Restatement of the Law, Liability Insurance (RLLI), was approved by membership at the 2018 Annual Meeting and the Official Text is now available. The project greatly benefited from its diverse and engaged Advisers and Members Consultative Group. In this Q&A, we posed questions to two of those most involved in the project.
You served as an Adviser on Restatement of the Law, Liability Insurance project. Why was it important to you to be an active participant on the project? Did you enjoy the experience?
Masters: I have turned on many occasions during my career to Restatements (e.g., on contracts, torts, conflict of laws) to understand a point of law; and, since law school, have admired the work and leaders of the ALI. I was therefore honored and a bit awed first to be nominated to join the ALI and later to be asked to serve as an Adviser to the RLLI when it began in 2010. As a longtime practitioner representing policyholders and an author of two treatises on insurance coverage, I believed I had the experience and knowledge to make a significant contribution. I saw participation in this project as a way to give back to the profession and the practice that has been such a significant part of my life. Working on the Restatement also gave me the opportunity to work collaboratively not only with lawyers practicing in the area, but also with judges, professors, and others with a deep interest in the law and specifically the law on liability insurance.
What I did not appreciate at the outset of the project was the genius of the ALI process. I very much have enjoyed the intellectual rigor and dialectic included in ALI projects; the opportunity for deep thinking on these issues can sometimes be missing in the day-to-day work of litigation. As with any project of such scope, it is obvious that the objective of such a wideranging and rigorous process is to produce the best possible consensus work on the topic.
Aylward: Being an Adviser on this project was one of the most professionally engaging, satisfying, and frustrating things that I have done in 38 years as a lawyer. I had spent a lot of time between 2011 and 2014 writing articles and giving speeches complaining about how bad the Principles were. Finally, Lorie Masters called my bluff and told me that if I really wanted to say something meaningful, I needed to become a member of the ALI and get involved directly. As a coverage geek, the experience of being an Adviser and debating arcane points of insurance law with some of the best coverage lawyers in America was great fun. More to the point, I came away from the experience with tremendous respect for the effort that the Reporters put into this project and just how difficult their jobs were. I also now have a much more informed perspective with respect to what Restatements are and could be. So I’m glad I did it, I think that I may have influenced the project some and, while it was a lot of work, I’m glad that I volunteered.
In contrast to other projects, in the Liability Insurance project, broadly speaking there are two sides – insurers and policyholders. Did the project participants get along? Was there general agreement on many of the Sections, but disagreement on some?
Aylward: In fact, there was a great deal of camaraderie among the lawyers who served as Advisers on this project. While I can’t say that we completely shed our client prejudices at the door, we really did do our best to listen to and appreciate each other’s arguments and perspectives. In the process, I met a number of leading policyholder lawyers with whom I made lasting friendships.
At some level, I think that the real fault line in the Advisers group and the MCG was between the trial lawyers and the law professors, who were more inclined to apply an academic approach to insurance issues that the practitioners felt was unrealistic and at variance with how these issues actually get worked out in practice.
For all the controversy surrounding this project, most of what the Reporters proposed was actually fairly mainstream, particularly after Chapters 1 and 2 were rewritten after this became a Restatement project in 2014. During that process, some areas that had been extremely contentious, notably the treatment of misrepresentation issues, largely evaporated. As a result, most of the debate from 2016 to the conclusion of the project in May 2018 centered on a handful of topics: § 3 (plain meaning); § 12 (liability of insurers for acts or omissions of defense counsel); § 19 (consequences of failing to defend); § 24 (duty to make reasonable settlement decisions); § 41 (allocation in long-tail cases) and § 48 (remedies and damages).
