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Will The American Law Institute’s Forthcoming “Restatement of the Law of Liability Insurance” Codify U.S. Insurance Law?

The American Law Institute ("ALI") is a leading independent organization in the United States "producing scholarly work to clarify, modernize and otherwise improve the law." See "About the American Law Institute," which can be found on the ALI website at: The ALI has an elected membership of judges, lawyers, and law professors. Its first project was to develop a restatement of basic legal subjects that "would tell judges and lawyers what the law was." Id. The initial ALI Restatement projects included Restatements of the Law of Agency, Conflict of Laws, Contracts, Judgments, Property, Restitution, Security, Torts, and Trusts. Id. The ALI's Restatements are heavily cited in the courts, including, for instance, tens of times by the Supreme Court of the United States in a single Supreme Court term.

In 2010, the ALI launched a project in the area of insurance law and appointed as drafters of the project law school professors Tom Baker of the University of Pennsylvania as Reporter and Kyle Logue of the University of Michigan as Associate Reporter. Professors Baker and Logue have indicated that the insurance law Restatement project will have four chapters, covering (1) Basic Liability Insurance Contract Rules; (2) Management of Potentially Insured Liability Claims; (3) General Principles Regarding the Risks Insured; and (4) Advanced Contract Principles –Remedies. Drafts of Chapters 1, 2 and 3 of the project have been prepared by the Reporters. A draft of Chapter 4 is anticipated in the Fall of 2016, and a final date for completion of the project has been set for May 2017.

The ALI's analysis – and recommendations for changes in insurance law – in Chapters 1, 2 and 3 of the Restatement have been met with deep concern by insurers, who view the early proposed drafts as unnecessarily prejudicial to insurers and in tension with a number of established common law insurance rules. Although there has been some movement toward a more balanced presentation of the law as the project has advanced, further corrections are needed to bring the project in line with black letter law formulations. Rather than codifying existing insurance law, important Sections of the drafts advocate for what the Reporters believe constitutes a "better" approach to the law of liability insurance. Typically, the positions advocated have been pro-consumer and pro-policyholder rules, often to the detriment of the insurance system and insurers.

For instance, the Restatement draft allows the plain meaning of a term in an insurance contract to be overridden by extrinsic evidence. The Restatement states that an "insurance policy term is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder's position would give the term a different meaning." Id. In contrast, the majority of U.S. jurisdictions explicitly bar the use of extrinsic evidence if the plain meaning of an insurance contract is unambiguous. Yet the Restatement makes no mention of ambiguity, and instead creates its own rule that allows consideration of extrinsic evidence without this widely-accepted limitation.

Another controversial position is taken in Section 19: Consequences of Insurer Breach of the Duty to Defend. Here, the draft Restatement again diverges from settled contract law, and the majority common law approach governing insurance agreements. In that Section, the draft provides that, if an insurer that breaches the duty to defend without a reasonable basis for its conduct, the insurer must provide coverage for the legal action for which the defense was sought. In doing so, the draft rejects the general analysis of the types of damages available for a contractual breach, as set forth in the Restatement of the Law of Contracts, and imposes an automatic and disproportionate penalty– the forfeiture of indemnity coverage defenses. This would alter some of the most fundamental principles of insurance law such as the fact that an insurance agreement is a contract, and its breach is subject to contract damages. The damages for breach of the duty to defend should not be to award a windfall of indemnity coverage for what may be uncovered claims, but to fully recompense the non-breaching party for its losses sustained because of the breach.

The rule that the Restatement draft adopts with respect to insurer recoupment of defense and indemnity costs is also unnecessarily prejudicial to insurers and in tension with a number of established common law insurance rules. It is at odds with both the approach followed by the majority of U.S. courts and with another ALI Restatement, The Restatement Third, Restitution and Unjust Enrichment (R3RUE). Section 21: Insurer Recoupment of the Costs of Defense provides: "Unless otherwise stated in the insurance policy or otherwise agreed to by the insured, an insurer may not seek recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs." Most courts permit insurers to seek reimbursement of expenses incurred in the defense of uncovered claim. Yet the Restatement draft rejects the majority rule, and overlooks policy considerations which strongly support the existing majority pro-recoupment approach. If insurers cannot obtain recoupment under any circumstances, then insurers may become less likely to accept the defense of their insureds in situations where a coverage issue is present. In addition, courts have recognized that a per se rule banning recoupment would raise prices on all policyholders because any defense provided to an insured for which it paid no premium is not "free," and it is not borne in the end by insurers, but rather it is passed on to other policyholders in the form of higher premiums.

As these examples demonstrate, in many respects these draft Chapters of the Restatement take positions about what liability insurance law should be, rather than describe the actual state of the law as it currently stands. As the project has evolved, there has been some movement away from positions most clearly tilted against insurers, and the ALI Restatement of the Law of Liability Insurance project is still underway. Current drafts of Chapters 1, 2 and 3 may be subject to further revision,2 and a draft of Chapter 4 has not yet been released. Therefore, the project may become more aligned with the goal of codifying existing insurance law by the time it is completed.

However, the ALI recently has approved policy changes for Restatement projects that give Reporters more latitude to "determine the best rule" and "make the law better adapted to the needs of life." ALI Style Manual – A Handbook for ALI Reporters and Those Who Review Their Work (2015). This raises great concern. Restatements for the most part historically have reflected a consensus statement of established law. However, under the new ALI standards, modern Restatements may be different. While they "aim at clear formulations of common law . . .and reflect the law as it presently stands or might appropriately be stated by a court," modern Restatements are not compelled to follow precedent, but may "propose the better rule and provide the rationale for choosing it . . . " ALI Style Manual, January 2015.

Some modern Restatements have been sharply criticized for foregoing their well-respected roles as summaries of the black-letter law in favor of assuming roles as self-appointed advocates for approaches deemed to be "better." This "reform-oriented" approach prompted a strong rebuke from United States Justice Antonin Scalia, who wrote that:

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. . . . Restatement sections such as that should be given no weight whatever as to the current state of the law, and no more weight regarding what the law ought to be than the recommendations of any respected lawyer or scholar. And it cannot safely be assumed, without further inquiry, that a Restatement provision describes rather than revises current law.

Kansas v. Nebraska, 135 S.Ct. 1042, 1064 (U.S. 2015) (Scalia, J., concurring and dissenting).

As the ALI Restatement of the Law of Liability Insurance project enters its final year, there is reason to ask whether it will codify existing common law and remove uncertainty in the field, or will follow a "reform-oriented" approach that reflects not a legal consensus but the aspirational recommendations of its drafters. How the final project takes shape will determine whether or not it should be influential in the courts in articulating and determining the law of liability insurance.

  1. Laura Foggan is an insurer advocate who leads the Insurance Appellate Group at Wiley Rein LLP in Washington, DC. She currently is serving as a Liaison to the American Law Institute's Restatement of the Law of Liability Insurance Project.
  2. On the other hand, with minor exceptions, the American Law Institute membership approved Chapters 1, 2 and 3 of the draft Restatement project on May 16, 2016, making the drafts available to the public and subject to citation in opinions or briefs as the most current statement of the Institute's position.