Liability insurers, their lawyers and their regulators are holding their collective breath that a scheduled vote this week on a proposed restatement of law regarding liability insurance will not happen.
If approved, the controversial restatement would give policyholders more clout in disputes with insurers over policy language, claims settlements, application misrepresentations, an insurer’s duty to defend and other matters.
The American Law Institute (ALI), a group of legal scholars that provides summaries of the current state of case law and statutes that courts use as a guide, is set to vote Tuesday, May 23 on the new Restatement of the Law, Liability Insurance.
But insurance interests and policymakers have asked the ALI to postpone a vote. These critics say the restatement goes beyond current legal thinking and adopts minority rather than majority opinions on certain issues. They fear the changes will tip the scales in favor of policyholders in ways that could raise premiums and hurt the availability of insurance.
[Editor’s Note and Update: Monday May 22, 11:50 am. ET
At the opening session of the ALI annual meeting today in Washington, D.C., ALI Deputy Director Stephanie Middleton announced to the membership that the reporters of this restatement would not be seeking approval on the full proposed final draft. Several new sections may be approved by members after the discussion at the meeting tomorrow, and any motions may be made from the floor.]
The reporters, or authors, of the draft — Tom Baker, a professor at the University of Pennsylvania Law School, and Kyle Logue, a professor at the University of Michigan Law School — have defended their work. They have rejected the criticisms that the changes are not grounded in solid legal opinion. They maintain that the industry has not proven that the changes will harm insurance markets. They also maintain their work is “informed by and consistent with modern economic and psychological research on how insurance markets work.”
Opponents have not received any indication that a delay in a vote will even be considered. The ALI membership has already approved some sections of the controversial document. ALI members could decide to postpone a vote, alter sections, approve only certain sections, or approve the entire draft. What happens depends on what motions are made at the meeting on May 23.
“We urge the ALI to delay consideration of this restatement planned later this month and enter into an immediate dialogue with state legislators,” said Tom Considine, CEO of the National Council of Insurance Legislators (NCOIL) who wrote to ALI on May 5. “This proposed restatement delves into the realm of legislative prerogative and departs from settled law.”
The National Association of Mutual Insurers (NAMIC), along with the American Insurance Association (AIA), also wrote to the ALI protesting the redraft and calling for a delay in a vote.
As it is currently drafted, the restatement “changes the way that insurance policies can be read and understood by policyholders, companies, insurance regulators, and the courts,” according to Tom Karol, NAMIC general counsel.
“Many sections of the restatement appear to be more of a reshaping of the law and based more on the preferred views of the authors than the existing majority understanding,” he said, adding that the since ALI’s restatements are used as guidance in courts across the country, “its members should recognize the obligation this creates to ensure they get it right.”
“A fair, reasonable insurance market requires that the insurer and the policyholder, at the beginning of the relationship, understand the risks each has agreed to bear. That contractual relationship and virtually every aspect of the insurance company’s operations is subject to intense regulatory scrutiny,” stated AIA’s J. Stephen Zielezienski, general counsel and senior vice president.
Zielezienski warned that if Tuesday’s vote is not deferred or defeated, “a short-sighted and unjust conclusion is the only possible outcome.”
The associations also claim that “significant changes” were made to the proposal since an earlier draft version was approved by the ALI membership but those changes have not been discussed in any meetings.
“Hastily approving the restatement without addressing these concerns would seriously damage the credibility of the ALI and its restatements going forward and could undermine case law duly established by the judiciary and legislative branches of government,” Karol said.
If ALI proceeds with a vote of approval, NCOIL said that it will organize opposition by circulating a petition for all state lawmakers and regulators to sign declaring the restatement as a “misrepresentation of the law of liability insurance, and as a usurpation of lawmaking authority from state insurance legislators.”
Industry Objections
The AIA paid Yale Law School Professor George Priest, an expert in insurance defense, to review the restatement. In his 28-page paper, Priest blasted the draft proposal as “a strikingly pro-policyholder statement, not generally reflective of the law in the various U.S. jurisdictions.” He said it “provides grounds for a very large expansion of insurance in favor of policyholders who have suffered loss.” And he warned that it could undermine the availability of insurance if adopted.
Priest has accused Baker and Logue of viewing themselves as “visionaries” who are “not bound by the common law method or its principles which has been the backbone of the ALI’s Restatement projects over the many past decades. ”
Among the provisions Priest and others have criticized is one on misrepresentation by an applicant or policyholder that would limit the insurer misrepresentation defense to only misrepresentations that were intentionally or recklessly committed.
Critics have also questioned changes to how an insurer’s breach of its duty to defend should be considered. The restatement would create a new “reasonableness” test for determining if there has been a breach and would boost the penalty for a breach so that the insurer would lose all of its coverage defenses.
According to critics, the restatement could also affect how insurers negotiate settlements because it would increase the penalties for an insurer’s breach of a duty to settle to the “full amount of damages assessed against the insured in the underlying legal action, without regard to policy limits, as well as any other foreseeable harm caused by the insurer’s breach of the duty.”
The restatement also puts a new twist on the traditional “plain meaning rule” governing contracts. The redraft carves out an exception to the long-standing rule that a contract is to be interpreted according to the plain meaning of its language. The exception would be for cases where “extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning.”
The Defense Research Institute, an association of defense attorneys, is also opposing the restatement as it currently stands. In DRI’s view, the restatement “does not codify existing common law, but instead repeatedly stakes out new and controversial positions without adequate grounding in law or public policy. ”
DRI claims there are “numerous individual sections that are seriously flawed,” citing as one, the creation of a new direct liability on the part of the insurer to the insured for the acts of defense counsel, even though the drafters themselves acknowledge “there is little case law on this topic.”
ALI has published the ongoing debate between Priest and the authors and other articles on the topic on its advisory blog.
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