The ALI’s Restatement of the Law of Liability Insurance (currently in draft form) is the subject of controversy over whether the proposed rules are excessively favorable to policyholders and whether they reflect true “majority rules.” But perhaps the more interesting question about the project is whether it even makes sense to create such a restatement.
The Specificity of the Topic Hurts the Brand
I have always been a fan of the Restatements of the Law. I remember my first year of law school as the provisions of the Restatement (Second) of Contracts gradually transformed from a hopelessly abstract collection of words into a beautifully coherent set of intertwining principles that, if properly understood, could be applied to resolve any fact pattern. This appreciation did not change when I became an insurance lawyer. I have resorted to the restatements for questions on contracts, torts, agency, judgments, restitution and conflicts of laws whenever I’ve needed to frame a difficult issue of fundamental law. It is because of this understanding of the role of Restatements that the draft Restatement on Liability Insurance leaves me puzzled. By far the most influential Restatements are on topics that are, or at least could be, the subject of a first year law school class. Because most ALI members have some exposure to the concepts or contracts, torts, agency or conflict of laws, the ALI membership has credibility in evaluating the merits of proposed statements of the law on those topics. In the case of liability insurance, by contrast, the expertise is presumably much thinner, and it is hard to see how the rules that emerge will be seen as representing a genuine consensus.
The fact that the Liability Insurance restatement explicitly departs from the more general Restatements already published merely demonstrates the quagmire that ALI is wading into. For example, Comment b. to Section 21 of the current draft of the Restatement acknowledges that the liability insurance rule regarding recoupment of defense costs differs from the approach to the same topic found in the Restatement (Third) of Restitution and Unjust Enrichment. Its attempt to justify the contradiction is comically vacuous and simply demonstrates the reality is that there is often no convincing principled reason for the failure to follow general principles in insurance cases. The Restatement has abandoned its role as the distiller of general principles by attempting to articulate the often unprincipled minutiae of how the law is applied to one part of one industry.
It’s Still the Policy That Governs
To the extent that ALI still thinks a Restatement of Liability Insurance is a good idea, they appear to have missed the big picture of liability insurance principles, which is that they are based on actual contract language. Liability insurance policies on topics such as the “duty to defend” have been remarkably uniform both over time and between insurers. Consequently, a body of law interpreting this policy language is developed, but the mooring for this law is still the policy language that is still used. The “majority” and “minority” rules are really just competing interpretations of the same language or competing conclusions about the duties that arise from that language.
The risk in creating a restatement of the principles adopted under standard policy language is that these principles may be reflexively extended to different policy language without any overriding justification. For example, § 14 of the current Tentative Draft states that the duty to defend includes “efforts to defend the insured from all of the causes of action and remedies sought in the action, including those not covered by the liability insurance policy.” The reason for this principle is that most current liability insurance policies contain an express promise to defend “suits” alleging covered claims without regard to whether they also alleged non-covered claims. If a policy were amended to explicitly say, “our right and duty to defend does not extend to claims or remedies that are not covered by this agreement,” there is a real risk that this unambiguous language would be overlooked by citation to the proposed Restatement. In other words, many of the Restatement provisions are comparable to saying “unless otherwise stated in the policy, the per-occurrence limits of a primary commercial general liability policy are $1,000,000” simply because that is a typical policy limit. There is no principled justification for an imposition of such terms without the consent of the parties.
There is no unitary body of related liability insurance law principles at the same level of generality and abstraction as the other areas of law covered by the Restatements. Instead, liability insurance law is the application of the principles of contract law, tort law, the law of judgments, the law governing lawyers, and the law of restitution to situations that arise in liability insurance litigation. The ALI’s failure to appreciate this greatly diminishes the coherence of the Restatement project.
