ALI’s Restatement of Liability Insurance Advocates a “Split-the-Baby” Approach to Allocation of Long-Tail Claims

“All sums” or “pro rata” – which one is the majority view for allocation of long-trail claims? Well, after eight years of iterative revision, the proposed final draft no. 2 of ALI’s Restatement of the Law, Liability Insurance was approved in May 2018. The restatement has received very critical feedback from both sides, chiefly that the ALI has abandoned its mission to “restate” common law in favor of advocating what the law should be. One of the more hotly contested sections is section 41, titled “Allocation in Long-Tail Harm Claims Covered by Occurrence-Based Policies.” 

Coverage under CGL policies for “long-tail” claims, such as environmental property and asbestos bodily injury claims, has long been disputed. In such claims, courts must determine what triggers the policies as well as the proper allocation of the costs of defense and indemnity between insureds v. insurers and insurers v. insurers. Courts have developed several allocation methodologies that generally fall into two categories — “pro rata” and “all sums.”

The restatement advocates a “split-the-baby” approach, applying “all sums” allocation to defense and pure “pro rata” to indemnity. The restatement also fails to address the issue of “unavailability” — the portion of the loss that is attributed to years when the insured had no coverage because it was unavailable in the marketplace. Rather than justifying the above methodology from a majority or minority view standpoint, the restatement’s justification appears to be based on a public policy as the “most consistent, simplest, and fairest solution to this problem.”

Given the weight that ALI restatements in general have been afforded by courts around the country in deciding key issues of law, the ALI’s decision to take a prescriptive approach for this particular Restatement is significant and something to keep an eye on, particularly because insurance law is heavily regulated and intensely state-specific. In fact, the legislatures of Kentucky, Ohio, and Texas have passed bills condemning the Restatement for misstating the established law of the state and improperly attempting to influence public policy.

The ALI reporters, subject to oversight by the director, will now prepare the Institute’s official text for publication. At this stage, the reporters are authorized to correct and update citations and other references, to make editorial and stylistic improvements, and to implement any remaining substantive changes agreed to during discussion with the membership or by motions approved at the annual meetings, which will be taking place on May 20-22, 2019.

Stay tuned for an updated blog post after the meeting as well as an upcoming webinar addressing the restatement more broadly.

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