The American Law Institute (ALI) publishes “Restatements of Law” to provide a reference on existing case law and common law principles. Their recent Restatement of the Law – Liability Insurance has been getting panned by lawyers, governors, regulators and scholars for not accurately restating liability insurance law and in many cases inappropriately suggesting what they think the law should say.
Examples of particularly egregious provisions within the Restatement include the creation of a new tort for negligent selection of defense counsel, the creation of a “substantiality” test on a carriers ability to rescind a policy for material misrepresentation, and the suggestion that carriers should pay for punitive damages assessed against an insured (in certain circumstances) despite established public policy to the contrary.
The threat of the Restatement should not be discarded as a benign specter as it has already been cited in several cases across the country. This includes a Nevada Supreme Court decision dealing with an insurers liability for damages in excess of the policy limits when bad faith was not proven.
So what is to be done?
A handful of states have already addressed the young issue by passing laws that generally say the ALI Restatement of Liability Insurance Law should not be used as an authoritative reference by courts. Here are some examples:
- Ohio – 3901.82 Restatement of the Law, Liability Insurance:
The “Restatement of the Law, Liability Insurance” that was approved at the 2018 annual meeting of the American law institute does not constitute the public policy of this state and is not an appropriate subject of notice.
- North Dakota – 26.1-02-34. Rules of interpretation:
In addition to the rules of interpretation under chapters 1-01 and 1-02, in interpreting this title, a person, including the courts of this state, shall apply the Constitution of the United States of America and the Constitution of North Dakota, this code, and the common law of this state. A person may not apply, give weight to, or afford recognition to, the American Law Institute’s “Restatement of the Law, Liability Insurance” as an authoritative reference regarding interpretation of North Dakota laws, rules, and principles of insurance law.
- Michigan – 500.3032.added Court action; application of “Restatement of the Law, Liability Insurance” prohibited:
In an action brought in a court in this state, the court shall not apply a principle from the American Law Institute’s “Restatement of the Law, Liability Insurance” in ruling on an issue in the case unless the principle is clearly expressed in a statute of this state, the common law, or case law precedent of this state.
- Texas – Sec. 5.001. RULE OF DECISION:
(a) The rule of decision in this state consists of those portions of the common law of England that are not inconsistent with the constitution or the laws of this state, the constitution of this state, and the laws of this state.
(b) 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.
- Arkansas (NEEDS TO BE SIGNED BY GOVERNOR) – 23-60-112. American Law Institute – — Restatement not public policy.
A statement of the law in the American Law Institute’s Restatement of the Law, Liability Insurance does not constitute the public policy of this state if the statement of the law is inconsistent or in conflict with, or otherwise not addressed by:
(1) A statute of the State of Arkansas;
(2) The common law and statute law of England as adopted in Arkansas under § 1-2-119; or
(3) Arkansas case law precedent.
- Tennessee – 56-7-102. Policies to contain entire contract — Exceptions — Construed as Tennessee contracts — Rules of construction — Duty to defend — Determination of obligations:
(a) Every policy of insurance, issued to or for the benefit of any citizen or resident of this state on or after July 1, 1907, by any insurance company or association doing business in this state, except fraternal beneficiary associations and mutual insurance companies or associations operating on the assessment plan, or policies of industrial insurance, shall contain the entire contract of insurance between the parties to the contract, and every contract so issued shall be held as made in this state and construed solely according to the laws of this state.
(b) A policy of insurance is a contract and the rules of construction used to interpret a policy of insurance are the same as any other contract.
(c) A policy of insurance must be interpreted fairly and reasonably, giving the language of the policy of insurance its ordinary meaning.
(d) A policy of insurance must be construed reasonably and logically as a whole.
(e) An insurance company’s duty to defend depends solely on the allegations contained in the underlying complaint describing acts or events covered by the policy of insurance. This subsection (e) does not impose a duty to defend on an insurance company that has no duty to defend pursuant to this title or that has an express exclusion of the duty to defend in the policy of insurance.
