State Legislators Put the Brakes on ALI's Redesign of Insurance Law

The American Law Institute (ALI) is coming to Houston on Monday, February 25, to pitch its Restatement of the Law, Liability Insurance to a group of judges and lawyers from the Texas legal community…

By Lisa A. Rickard

The American Law Institute (ALI) is coming to Houston on Monday, February 25, to pitch its Restatement of the Law, Liability Insurance to a group of judges and lawyers from the Texas legal community in hopes of drumming up support for the controversial document.

But here’s the real reason for this road show: ALI is on the defensive in light of unprecedented pushback from state legislators over its aggressive reimagining of liability insurance law.

Even before ALI approved the Restatement at its annual meeting last May, the governors of Texas and five other states warned ALI President David F. Levi that its proposed changes to the law would intrude on the powers of state legislators to regulate the insurance industry within their borders. If the Restatement passed, the governors warned that the “implicit usurpation of state authority may require legislative or executive action.”

ALI brushed aside such concerns and passed the Restatement, including significant changes to how insurance policy language should be interpreted. Ohio responded swiftly by passing Senate Bill 239 in July, the first time a state has declared an ALI Restatement as contrary to public policy and not to be relied upon by its courts.

Tennessee and Michigan last year also amended their insurance laws to make it clear the Restatement doesn’t change existing common law within their states, and the Kentucky House of Representatives passed a resolution on a 90-0 vote stating that ALI’s description of insurance law should not “be afforded recognition by the courts as an authoritative reference.”

What’s behind this backlash? For most of its history, ALI’s Restatements have served as a sort of encyclopedia for attorneys and state and federal courts, describing the law as interpreted by judges around the country. But over time, mission creep has infected the process. Now ALI “reporters”—primarily academics with interests in specific fields of the law—are too often injecting their own ideas of what the law should be, or cherry-picking court decisions that reflect their views and reporting them as authoritative law, while ignoring others that run counter to their views.

The Insurance Restatement is filled with such overreach. While Texas law is clear that an insurer does not have any duty to make settlement proposals to a claimant suing a policyholder, the Restatement says it might be unreasonable for an insurer not to offer to settle with a claimant before trial.

The Restatement also expands the obligation of insurers to defend policyholders and exposes them to increased liability, including paying for punitive damages assessed against a policyholder for its wrongful conduct, if the insurer fails to settle claims quickly. The Restatement even skids into quasi-legislative policymaking by endorsing new standards for rescission of insurance contracts that are at odds with Texas law.

The question isn’t whether or not these are good ideas. It is whether these ideas actually reflect the current state of insurance law.

The reality is that many state legislators and courts have other ideas, and it is their prerogative to make insurance policy and interpret the law as they see fit. Already some judges are rejecting ALI’s interpretation of insurance law. A Delaware court dismissed the Restatement as “mere persuasive authority” and applied contrary Tennessee law on the question of recouping defense costs. A federal judge in Kansas similarly refused to adopt ALI’s expanded concept of insurer liability for the conduct of lawyers retained to defend policyholders.

With each refutation, the ALI loses a bit more of its credibility as an independent authority on what the law is. And there was no need for this to happen. A broad coalition of lawyers and state officials warned the organization it was straying out of its swim lane with the Insurance Restatement, but ALI chose to ignore them.

Now ALI members are considering a similarly sweeping Restatement of consumer contracts law, one that introduces new concepts like a “deceptive contract” theory and broadens the “unconscionability” doctrine to give courts more leeway to invalidate contract terms they find objectionable. These are problematic new ideas, and should not be in the jurisdiction of ALI reporters. 

Unless it wants to take another hit to its reputation, ALI should listen to its many critics and stick to stating what the law is in any Restatement of the Law, not what some academics think it should be.

Lisa A. Rickard is the president of the U.S. Chamber Institute for Legal Reform.