The ALI’s Recently Adopted “Restatement of the Law of Liability Insurance” Receives Mixed Reviews from Courts and Legislatures

The much-anticipated Restatement of the Law of Liability Insurance (RLLI) was recently approved by the American Law Institute (ALI) during its Annual Meeting in May 2018. Since its adoption, the RLLI has been met with mixed reviews from courts as well as at least one state legislatures.

As discussed in previous blogposts, the RLLI is the ALI’s first publication in the field of insurance law and touches upon nearly every legal issue frequently faced by insurance professionals. Prior to its adoption, the RLLI had been the subject of much debate and criticism. Specifically, many in the legal community believe that the RLLI adopts several minority rules, which is inconsistent with the purpose of the Restatements — to set forth “clear formulations of common law . . . as it presently stands or might appropriately be stated by a court.” By way of example, the RLLI adopts a “plain-meaning presumption” rule in lieu of the majority “plain meaning” rule for interpreting policy language. Similarly, the RLLI adopts a rule that results in the waiver of coverage defenses if an insurer breaches its duty to defend.

The RLLI project and the ultimate adoption of the RLLI was met with consternation because of these types of minority positions adopted by the drafters of the RLLI combined with the enormous influence of the ALI’s Restatements in the legal field. For example, the U.S. Supreme Court cited to ALI publications 71 times during the 2013 to 2015 terms of court, and state and federal courts have cited to ALI publications over 200,000 times since the ALI was founded in 1923. In fact, several courts began citing the RLLI as persuasive authority even before the RLLI was formally adopted by the ALI.

Now that the RLLI has been adopted, it is likely that courts will begin to cite or reference the RLLI with increased frequency. However, to date, the RLLI has been met with mixed reviews by those courts that have addressed the impact of the RLLI on their decisions. For example, in Selective Ins. Co. of Am. v. Smiley Body Shop, Inc., the U.S. District Court for the Southern District of Indiana, the insurer filed an action seeking a declaratory judgment that it did not owe a duty to defend its insured in an underlying action involving an automobile accident, and also seeking recoupment of the costs that it had incurred in defending its insured in the underlying action. 260 F. Supp. 3d 1023, 1033 (S.D. Ind. 2017). Recognizing that there were not any reported cases applying Indiana law on the issue of recoupment of defense costs, the court predicted that the Indiana state courts would hold that insurer is not entitled to recoup costs expended in defense of insured in underlying action. In coming to this decision, the court relied in part on the RLLI (which at that point was still in draft), providing that “[u]nless otherwise stated in the insurance policy or otherwise agreed to by the insured, an insurer may not seek recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs.” Restatement of the Law of Liability Insurance § 21.

However, more recently, and following the ALI’s adoption of the RLLI, a Delaware Superior Court recognized that “the Restatements are mere persuasive authority until adopted by a court,” in reaching the opposite conclusion on the issue of recoupment of defense costs. Catlin Specialty Ins. Co. v. CBL & Associates Properties, Inc., No. CVN16C07166PRWCCLD, 2018 WL 3805868 (Del. Super. Ct. Aug. 9, 2018) (applying Tennessee law). Similar to the Smiley Body Shop case, the court in the CBL case addressed a coverage action filed by the insurer seeking a declaration that the insurer did not have a duty to defend its insured in an underlying action, and also seeking recoupment of the costs that had already been incurred by the insurer in defending its insured in the underlying action. After finding that the insurer did not have a duty to defend its insured in the underlying action, the CBL court held that the insurer was entitled to recoupment of the costs incurred in defending its insured in the underlying action. In holding that the insurer was entitled to recoupment, the CBL court recognized that “most recently, the American Law Institute has revised its Restatement of the Law on Liability Insurance to reflect [the modern trend moving away from awarding reimbursement costs unless an agreement to the contrary is found in the policy].” However, the CBL court noted that Tennessee state courts had never before directly addressed the recoupment issue, and that “they have also not yet adopted the new Restatement’s rule,” which itself acknowledged that “[s]ome courts follow the contrary rule.” Further, the court noted that “the Restatements are mere persuasive authority until adopted by a court,” and that “they never, by mere issuance, override controlling case law.” Accordingly, the CBL court followed a prior Tennessee federal court decision, which had previously adopted the then-majority position permitting recoupment when the policy does not contain an express provision regarding reimbursement and the insurer timely reserves its right to reimbursement in a specific and adequate notice.

Similarly, the RLLI has also received some unwanted attention from at least one state legislature. In August, Ohio Governor John Kasich signed into law a bill which specifically states that “‘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.” S.B. No. 239, Sec. 3901.82 (132 G.A. 2018). This legislative action by the State of Ohio demonstrates the strong opposition to the RLLI in the insurance industry, and continued efforts to undermine the potential influence of the RLLI since its adoption. It will certainly be interesting to see if other states follow suit.

Now that the ALI has adopted the RLLI, there will certainly be continued debate over the weight that courts should give to the ALI’s RLLI. However, despite the mixed reviews to date of the RLLI, we would all be well-served to become familiar with the RLLI and how it may impact coverage disputes moving forward.

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