(f) An insurance company may determine its obligations under a policy of insurance as to any and all parties or claimants through a declaratory judgment action, an interpleader claim or action, or both. The filing of such action or claim creates a rebuttable presumption the insurance company is acting in good faith when making a determination of its obligations under a policy of insurance.
The Florida legislature has not yet addressed the issue, but considering the state already ranks 5th worst within the Institute for Legal Reform’s ranking of state legal climates, policymakers should consider addressing the Restatement before it adds fuel to the fire.
For more information on the ALI Restatement of Law – Liability Insurance or to discuss solutions to the issue in Florida, please contact our partner George Feijoo.
Topics within the ALI Restatement of the Law – Liability Insurance
CHAPTER 1 -BASIC LIABILITY INSURANCE CONTRACT RULES
- § 1. Definitions
TOPIC 1 – INTERPRETATION
- § 2. Insurance Policy Interpretation
- § 3. The Plain-Meaning Rule
- § 4. Ambiguous Terms
TOPIC 2 – WAIVER AND ESTOPPEL
- § 5. Waiver
- § 6. Estoppel
TOPIC 3 – MISREPRESENTATION
- § 7. Misrepresentation
- § 8. Materiality Requirement
- § 9. Reasonable-Reliance Requirement
CHAPTER 2 – Management of Potentially Insured
TOPIC 1 – DEFENSE
- § 10. Scope of the Right to Defend
- § 11. Confidentiality
- § 12. Liability of Insurer for Conduct of Defense
- § 13. Conditions Under Which the Insurer Must Defend
- § 14. Duty to Defend: Basic Obligations
- § 15. Reserving the Right to Contest Coverage
- § 16. The Obligation to Provide an Independent Defense
- § 17. The Conduct of an Independent Defense
- § 18. Terminating the Duty to Defend a Legal Action
- § 19. Consequences of Breach of the Duty to Defend
- § 20. When Multiple Insurers Have a Duty to Defend
- § 21. Insurer Recoupment of the Costs of Defense
- § 22. Defense-Cost-Indemnification Policies
- § 23. The Right to Associate in the Defense
TOPIC 2 – SETTLEMENT
- § 24. The Insurer’s Duty to Make Reasonable Settlement Decisions
- § 25. The Effect of a Reservation of Rights on Settlement Rights and Duties
- § 26. The Effect of Multiple Claimants on the Duty to Make Reasonable Settlement Decisions
- § 27. Remedies for Breach of the Duty to Make Reasonable Settlement Decisions
- § 28. Excess Insurer’s Right of Subrogation
TOPIC 3 – COOPERATION
- § 29. The Insured’s Duty to Cooperate
- § 30. Consequences of the Breach of the Duty to Cooperate
CHAPTER 3 – General Principles Regarding the Risks Insured
TOPIC 1 – COVERAGE
- § 31. Insuring Clauses
- § 32. Exclusions
- § 33. Timing of Events That Trigger Coverage
TOPIC 2 – CONDITIONS
- § 34. Conditions in Liability Insurance Policies
- § 35. Notice and Reporting Conditions
- § 36. Assignment of Rights Under a Liability Insurance Policy
TOPIC 3 – APPLICATION OF LIMITS, RETENTIONS, AND DEDUCTIBLES
- § 37. Policy Limits
- § 38. Number of Accidents or Occurrences
- § 39. Excess Insurance: Exhaustion and Drop Down
- § 40. Indemnification from Multiple Policies: The General Rule
- § 41. Allocation in Long-Tail Harm Claims Covered by Occurrence-Based Policies
- § 42. Contribution
- § 43. The Effect of Partial Settlements on Amounts Owed by Non-Settling Insurers
CHAPTER 4 – Enforceability and Remedies
TOPIC 1 – ENFORCEABILITY
- § 44. Implied-in-Law Terms and Restrictions
- § 45. Insurance of Liabilities Involving Aggravated Fault
- § 46. Insurance of Known Liabilities
TOPIC 2 – REMEDIES
- § 47. Remedies Potentially Available
- § 48. Damages for Breach of a Liability Insurance Policy
- § 49. Liability for Insurance Bad Faith
- § 50. Remedies for Liability Insurance Bad Faith