Restate or Rewrite?: Stark Choice Faces ALI Leaders on Liability Insurance Law Project

rockThe debate over the American Law Institute’s (ALI) still ongoing Restatement of the Law: Liability Insurance (RLLI) project the mythical struggles of Sisyphus. Since 2015, when ALI—in unprecedented fashion—shifted the venture from an aspirational “Principles Project” to a Restatement, stakeholders and a growing number of third parties concerned with the project’s direction have been pushing the proverbial rock up the hill.

Throughout the drafting process, concerns have been consistently raised that multiple RLLI sections either depart from settled insurance-liability principles or establish entirely new rules. Each time, the RLLI’s Reporters issued a new draft that was nearly identical to the last.

With the release of Council Draft No. 4 for discussion at a January 18, 2018 conclave of the ALI Council—a final step in the approval process before the group’s May annual meeting—the uphill resistance has resumed and intensified. What transpires over the next week could have a profound impact not only on the insurance liability system and its stakeholders, but on ALI itself.

As we’ve written previously, ALI tabled the RLLI at its May 23, 2017 meeting and the Reporters pledged to actively consider dissenting voices as they reassessed the draft. For concerned stakeholders, the top of the hill seemed to be in sight. But that rock came rolling back down again just 10 weeks later in the form of a new, barely revised Preliminary Draft No. 4. The Reporters next released Council Draft No. 4, again with very few changes, on December 8, 2017.

Respected stakeholders, ALI members, and third parties—including several who had previously communicated their concerns—have written to ALI’s president and the Council over the last month urging their intervention.

A letter from 27 general counsel expressed great concern over RLLI draft § 3, which advocates a change in how 40 states’ courts interpret insurance-contract terms. The letter also criticized the sections that would require insurers who lose coverage disputes to pay the insured’s attorneys’ fees. The general counsel did so even though “some of the undersigned … might benefit from such a provision in the capacity of a corporate policyholder.”

23 ALI members signed a January 4 letter to the Council analyzing RLLI § 3’s alteration of contract interpretation and proposing an entirely new section that preserves the traditional “plain meaning” rule.

Malcolm Wheeler, an ALI member who participated intensively in several past Restatement projects, wrote the Reporters about an RLLI section that undercuts insurance policies’ requirement that policyholders obtain their insurer’s consent before settling a dispute. Prior to the May 2017 meeting, Wheeler impressed upon the RLLI Reporters to eliminate that section. He argued that it essentially asked courts to rewrite insurance contracts in a manner that would inspire collusion and inflated settlements. Council Draft No. 4 deleted that section (§ 35), but then included the language on consent for settlement in another, related section (§ 27).

On January 8, a group of state legislators serving on legislative committees with insurance oversight forcefully voiced their frustration with the RLLI project. The executive committee of the National Council of Insurance Legislators (NCOIL) unanimously approved a resolution encouraging ALI to materially change the proposed Restatement.

NCOIL had initially voted on the resolution last November, but held off on finalizing its approval so the Reporters and ALI leadership could assess the group’s concerns and make changes to the RLLI draft. In announcing the resolution, NCOIL’s president remarked, “It is disappointing that, despite our repeated efforts, there continues to be little movement to make this a true ‘Restatement’ of existing majority law.”

If adopted in its current form, the RLLI will not achieve ALI’s express goal for Restatements: to “clarify, modernize, and otherwise improve the law.” Many key sections in the current draft will undermine the legal consistency and predictability that insurers and insureds rely upon to conduct their affairs while provoking satellite litigation—all of which increases risk as well as insurance premiums.

The RLLI’s adoption could also come at a high price for its patrons at ALI. The general counsel’s letter warned that RLLI passage “risk[s] causing irreparable harm to the ALI’s reputation in the legal community due to [its] lack of adherence to the ALI’s own principles.” Restatements certainly don’t carry the force of law, but parties to disputes, and the judges that resolve those disputes, frequently cite Restatements’ provisions because they arose from a rigorous, impartial, and academic process.

Judges will hear, time and time again, from insurance defendants that the RLLI doesn’t reflect the “black letter law.” In its resolution, NCOIL declared that it would communicate to state supreme courts that the RLLI “should not be afforded recognition as an authoritative reference.” If it becomes apparent to judges that ALI’s impartial approach has gone awry with the RLLI, they could very well begin questioning the value of other Restatements as well.

The ALI Council should also pay heed to another statement in NCOIL’s resolution: that the group would communicate with state legislators about the RLLI’s departure from settled common law. State legislatures may have no choice but to engage in their own restatement projects, passing statutes that clarify how judges should interpret insurance policies or should consider policyholders’ requests for attorneys’ fees. Council members may recall that in response to a provision in a torts Restatement that expanded premises liability, 22 states passed laws rejecting that provision’s approach to trespassers.

At the January 18 meeting, the jurists, academics, and practitioners who sit on ALI’s esteemed Council will not only pass judgment on RLLI Council Draft No. 4, they could also be determining the American Law Institute’s future direction. Will the organization continue its mission drift, or will its leadership initiate the beginning of a course correction?

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

One thought on “Restate or Rewrite?: Stark Choice Faces ALI Leaders on Liability Insurance Law Project

  1. Pingback: Law of Copyright Reinterpretation Project Steers ALI Further Off Course – The WLF Legal Pulse

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