Masters: Leaders in our practice came together in the later 1980s to develop a national coverage bar, both to enhance lawyers’ satisfaction in this practice area and to promote our clients’ interests as well. It can be difficult to settle a highstakes, hard-fought litigation if there is no trust among the lawyers. That effort has succeeded in the decades since in enhancing not just professionalism, but also friendships among lawyers from across the country. In my view, the RLLI benefited from those long-standing efforts to promote collegiality among lawyers representing both policyholders and insurers. As Mike Aylward said in his comments, “fault lines” in these projects often emerged not just between lawyers who practice on opposites sides of these issues, but also between academics who may focus on the theoretical, judges who may focus on the balancing inherent in judging, and practicing lawyers who see (or think we see) practical limitations on more theoretical perspectives of the law.
While the process was professional and collegial, we had significant disagreement on many, if not most, of the Sections at times over the life of the project. That disagreement has extended beyond the ALI. I continue to see articles in the “insurance press” hostile to the Restatement and taking aim, unfairly, in my view, at not only the ALI but the Reporters also. Most of that commentary comes from individuals who were not involved in the project and most do not disclose the speaker’s affiliation (insurer/policyholder) or seek out other viewpoints. In speaking about the Restatement, I have felt compelled to defend the ALI, the process, and the Reporters; in such situations, I stress my views about the professionalism and scholarship of all involved in the process, including our dedicated Reporters. I believe it important, in discussions, in seminars and writings about the Restatement, to communicate my view that the Restatement makes an important contribution to this key area of the law.
It has unsettled me to see the organized effort to undermine the Restatement. For example, in speaking at the National Conference of Insurance Legislators (NCOIL) in March this year, references were made to “overreach” by the ALI and asserting the need for legislation, or perhaps a “model law,” that would “accurately state” the law applicable to liability insurance. Ignoring that much of the law on insurance is, and of necessity will be, made by courts, resolving disputes over specific claims and facts, these efforts could threaten the viability of insurance as a product should they achieve the stated objective.
What happens when there is disagreement among the participants?
Aylward: Disagreement on a project like this was inevitable and probably useful, if only because the law of insurance differs markedly among the 50 states and, in many states, is far from settled on key issues. As Kyle Logue said in a recent conversation, “if the law was cut and dried, why would we need Restatements?” Unanimity among the project participants was never the issue, however. The job of the Advisers and MCG is to flesh out the arguments and make sure that the Reporters are fully aware of the law and its practical implications. It is then the Reporters’ choice as to how to proceed whether a majority of the Advisers agree with them or not.
Masters: Disagreement in the RLLI process led to spirited debate at project meetings and ALI Annual Meetings, and was reflected in the voluminous comments submitted in advance of the Annual Meetings about the RLLI. Particularly at the Annual Meeting in 2017, when Preliminary Draft No. 1 was considered, the motions submitted filled a six-inch binder. A few of those originated on the policyholder side but most came from the insurer side. As Mike Aylward says, most of those motions were defeated. I draw a different conclusion from that result. I saw the debate on the floor at the Annual Meetings as reflecting a useful perspective from lawyers who practice in other practice areas (whether those practice areas may include some need to consider insurance or not) and at times raising the perspective and needs of insurance purchasers.
In what ways do you feel that the input you provided to the Reporters, ALI Council, and ALI members at the Annual Meeting helped to shape the project?
Masters: I felt privileged during the entire course of the project to be part of a group of leaders who treated both the subject matter and each other with respect and professionalism. I was able to make what I believe were important contributions to the overall project (orally, in writing, at meetings of the Advisers, and at ALI Annual Meetings), which, even when they were not accepted, were heard and considered. I believe we were fortunate to have Tom Baker and Kyle Logue as Reporters on the project. Throughout the eight years of the project, they addressed all respectfully and considered the varying views and comments thoroughly and objectively.
Aylward: While I would like to think that I helped to fix some of the problematic Sections in earlier drafts and may have headed off amendments that would have misstated the law in other areas, this was very much a collaborative effort that reflects the immense experience and passionate views of many members of the ALI and lawyers in the insurance community at large. I do think, however, that by engaging in a hard fought debate at our Advisers meetings and through letters and emails in between and finally at our floor discussions in Washington, D.C., I and others like me helped to ensure that the process was thoughtful and honest and, in most cases, correct.
