommended shifts in insurance liability law that tilted in a decidedly pro-policyholder/pro-plaintiff direction.

In the fall of 2014, ALI converted the Liability Insurance Principles project into a Restatement project—a highly unusual move. Soon after that transformation, in January 2015, ALI amended its Style Manual to give Restatement Reporters the flexibility to “determine the best rule” and “make the law better adapted to the needs of life.” The Liability Insurance Restatement Reporters took this change to heart, releasing a first draft in February 2015 that closely resembled the aspirational, reform-oriented Principles draft.

Though the Reporters made some minor modifications in 2015 and 2016, the three chapters of the Restatement approved by ALI members last year were largely unchanged from the first draft. Parts of chapters 2 and 3, and all of chapter 4, face a membership vote at the May 22 annual meeting.

The Restatement draft changes a host of liability-law principles that govern businesses whose solvency depends on reliable contracts and predictable, clear rules. Notable departures from current common-law norms include:

  • A rule that allows policyholders to introduce extrinsic evidence in insurance contract interpretation disputes, contrary to the traditional “parole evidence” rule.
  • A vague, new “reasonableness” standard for insurers’ duty to settle claims disputes, breaches of which can result in damages paid to policyholders in excess of policy limits (and which can include punitive damages, even in states that ban insurance of such damages).
  • The endorsement of fee-shifting, i.e. the losing party pays the winner’s attorneys’ fees, which conflicts with the “American rule” for fees (each side pays its own fees).

These and other substantial changes to insurance-liability law would undoubtedly tilt the litigation playing field toward some plaintiffs in the short term, but such a shift is not in policyholders’ collective, long-term interest. Yale Law School Professor (and WLF Legal Policy Advisory Board member) George Priest explains in a 2015 article that the proposed ALI Restatement threatens to increase insurance costs, which in turn would reduce the availability of insurance. Fewer policyholders significantly complicate insurers’ ability to predict and reduce risk.

Former New York State Superintendent of Insurance Eric Dinallo has warned that finalizing the draft Restatement would profoundly complicate the work of state insurance regulators, whose responsibilities include not only consumer protection, but also maintaining insurer solvency. The current Restatement draft imperils solvency by “chang[ing] longstanding and fundamental precepts in key areas that form the foundation for policy coverages, rates, reserving, claim handling and reinsurance.”

It is especially troubling, given Mr. Dinallo’s concerns, that ALI has failed to seek the counsel of state insurance regulators in drafting the Restatement. Idaho’s insurance regulator wrote to ALI’s director on April 5 seeking a delay in the final vote so he and his fellow regulators could assess the draft and weigh in.

The draft Restatement has already influenced the outcome of a claim-coverage dispute being litigated in the US District Court for the Northern District of Georgia. The judge cited the draft in concluding that an insurer could not recoup settlement funds. The proposed rule he applied directly conflicted with Restatement (Third) of Restitution and Unjust Enrichment § 35—which actually does restate the prevailing rule on this point of law.

The Liability Insurance Restatement could be a tipping point for ALI. If the membership adopts it in its current form, it’s likely that other pending, equally aspirational Restatements will advance as well. The proposed Restatement of the Law, Consumer Contracts has been sharply criticized by a group of consumer-law practitioners and academics for not “accurately captur[ing] the state of consumer contract law,” as well as by business interests, who wrote that it would “significantly distort prevailing contract law.” Criticism of ALI’s second draft of a Copyright Restatement has been equally pointed. Columbia Law Professor (and ALI Adviser) Jane Ginsburg, for instance, conveyed her concern that the draft “focus[es] on changing the law rather than restating it.”

The late Justice Antonin Scalia expressed that very concern well ahead of the most recent erosion of ALI’s stated mission. He wrote in Kansas v. Nebraska: 

[M]odern Restatements … are of questionable value, and must be used with caution … Over time, the Restatements’ authors have abandoned the mission of describing the law, and have chosen instead to set forth their aspirations for what the law ought to be … And it cannot safely be assumed, without further inquiry, that a Restatement provision describes rather than revises current law.

Last September, during a Senate Judiciary Committee confirmation hearing for five of President Obama’s choices for federal judgeships, the nominees (four of whom had judicial experience) each echoed Justice Scalia’s skepticism about ALI’s Restatements when questioned by Chairman Chuck Grassley.

If ALI continues down its present path of seeking law reform that foments legal disputes and stimulates the litigation industry, instead of fostering clarity in the law, its credibility will soon disappear. Esteemed ALI members who have invested their time with and lent their reputations  to the organization have an opportunity this month to forestall that outcome by voting down ALI’s Restatement of the Law, Liability Insurance in its current form.

Also published by Forbes.com on WLF’s contributor page.

3 thoughts on “Insurance Liability Project Exemplifies American Law Institute’s Mission Drift

  1. Pingback: Heeding Criticism from Many Corners, ALI Pulls Liability Insurance Restatement Before Membership Vote – The WLF Legal Pulse

  2. Pingback: Does the American Law Institute Have an Ethics Problem on Its Hands? – The WLF Legal Pulse

  3. Pingback: The Latest on ALI’s Liability Insurance Restatement: Same as it Ever Was – The WLF Legal Pulse

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