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Vol. 3, Iss. 15
November 5, 2014

New A.L.Idea:
“Principles of the Law of Liability Insurance” To Now Be A “Restatement”

I have been studying, as well as writing and speaking on, the American Law Institute’s “Principles of the Law of Liability Insurance” for a while now. The ALI is best known for publishing “Restatements” on various aspects of the law. For that reason, when I’ve addressed the subject, I’ve sometimes had to answer, at the get-go, the obvious question -- How are ALI “Principles” different from a “Restatement?” The ALI has now saved me from this chore. Just days ago the ALI announced that the “Principles of the Law of Liability Insurance” will now be called “Restatement of the Law of Liability Insurance.” This news came by way of e-mail from the ALI Director to the involved parties. But its impact will be akin to one that was delivered via stone tablets.

While the new name sounds similar, the change is far from cosmetic. In doctrinal terms, as a Principles project, its objective was to set forth what the law on liability insurance should be, i.e., it was aspirational. The objective of a Restatement, however, is much different. It is to lay out rules describing what the law is. In practical terms, the change from a Principles project to a Restatement means that it will carry more weight with courts. Many courts are quite comfortable citing to the ALI’s various Restatements when it comes to deciding cases. There is surely no reason why this won’t be the case with the Restatement of the Law of Liability Insurance. Not to say that the Principles did not have the ability to influence judicial decisions, but that possibility is now magnified by this left turn.

This difference in purpose – from describing what the law “should be” to what it “is” – naturally means that there needs to be a different analysis undertaken when drafting the Restatement provisions. To the extent that Principles provisions have already been drafted (some approved by the ALI membership and some in earlier stages), the ALI has taken care of this. In announcing the change, the ALI stated that “[t]he Reporters will closely examine the existing text to determine what portions will need to be changed.” In addition, ample time will be provided at the ALI Annual Meeting (May 2015) “to review all the text that has already been approved and to vote on it again in light of the change in the project’s title.”

Therein lies the most important issue concerning the Restatement (also known as the ALI project formerly known as the Principles of the Law of Liability Insurance) – to what extent its approved and drafted provisions will be amended, as well as new ones approached.

To be sure, the insurance industry has not had a love affair with the Principles project. In general, insurers and their counsel have criticized the project for adopting the minority position on several issues that are adverse to their interests. If that’s so, then insurers’ initial reaction to the name change may be one of disdain. After all, if you don’t like a Principles project, then you really must not like a project that is going to carry more weight with courts. But, in fact, insurers should welcome this change from a Principles project to a Restatement.

The ALI defines a Restatement as follows: “Restatements are addressed to courts and others applying existing law. They aim at clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might plausibly be stated by a court. Restatement black-letter formulations assume the stance of describing the law as it is.”

The ALI’s description of a Restatement could not be clearer that its objective is to set forth what the law is. That being so, those involved in putting together the now-Restatement should have no choice but to go back and amend several provisions – both approved and in draft – and approach new ones from a different perspective. After all, if the purpose of a Restatement is to set forth what the law is, then minority positions surely have to be revisited.

For example, the ALI Principles adopted a provision that, generally speaking, if an insurer breaches the duty to defend, it loses the ability to disclaim coverage for indemnity, even if there is an otherwise applicable exclusion. While this is the law in some states, it is the minority. The Reporter’s Notes to the provision admit as much.

And several more examples like this abound. By my count, courts in 24 states hold that when an exclusion applies to “an insured” or “any insured,” coverage is precluded even to a person who did not commit the excluded conduct (the innocent co-insured) and, it is important to note, this remains so even if the policy contains a separation of insureds clause. Eleven states go the other way. Despite a 24-11 score, the ALI drafters have sought to adopt the minority rule that, under this circumstance, coverage is owed.

The score on pre-tender defense costs is this: 21 states preclude coverage without the insurer needing to prove prejudice and 6 states preclude coverage only if the insurer can prove prejudice. But despite this lopsided score favoring no prejudice required, the ALI Principles seem to be requiring an insurer to establish “substantial prejudice” to disclaim coverage for pre-tender defense costs.

When it comes to the often contentious issue of the hourly rate to be paid to independent counsel, when an insured is being defended under a reservation of rights, the Principles concluded that the insurer must pay counsel whatever it asks for – and litigate the reasonableness of that when the case is over. No court has ever said that.

Faced with the adoption of unwelcomed minority positions via a Principles project, insurers should embrace this change to a Restatement. As a Principles project, the ALI has been able to support the adoption of minority positions by saying, well, it’s a Principles project. As a Restatement, this cover should no longer be available. Even if the ALI abandons minority positions, insurers will still confront Restatement provisions that they object to. That’s to be expected. No side in a project like this can be satisfied with everything.

It seems possible that efforts will be made by some of those involved in the Restatement process to maintain the adoption of minority positions. I’ve never seen how a Restatement comes to life, but I suspect that some would say that there is more to it than just counting states. In addition, in some situations it will not be clear what the law is. Not to mention that the Restatement may seek to visit unfertile ground. So even if the ALI, now penning a Restatement, is forced to reverse course on some minority positions, there are still ample opportunities for debate, and fierce for sure, over the final text.

When the ALI’s Principles project first got going in 2010, it went largely unnoticed. And some who noticed it, like me, dismissed it as academic mumbo jumbo – something for law professors to talk about when they ran out of things to say about Blackstone. Over time the Principles project took on a raised profile – garnering a lot of attention, and efforts by insurer contingents to influence its outcome. This coverage lawyer went from rolling his eyes to calling the Principles project the most important topic in liability coverage today. Now, as a Restatement, the importance of the project cannot be overstated. The work being undertaken by the ALI is surely going to add to the universe of what some courts consider when deciding coverage disputes.

[Note: I mentioned in the last issue of Coverage Opinions that I planned to address in this issue some instances where I believe that the ALI Principles project achieved its objectives. This was to be a change from several prior articles that criticized the project for not achieving its stated mandate. I was all set to do this when news broke that the Principles had been changed to a Restatement. This significant development trumped the planned article. I’ll get back to that – in the context of the new ALI landscape.]

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