For nearly 100 years, the independent organization The American Law Institute has produced influential “Restatements” of U.S. common law in a wide range of areas, intended as authoritative summaries of the main currents of the law. But they’ve never tackled insurance law—until now. Restatement of the Law, Liability Insurance (RLLI), approved by the ALI in May 2018, marks several important firsts. It’s the first Restatement on insurance—a particularly complex and nuanced area of the law, as each state highly regulates it under its own sets of statutes and precedents. It’s also the first Restatement that focuses on a particular industry—insurance—as opposed to a generalized legal area such as agency, torts or property. Likely because of this, the drafting of the RLLI was not without controversy and it’s unclear how it will be received.
In general, ALI Restatements provide courts with guidance as to common law and corresponding statutes and regulations so that the legal precedents set forth in the Restatement may be appropriately stated by the courts in their decisions. Restatements consist of three components: 1) “Black Letter” rules; 2) comments; and 3) reporters’ notes. Black Letter rules and comments sections generally set forth the majority rule or an emerging trend in the law. Reporters’ notes include the case law supporting the Black Letter rules and comments, as well as contrary authority.
The ALI also makes clear that while Restatement rules should be based on precedent, the ALI is not bound by precedent that is inappropriate or inconsistent with the law as a whole. In such cases, the ALI will propose a better rule along with an explanation for its choice. The RLLI sets out several findings, including:
- A policy term’s plain meaning is the single meaning to which it is reasonably susceptible in light of the facts of the claim in the context of the entire insurance policy, without turning to extrinsic evidence other than industry custom, practice and usage;
- If a term is ambiguous, it should be interpreted against the party that supplied the term, without any exception based on the policyholder’s level of sophistication;
- If an insurer does not take reasonable care in selecting defense counsel for its policyholder, the insurer may be held liable for that defense counsel’s negligence;
- Insurers must defend policyholders against entire actions, without regard to the merits of the allegations, when reasonable insurers would regard any claim as an actual or potential basis for coverage based on a review of policy terms, the complaint, and any additional allegations known to the insurer but not contained in the complaint;
- Insurers cannot obtain recoupment of payments without a specific policy provision or separate agreement to that effect;
- Insurers cannot deny a coverage claim for failure to meet the cooperation and notice conditions without establishing that they suffered prejudice as a result of the policyholder’s noncompliance;
- Policyholders may report claims at the end of claims-made-and-reported policies within a reasonable time if there is no extended reporting period;
- Underlying limits to excess policies are exhausted if those amounts are paid by or on behalf of the underlying insurer or the policyholder.
Many of the RLLI rules have met with severe criticism from the insurance industry, which claims that they are weighted heavily against insurers. Insurers and insurance industry advocates have argued that if the RLLI rules are adopted by the courts, it may disrupt the liability insurance system and upset the market. A more balanced view is that the insurance industry seeks to move decisional law more in its favor—and away from the RLLI rules, which in most cases do reflect majority U.S. law. The insurance industry’s position is more fairly viewed as an advocacy position that it is supporting with lobbying.
As a result, some state governments have already felt the influence of the insurance industry’s stated concerns, and have even started acting on them. In April 2018, the governors of Iowa, Maine, Nebraska, South Carolina, Texas and Utah sent a letter to the president of the ALI expressing concerns with the then-draft version of the RLLI, stating certain rules were “the prerogative of our state legislatures [and/or] at odds with established common law” and threatening legislative or executive action if they were approved. The ALI did not revise or rescind many of the new rules.
On July 30, 2018—just two months after the RLLI was approved—Gov. John Kasich of Ohio signed into law Senate Bill No. 239, which amended the Ohio Revised Code of Insurance to state: “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.” The bill did not elaborate on what appears to be an unprecedented amendment to preclude courts from applying the RLLI, even as persuasive authority, noting only in the comments section that Restatements are “nonbinding treatises” that simply inform the legal community on “general principals (sic) of common law.” But the message is clear—Ohio courts should look to Ohio statutes and Ohio common law in deciding insurance issued—not the RLLI.
While Ohio may be the only state to have taken legislative action in response to the RLLI so far, additional states may follow. Ohio is one of only a handful of states whose legislature stays in session all year. The majority of state legislatures (including those in the states whose governors wrote to the ALI) were out of session by the time the ALI approved the RLLI, and will not be back in session again until January 2019, which may well bring more state legislature responses to the RLLI. Interested observers should mind these developments and consider advocating as appropriate to their interests.