The Latest on ALI’s Liability Insurance Restatement: Same as it Ever Was

scales of justiceWhen last we addressed the American Law Institute’s (ALI) proposed Restatement, Law of Liability Insurance, we reported that the organization decided at its May annual meeting to table final consideration of the document until 2018. One of the proposal’s chief Reporters, Professor Tom Baker, indicated that he and co-Reporter Kyle Logue would embark on a year-long listening tour and consider what they heard when looking anew at the Restatement draft.

It is quite curious then, considering Professor Baker’s statement as well as ALI’s declaration that the draft needed “another year of work,” that on August 4, the institute released Preliminary Draft No. 4—a mere 10 weeks after tabling Draft No. 3 at its meeting.  Even more remarkable are the fundamental similarities between the draft tabled on May 23 and the one released on August 4.

ALI’s haste in issuing another draft, and the Reporters’ obstinate refusal to address valid criticisms of Draft No. 3, are further evidence of an accelerating mission drift that could cause the legal community to lose respect for organization’s work.

ALI Restatements of Law, as should be obvious from their title, are meant to restate the law—to summarize or distill down judge-made, or common-law, rules from scores of court decisions in a specific area, such as torts or contracts. If the organization, or the leaders of its projects, are more interested in law reform than restatement, they can pursue other avenues within ALI to publish their thoughts, such as an aspirational “Principles Project.” In fact, that’s how the Restatement of the Law, Liability Insurance got its start several years ago before ALI decided to re-categorize it.

The conversion to a Restatement did not, however, result in a document that reflects the common law governing liability insurance disputes or accurately relates the “black letter” law. Instead, the Restatement as presented to ALI’s membership last May far more often reflects what the Reporters think the law should be, rather than what it is.

Our May 5 blog post and a May 19 WLF Legal Backgrounder detail some of Draft No. 3’s most blatant departures from long-settled legal principles that affect, among other things, the interpretation of insurance contracts, the duty of insurers to settle, and the payment of legal fees.

These concerns were echoed not only by direct stakeholders in the debate, but also by non-insurance-company general counsel, who expressed dismay over what the revolutionary nature of the Liability Insurance Restatement portended for future ALI scholarship. After the one-year delay was announced, we called on ALI to take into consideration the ethical problems it was courting for the lawyers who might cite to a Restatement out of sync with the majority rules.

The hope that WLF and many others had that our criticisms would be taken seriously, or that the Reporters’ year-long listening tour would be eye-opening, quickly evaporated upon release of Draft No. 4. The draft indicates that the minds of those steering this Restatement project are not interested in any substantive critiques of their work.

Though the comments in some sections in Draft No. 4 are more extensive and offer more nuance, little has changed with regards to what ALI thinks are the “better” rules for liability-insurance disputes. The Reporters’ Memorandum introducing Draft No. 4 in fact states openly that “we have made relatively few changes to the black letter of the draft.”

Two of the most profoundly flawed parts of Draft No. 3 that remain unchanged in Draft No. 4 are Sections 3 and 4, which relate to insurance-contract interpretation. Rather than endorse the long-standing and sensible “plain meaning rule,” the Insurance Liability Restatement reduces plain meaning to a presumption which, even if the contract term at issue is unambiguous, can be rebutted by a plaintiff through extrinsic evidence. One highly regarded attorney with over three decades of insurance-law experience spelled out what could happen if courts embrace these sections as black-letter law:

The ‘reporters’ correctly concede that this approach may increase the cost of coverage litigation. … [Another] likely result also would be an overall premium increase to subsidize the litigation tactics of a small universe of policyholders.

The Liability Insurance Restatement’s authors and their supporters within ALI may believe that even if their black-letter law conclusions don’t comport with the majority common-law approach, they have identified the “better” rules. But for whom are the Restatement’s rules “better”? They are no doubt better for lawyers, who will profit from longer and more complex litigation battles.

They are, however, not better for policyholders, the very stakeholders the Restatement seems geared to help. Increased litigation costs and increased premiums won’t be borne by insurers; they will be passed on to consumers.

The project also begs a larger question: what sort of organization does ALI wish to be? ALI’s rank-and-file, who are proud (as they should be) to tout their ALI membership, must ask themselves “where does this highway go to?” Will ALI henceforth be a more aggressive “law reform organization”—a term it uses in its Restatement Style Manual—advancing its version of “the law”?

That seems contrary to ALI’s historical role of providing expertly researched, unbiased compilations. Indeed, the group’s Style Manual also states that ALI has “limited competence and no special authority to make major innovations in matters of public policy.”

Time remains to scale back the major innovations to liability-insurance law the current Restatement draft recommends. Another draft is expected to be released in November, and then the ALI Council will consider its approval in January 2018 for another final vote at the May 2018 ALI annual meeting.

We encourage Professors Baker and Logue to resume their listening tour. And we expect that those with a stake in liability-insurance disputes, and those with an interest in ALI’s future, will have plenty to say.

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

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