Insurance groups breathed a sigh of relief this week after legal scholars delayed a vote on a controversial restatement of liability insurance law.

As reported by our sister publication Insurance Journal, the American Legal Institute (ALI) on Tuesday formally decided to postpone a final vote on its full liability insurance restatement until next year. The authors in charge of the “Restatement of the Law, Liability Insurance,” agreed to spend some more time working on the document, with an eye on bringing a new final draft before the 2018 annual meeting for consideration.

The proposed controversial restatement would give policyholders more clout in disputes with insurers over policy language, claims settlements, application misrepresentations, an insurer’s duty to defend and other matters.

Insurance groups have been calling for a vote delay and reconsideration of key sections of the restatement.

The industry associations also claim that “significant changes” were made to the proposal since an earlier draft version was approved by the ALI membership but those changes have not been discussed in any meetings.

“Given our serious concerns about the unfairness and uncertainty this restatement would likely lead to, we are pleased ALI did not take a vote for final approval yesterday. We look forward to working over the next year to ensure this restatement is improved for everyone—insurers and policyholders,” commented J. Stephen Zielezienski, general counsel and senior vice president for the American Insurance Association.

The ALI, a group of legal scholars that provides summaries of the current state of case law and statutes that courts use as a guide, had been scheduled to vote on the full restatement on Tuesday. However, after what ALI termed “a thought-provoking discussion,” members voted to approve some new sections, but the authors—Tom Baker, a professor at the University of Pennsylvania Law School, and Kyle Logue, a professor at the University of Michigan Law School—agreed to do further work on the complete document. They hope to have a revised draft ready in the fall and a new final draft of the full restatement ready to be presented for consideration at next year’s ALI annual meeting.

Insurers, defense lawyers, regulators and lawmakers have expressed concerns about numerous sections of the redrafted document, arguing that they go beyond summarizing current legal thinking and adopt minority opinions on certain issues. They fear the changes will tip the scales in favor of policyholders in ways that could raise premiums and hurt the availability of insurance.

Tom Considine, CEO of the National Council of Insurance Legislators (NCOIL), also welcomed the reconsideration. “NCOIL legislators are pleased that the ALI heeded our advice,” said Considine in a written statement. “We continue to call for an immediate dialogue with the ALI to ensure their restatements do not creep into the realm of legislative prerogative.”

Tom Karol, general counsel for the National Association of Mutual Insurance Companies (NAMIC), applauded ALI for listening to critics and being willing to weigh amendments.

“NAMIC is grateful that its serious concerns regarding the restatement of insurance liability, which are shared by an array of legal experts, has helped convince the ALI to delay the approval on the full proposed final draft and consider several important amendments. Restatements that create new legal standards rather than restate the common law could have direct and serious impact on the availability of insurance coverage and increase premiums for policyholders,” Karol said.

Among the provisions being criticized is one that would limit an insurer’s defense when an applicant misrepresents information to only those misrepresentations that were intentionally or recklessly committed.

Critics have also questioned changes affecting an insurer’s breach of duty to defend and breach of duty to settle claims.

The restatement also carves out an exception to the traditional “plain meaning rule” governing contracts for cases where “extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning.”

Baker and Logue, the authors of the draft, have defended their work. They have rejected the criticisms that the changes are not grounded in solid legal opinion. They maintain that the industry has not proven the changes will harm insurance markets. They also maintain their work is “informed by and consistent with modern economic and psychological research on how insurance markets work.”

Topics Carriers