In May 2018, the American Law Institute (ALI) approved the ‘final’ version of a project initially launched in 2010 to deal with the principles of liability insurance law. During the drafting and approval process, the project, the “Restatement of Law, Liability Insurance” (the “RLLI”) became, and continues to be, increasingly controversial. Some scholars argue that this new Restatement does not accurately reflect the current state of the law. Others counter that the Restatement fills in gaps and provides guideposts as to where the law should trend. Still others, including practitioners in real life cases, are confused as to how courts will consider and use the new Restatement.
This last point is critical. Many states have bold, vibrant case law and statutes which are considered “the law of the land” on a myriad of insurance issues. But no state legislature has considered, nor has any state court spoken, on every insurance issue. Consequently, each state will have to consider how this Restatement will be used on pending issues. Will, for example, this Restatement be considered to be authoritative, persuasive, or inconsequential on legal issues that have never been addressed? Will the Restatement cause courts to rethink long established state specific precedents? And will the Restatement spur state legislatures to act? While these issues are broad and are likely to be the subject of years of scholarship, this article suggests a few points as to how states may respond to the Restatement.
Controversial Drafting and Support
The RLLI is 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 can also be described as the first Restatement that focuses on a particular industry—insurance—as opposed to a generalized legal area such as agency, torts, or property.
Judges and litigants have historically used ALI Restatements because Restatements synthesize the law of particular issues in a digestible format and includes relevant citations. For the most part, ALI Restatements, at least in the past, have historically stood on their own merits as being trusted, neutral, bias-free statements of the common law, or at least existing law. Many scholars, however, have raised issues in regard to restatement projects, particularly those of a recent vintage. Commentators and judges (including the late Justice Antonin Scalia) have been critical of Restatement projects in general for creating law rather than merely restating it.
With respect to the RLLI, members of the insurance industry have expressed similar concerns because many of the provisions contained in this restatement are viewed as innovations rather than mere expressions of existing law. Moreover, because insurance is traditionally governed by each individual state’s law, members of the insurance industry are concerned that if the RLLI is relied upon by courts and litigants, the RLLI has the potential to undermine already-existing fundamental insurance principles in various jurisdictions.
It is unclear how the RLLI will be received by courts and legislatures. Thus far, the vast majority of citations to the RLLI in court filings have been made by policyholders. Several states have already passed statutes or otherwise resolved that the RLLI is not the law of the state. In other states, with varying levels of success, litigants have used citations to provisions of the RLLI in their briefs submitted to courts as a means to further support their positions.
To date, there are few reported cases that directly cite the RLLI. Some courts appear to accept the RLLI, and have used it to support their opinions when its provisions are already consistent with the law of their particular state. However, because the RLLI has proposed many innovations in the law with unclear application, the total impact of the RLLI on the insurance industry is unclear.
Consequently, the controversy continues with each and every new court decision.
So far, several courts have refused to rely on the RLLI when fashioning their decisions. Recently, the United States District Court for the District of Kansas refused to apply a provision from the RLLI, stating the policyholder’s reliance on the RLLI was “premature.” Progressive Northwestern Ins. Co. v. Gant, No. 15-9267-JAR-KGG, 2018 WL 4600716, slip op. at *6 (D. Kan. Sept. 24, 2018). The court stated in pertinent part:
[T]he Restatement was approved by the members of the American Law Institute at its May 2018 Annual Meeting; as of the date of this Order, the official text had not been published. Kansas courts have neither directly addressed the issue of when an insurer may be directly liable for the conduct of defense counsel retained for the insured, nor relied upon or adopted the new Restatement’s rule. . . . Accordingly, this Court is not inclined to use a nonbinding Restatement as a means to overturn or expand Kansas law.
The United States District Court for the Eastern District of Pennsylvania similarly considered a section of the RLLI final draft and comment offered by a party, but refused to rely on it to form its decision. Catlin Specialty Ins. Co. v. J.J. White, Inc., 309 F. Supp. 3d 345, 362-63 (E.D. Pa. 2018). The court in Catlin determined that a choice of law clause in the pollution insurance policy required the court to both interpret and decide substantive issues under the policy according to New York law. Id. at 354-56. The court, in making its decision, noted that the New York Court of Appeals had already considered and refused to adopt the rule proposed by the RLLI and offered by the insured. Id. at 363. Additionally, in Outdoor Venture Corp. v. Philadelphia Indemnity Ins. Co., the court referenced the insured’s citation to a tentative draft of the RLLI but did not rely on the statement in the RLLI as authoritative. No. 2:14-cv-00224, 2018 WL 4656400, slip op. at *18-19 (E.D. Ky. Sept. 27, 2018).
Some cases make it less clear as to how the RLLI may be used by courts in the future. For instance, in Selective Ins. Co of Am. v. Smiley Body Shop, Inc., the court mentioned in dicta the RLLI regarding the insurer’s duty to defend, but relied instead on Indiana law to render its decision. 260 F. Supp. 3d 1023, 1033 (S.D. Ind. 2017). Similarly, in Mid-Continental Casualty Co. v. Petroleum Solutions, Inc., the court relied on a rule stated in an earlier decision, but also cited a consistent portion of the RLLI in a footnote. No. 4:09-0422, 2016 WL 7733054, at *4 n.28 (S.D. Tex. Dec. 16, 2016). It is unclear whether the citation of the RLLI by these courts in their decisions points to an additional reliance on the RLLI in the future.
Adding to this uncertainty, some courts have cited to provisions of the RLLI to support their decisions. To date, these decisions have cited portions of the RLLI which are not innovations in the law, but rather provisions that are statements of what the majority or minority rule is for a particular issue.