As a project participant, you attended most (if not all) of the project meetings. Why was it important to you to contribute to the project by attending the Annual Meeting Liability Insurance sessions as well?
Masters: In attending ALI Annual Meetings, I have always been impressed with the seriousness and insights of members who delve into and comment on disparate issues outside their practice area. The value of the debate at ALI Annual Meetings in my view is to get the sense of the larger legal community on issues that can have broad impact on the law and on Society more generally. In the context of the RLLI, I found that comments by those not involved in the project often focused on the importance of the legal principles governing liability insurance as they affect other practice areas; the economy (as insurance helps facilitate innovation in commerce); and not just commercial policyholders and insurance companies, but individuals—who of course buy most of the insurance policies sold. All of us of any means are policyholders after all.
Personally, I felt it important to both observe the debate and participate in it. As the Proposed Final Drafts came up for debate and vote at Annual Meetings, I helped draft and comment on the targeted motions that policyholder representatives felt were important. I wanted to present my perspective as a longtime practitioner and advocate for policyholders, particularly given the many comments from both inside and outside the ALI. In 2017 and 2018, as the Annual Meeting drew near, the volume of commentary—both as part of the ALI process and in the press—increased dramatically. Some commentary has said (and frankly since approval has continued to say) that the ALI somehow “lost its way” in the project. Given my participation in the project and my understanding of the exacting work that went into it, I felt it important to participatein the debates at the Annual Meetings and to be able to confirm from my personal experience that these kinds of critiques of the ALI and the Restatement are unfounded.
Aylward: Attending the Annual Meetings gave me more insight into the thinking of the Reporters and other project participants and a better sense of some of the general themes that Tom and Kyle were trying to apply throughout the project. Although relatively few floor motions succeed at Annual Meetings, this is not always the case. Also, surprising things can sometimes happen that you can only respond to if you’re physically there. At the May 2017 Meeting, for instance, the project that was scheduled for debate before the RLLI finished much earlier than expected and ALI Council member Gary Sasso, who served as chair of the RLLI Annual Meeting session, rolled right into the discussion of the Insurance Restatement at 11:20 a.m. when most of the ALI members favorable to the insurance industry hadn’t yet flown in from out of town since the debate had been scheduled to start at 1 p.m. It may be the first and last 40 minute filibuster that the ALI has ever seen.
It’s also important to be there and make the arguments that matter. Even where floor motions do not carry, the arguments that are presented have a lingering effect and can sometimes sway the Reporters in their post-Meeting drafting. For instance, Bob Cusamano of Crowell & Moring (former general counsel to ACE) made what I thought was a very compelling argument at the 2016 Annual Meeting as to why § 24’s standards for holding insurers liable for failing to make reasonable settlement decisions failed to reflect the reality of litigation and insurance practice. His motion went down in flames by a voice vote but nearly all of what he argued for was in the next draft of Chapter 2 when it came out that fall. Similarly, Harold Kim of the Chamber of Commerce made some very practical comments in May 2018 concerning the impracticality of insurers being liable for not monitoring substance abuse problems with defense counsel that got voted down but was subsequently adopted by the Reporters in their Comments to § 12.
Masters: I also feel it important to say that the insurance industry was represented throughout in the process (except for a brief time in 2013-2014) by a liaison from the American Insurance Association (AIA). There really is no comparable “industry group” that represents policyholders in the same way. While Amy Bach of United Policyholders (UP) made valuable contributions as an Adviser throughout, UP, a small nonprofit (admittedly with an outsize impact), cannot compete with the resources of the AIA. I wanted to ensure that my perspective, informed by years of representing policyholders, from individual pro bono clients to Fortune 100 companies, and participation in debates at the meetings of Advisers, was heard.
Restatements are primarily addressed to courts. Do you think that the Liability Insurance Restatement will continue to be cited by courts? Are there some Sections you think may be cited more than others?
