The American Law Institute (ALI) is set to vote to approve its much anticipated “Restatement of the Law of Liability Insurance” Law at its annual meeting from May 21 to 23, 2018, in Washington, D.C. For almost 100 years, the ALI has published “Restatement of the Law” treatises on various legal topics which are meant to inform legal practitioners on general principles of common law, and courts will often look to these Restatements for guidance. In fact, according to ALI statistics, state and federal courts have cited to the ALI’s publications roughly 200,000 times since the ALI was founded in 1923.
As a result, since the ALI announced in 2010, that it would be publishing a Restatement of the Law of Liability Insurance many in the insurance field have taken notice, and there has been no shortage of debate over the draft statements of law proposed by the ALI in the Restatement. Although the ALI purports to only set forth “clear formulations of common law. . .as it presently stands or might appropriately be stated by a court” in the Restatements, many in the legal community believe that the Restatement of the Law of Liability Insurance as it is currently drafted adopts several minority rules preferred by the members of the ALI who have been charged with drafting the Restatement.
Most notably, Section 3 of the Restatement addresses one of the most fundamental principles of insurance law — the interpretation of the policy itself — but adopts a rule of construction which is at odds with the majority “plain meaning” rule. As an initial matter, the Restatement states that “[a]n insurance-policy term is interpreted according to its plain meaning.” However, the Restatement goes on to state that “extrinsic evidence may be used to show that the term has a different meaning in context” (even the term “is unambiguous on its face”) if “a reasonable person in the policyholders’ position would give the term a different meaning.” As such, the “plain-meaning presumption” rule adopted by the Restatement is at odds with the majority “plain meaning” rule and will certainly lead to greater uncertainty in the interpretation of standard coverage forms and higher costs in resolving insurance coverage disputes.
Similarly, Section 24 of the Restatement fails to adopt common law “as it presently stands” by imposing an obligation on an insurer to make settlement offers even in the absence of a demand. Noting that “[t]here is no hard and fast rule regarding the insurer’s obligation to make offers,” Comment f to Section 24 states that “there can be circumstances in which an insurer has a duty to make a settlement offer even where no settlement demand has been made.” In setting forth this purported “restatement” of the law, the ALI recognizes that “[t]here is a split of authority on the question of whether the duty to make reasonable settlement decisions can obligate an insurer to explore settlement negotiations should the claimant or claimants not come forward with a settlement offer.” This concession in the Reporters’ Note alone demonstrates the ALI’s departure from the stated goal of Restatements to set forth “clear formulations of common law. . . as it presently stands.”
There will certainly be continued debate over the substance of the Restatement of the Law of Liability Insurance when it comes before the ALI’s full membership for a vote in this May, and it will be interesting to see what — if any — amendments are adopted to the Restatement. However, if the ALI adopts the Restatement as currently drafted, it is clear that some of the provisions will fail to meet the goal of a Restatement to provide “clear formulations of common law” as it currently stands.