For example, in Nat’l Cas. Co. v. Western Express, the United States District Court for the Western District of Oklahoma, applying Tennessee law, quoted § 39 of the RLLI (Number of Accidents or Occurrences (2017)) to support the court’s conclusion that Tennessee would adopt a “cause,” not “effects,” theory to determine the number of accidents for a claim. No. CIV-15-1222-R, 2018 WL 6059388, slip op. at *8-9 (W.D. Okla. Nov. 19, 2018) (The provision states “[t]he ‘effects test’ is a relatively old rule that has fallen out of favor with the courts. Most of the courts that originally adopted this approach have abandoned it.”). Thus, the court cited the RLLI not to support an innovation in the law, but to indicate that Tennessee would likely follow the trend a number of states have followed, as captured by the RLLI. Similarly, in Nationwide Mut. Fire Ins. Co. v. D.R. Horton, Inc.—Birmingham, the court cited an earlier version of the RLLI as well as an earlier court decision in “recogniz[ing] the longstanding principal of law.” No. 15-351-CG-N, 2016 WL 6828206, at *271-72 (S.D. Ala. Nov. 18, 2016).
Finally, a recent decision of the United States District Court for the Northern District of California cited § 13 of the RLLI regarding an insurer’s duty to defend. Webcor Construction, LP, et al. v. Zurich Am. Ins. Co., No. 17-cv-2220 YGR, 2019 WL 1129554, slip op. at *4 (N.D. Cal. Mar. 12, 2019) (stating that, “(a)n insurer that has issued an insurance policy that includes a duty to defend must defend any legal action brought against an insured that is based in whole or in part on any allegations that, if proved, would be covered by the policy, without regard to the merits of those allegations. Restatement Of The Law, Liability Insurance § 13, Conditions Under Which the Insurer Must Defend (Am. Law Inst., Revised Proposed Final Draft No. 2, Sept. 7, 2018).”).
Whether or not these, or other courts, will cite to provisions of the RLLI, which many in the insurance industry largely consider innovations in the law, is yet to be seen.
States have already began responding to the finalized version of the RLLI. On July 30, 2018, in a first-of-its-kind move, Ohio lawmakers unanimously approved a bill rejecting adoption of the RLLI as the law of the state. This is a significant move by Ohio—In the ALI’s 95-year history, no state had ever before passed legislation against a Restatement in its entirety, according to Stephanie Middleton, American Law Institute’s Deputy Director.
More recently, North Dakota and Michigan approved bills similar to that of Ohio, preventing judges from considering arguments or citations to the RLLI from litigants. A similar bill was introduced in Arkansas. Tennessee’s legislature also amended its insurance statute to add provisions addressing plain meaning interpretation of insurance statutes and insurers’ duties to defend obligations. Unlike Ohio or North Dakota’s newly enacted laws, Tennessee’s amendment of Tenn. Code Ann. § 56-7-102 does not mention the RLLI specifically, but adds additional language regarding the interpretation of insurance policies to preempt (or at least impede) the RLLI’s handling of policy interpretation.
The Kentucky legislature also passed a resolution to send the ALI a letter asking it to revisit the RLLI and draft changes consistent with established insurance law. The legislature noted that the National Council of Insurance Legislators (NCOIL) had already identified several areas of the proposed Restatement that, contrary to ALI’s stated intent, are inconsistent with well-established law and purport to address matters which are properly within the legislative prerogative. The legislature urged ALI leadership, members, and reporters to abide by ALI’s own acknowledgement that “[a]n unelected body like The American Law Institute has limited competence and no special authority to make major innovations in matters of public policy” and, instead, afford proper respect to the legislative prerogative, and the expertise and jurisdiction of NCOIL members.
Indiana has also introduced a resolution similar to that of Ohio, stating the RLLI does “not reflect the determination of the State of Indiana’s public policy, is not a faithful statement of existing law of the State of Indiana, is not an appropriate subject of notice, and should not be afforded recognition by courts as an authoritative reference regarding established rules and principles of insurance law.”
Other states have similarly expressed their rejection of the RLLI—Governors of South Carolina, Maine, Texas, Iowa, Nebraska, and Utah submitted a joint letter to the ALI expressing their concerns that the RLLI alters fundamental insurance law principles. In addition, the Insurance Commissioners of Michigan, Idaho, and Illinois have written to the ALI to express concerns that the RLLI goes beyond the codification of the law and could adversely impact the insurance system.
A year has passed since the RLLI’s general approval and its full effect on the insurance industry is still unknown. There are states like Maryland (this author’s state) that have not relied on, or even referenced, the RLLI in any decision to date (there has only been one brief submitted to the Maryland Court of Appeals referencing the RLLI, tucked in a footnote. Similarly, the Fourth Circuit has not relied on or referenced the RLLI in a decision in any case).
Currently, the RLLI can only be found online. The final print publication is anticipated later in 2019. Judges in Maryland and beyond can expect to consider arguments from litigants citing to the RLLI in the future, after printing, as litigants and courts have already started citing portions of the RLLI in their briefs and decisions. The RLLI’s controversial drafting, support, and uncertain effect on the insurance industry should cause judges and litigants to consider it with caution; after all, the RLLI makes many changes to fundamental insurance laws that may not be consistent with the laws of their particular jurisdiction.
 “The notice-prejudice rule has also been endorsed by the Reporters in the most recent drafts of the Restatement of the Law of Liability Insurance.” Brief of Amicus Curiae United Policyholders in Support of Respondent, Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. The Fund for Animals, 2016 WL 8193324, at *12 n.10 (Md.).