Masters: I believe that the RLLI will be cited in the same context in which other Restatements typically have been cited during my years of practice: When courts look for guidance on an unsettled question of law. Restatements are not law and, in my experience, do not sway courts when the jurisdiction has settled law on an issue. However, like influential treatises and other secondary sources, a Restatement can provide important guidance when the law is unsettled or has not been addressed.
Aylward: Now that this Restatement is available in its final form, I think that it is far more likely to be cited by litigants. Whether courts will rely on it is another story. Moreover, many of the most controversial Sections of this Restatement (e.g., §§ 3 and 24) are areas where most states already have abundant precedent and probably could care less what the ALI thinks. Where I do think that this Restatement will ultimately prove most influential are some of the more arcane areas, such as counting “occurrences” (§ 38) and the “drop down” obligations of excess insurers (§ 39), where many states don’t have precedents.
Masters: Given that insurance policies are contracts, I believe that §§ 2-4 on principles of policy interpretation will be influential not just on issues arising under liability insurance policies, but other kinds of insurance as well. Sections 24-28, addressing an insurers’ duty to make reasonable settlement decisions, seek to strike a middle ground in an issue of great importance to policyholders—the promise by a liability insurer to pay for the policyholder’s liability. Because the law on this very important duty is less uniform than that on the duty to defend, and because of the interplay between law on this issue and on insurance company bad faith, these Sections seem likely to provide useful guidance to courts (and advocates). The Sections on insurance company bad faith likely will be cited by both policyholders (perhaps particularly in states that have not adopted a bad-faith tort) and insurers (perhaps in states that have). The rules in § 13 relating to liability insurers’ other significant duty, the duty to defend, follow the generally applicable “potential for coverage” rule, with perhaps one exception that created much debate. That is the “one-way rule,” under which evidence outside the complaint against the policyholder and the insurance policy can be used when it confirms that the duty to defend applies—but not the other way, to deny coverage.
Two other principles addressed in the Restatement may be influential as well.
- Section 21 and § 47, Comment d, state that an insurer cannot seek to recoup the payment of policy proceeds paid in defense or liability absent and explicit agreement between the insurer and the policyholder allowing for such recoupment. This is a sensible rule that gets to the heart of why people buy liability insurance.
- Section 41 on the issue of “allocation” in claims involving “long-tail harm” changed 180 degrees in response to insurer comments and after the Council voted to change the project from a Principles project to a Restatement. That Section throughout was the subject of extensive debate and commentary, including motions at more than one Annual Meeting. We policyholder lawyers advocated strenuously for a different rule (“all sums”), in part because, unlike all the other Sections in the Restatement, this Section relies on principles of “equity” and “fairness,” and not the contract language. This is in contradiction to the rule in § 2(1) which defines insurance policy interpretation as “the process of determining the meaning of the terms of an insurance policy.” I feel confident, however, courts will (continue to) distinguish between these two approaches (“fairness” vs. “contract language”) when deciding this issue and will choose between them.
Both of you have signed up to participate on the Members Consultative Groups on several additional projects. Why is it important for you to dedicate your time to ALI’s work?
Aylward: For all that I think of myself as being an expert in insurance law, it is a narrow and somewhat confining area of the law and it’s engaging to see what else is bubbling up. Also, many of the projects, where I am on Members Consultative Groups, involve areas (e.g., data privacy, intentional torts) that can have an enormous albeit indirect impact on the emerging claims that give rise to insurance disputes.
Masters: The ALI has active projects on many issues of great personal and professional interest to me. I very much enjoyed the ALI process leading to the RLLI, learning much from the wide range of perspectives offered and appreciating the intellectual challenge of the process. I went to law school because I wanted intellectual challenge. Few organizations in which I have been active provide the same opportunity to consider the issues with this level of intellectual rigor and challenge. Particularly after my experience with the RLLI, I see ALI projects as presenting the opportunity to give back to the profession I love.