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American Law Institute’s Proposed Liability Insurance Restatement Could “Upend the Insurance Market”

American Law Institute’s Proposed Liability Insurance Restatement Could “Upend the Insurance Market”

American Law Institute Proposed Liability Insurance Restatement Could “Upend the Insurance Market”The American Law Institute (“ALI”) is poised to meet on September 7, 2017 in Philadelphia for a debate on its controversial project to restate the law of contracts in the liability insurance context, liability insurance coverage, and the management of insured liabilities.

Approval was expected for the proposed “Restatement of the Law, Liability Insurance” at the ALI’s May 23 meeting earlier this year, but in a surprise announcement, the organization ordered another year of work on the project. The plan now is to present a proposed final draft at the next ALI annual meeting in May 2018. But some legal experts cautioned that, should it pass, ALI’s proposed Restatement “will upend the insurance market and lead to dramatic increases in pricing.”

“We urge the ALI to delay consideration of this Restatement . . . and enter into an immediate dialogue with state legislators,” former New Jersey Insurance Commissioner and National Conference of Insurance Legislators CEO
Tom Considine said in prepared remarks issued just before the aforementioned May vote that was ultimately delayed. “This proposed restatement delves into the realm of legislative prerogative and departs from settled law.”

As an ALI “restatement,” the liability insurance proposal aims to provide “ . . . clear formulations of common law and its statutory elements or variations and reflect the law as it presently stands or might appropriately be stated by a court.” The ALI mission is “to promote the clarification and simplification of the law and its better adaptation to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work.”

The American Law Institute achieves this goal partially through the development of its projects, which are categorized as “Restatements,” “Codes” or “Principles.” Although Restatements “ . . . aspire toward the precision of statutory language,” they are also intended to reflect the flexibility and capacity for development and growth of the common law. The ALI explains that is why they are phrased in the descriptive terms of a judge announcing the law to be applied in a given case, rather than in the mandatory terms of a statute. Fundamental elements of an ALI restatement include ascertainment of the nature of the majority rule, legal trends, and a determination of what specific rule fits best with the broader body of law, with the intention of leading to more legal coherence. A restatement is also designed to ascertain the relative desirability of competing rules (by considering social science and empirical analyses).

Given that, the ALI’s Liability insurance restatement includes the following:

Chapter 1, which addresses basic contract law doctrines that have special application in the insurance law context: interpretation, waiver, estoppel, and misrepresentation.
Chapter 2, which addresses insurance law doctrines relating to duties of insurers and insureds in the management of potentially insured liability actions: defense, settlement, and cooperation.
Chapter 3, which addresses general principles relating to the risks insured that are common to most forms of liability insurance, and is divided into three Topics: (1) coverage provisions, (2) conditions, and (3) the application of limits, retentions, and deductibles.
Chapter 4, which will deal with remedies, bad faith, enforceability, and broker liability.

Even though the American Law Institute delayed the final vote on the Restatement, the membership still voted in May to approve all eleven of the new sections that were presented, as well as two revised sections. These sections included provisions on such topics as notice and reporting, allocation in long-tail claims, known liabilities and bad faith. Thus, the Restatement has been essentially approved even though the necessary final membership vote on the entire Restatement was not taken.

In an effort to work toward such a vote a year from now, the ALI will hold meetings with its Advisers (mostly law professors) and Members Consultative Group such as the one scheduled for September 7. As part of this process, changes to the text will be proposed and debated.


For any comments or questions, please call the insurance regulation lawyers and insurance defense litigation attorneys at Colodny Fass (954) 492-4010.