The Restatement of Liability Insurance in the Courts
This Director's Letter was originally published in the fall 2021 edition of The ALI Reporter.
A recent case in the U.S. District Court for the District of Maine considered when an insurer’s duty to defend ends if only some of the underlying causes of action are covered under the insurance policy.  The case arose under Maine law, but Maine’s state courts had not yet addressed the issue. The court looked to § 18 (Terminating the Duty to Defend a Legal Action) of the Restatement of the Law, Liability Insurance, and quoted Comment d, which explains that adjudication of the covered causes of action ends the duty to defend “provided that the time for taking an appeal from that adjudication has expired, any appeals have been resolved, or the claimant has relinquished its appeal rights.” Judge D. Brock Hornby recognized that one of his colleagues had previously reached a different conclusion on this question, but Judge Hornby explained that his colleague “did not have the benefit of the later Restatement analysis.”
It is gratifying to see that the Restatement of Liability Insurance is proving useful to judges because it has been one of the ALI’s more contentious projects. Some critics charged that the Restatement adopted several minority positions in a manner that increased liability on insurers and portended “dramatic changes to liability insurance law.” In response, the Reporters took an extra year to consider feedback from stakeholders in the insurance industry and to further refine the draft. Approved by the ALI membership in 2018 and published a year later, the Restatement of Liability Insurance has now been cited in over 50 cases by state and federal courts.
For lawyers and judges (and their law clerks) who lack backgrounds in insurance, the Restatement provides a helpful orientation. Courts often cite the Restatement to explain basic terms. A recent opinion by the U.S. Court of Appeals for the Fifth Circuit, for example, drew on § 33 (Timing of Events that Trigger Coverage) to distinguish “harm-based triggers of coverage” from “caused-based triggers of coverage,” and to define “deemer clauses,” which attribute a triggering event to a particular time even if reality was more complicated. Likewise, the Oregon Supreme Court used § 13 (Conditions Under Which the Insurer Must Defend) to explain the four-corners rule, noting that in the insurance context it is sometimes referred to as an “eight-corners” rule because the duty to defend is determined by the four corners of the complaint and the four corners of the insurance policy.
In addition to defining key concepts, courts are also using the Restatement to fill gaps in the law. One area in which the Restatement has been helpful involves insurers’ attempts to recoup defense costs. In these cases, the insurer defends the insured against a lawsuit despite believing that it has no duty to defend under the policy, and the insurer subsequently seeks to recoup the costs of the defense. Section 21 (Insurer Recoupment of the Costs of Defense) sets forth a default rule that “an insurer may not obtain recoupment of defense costs from the insured, even when it is subsequently determined that the insurer did not have a duty to defend or pay defense costs.” As Comment b to § 21 explains, this position differs from the ordinary rule for non-insurance cases set forth in § 35 of the Restatement of the Law Third, Restitution and Unjust Enrichment, which allows a party to perform a legally uncertain obligation while reserving the right to seek restitution. When the Restatement of Liability Insurance was completed, it noted that a slight majority of courts favored a default rule permitting insurers to recoup defense costs, although several recent court decisions opposed recoupment. When a Restatement adopts a minority rule, it is incumbent on the Institute to reveal that the rule is a minority rule so that courts are on notice of the split in authority. That happened here.
The divided case law reflects that recoupment is a tough issue. As the U.S. District Court for the Eastern District of Wisconsin observed, “[A] simple tally of the states on each side of this issue does not accurately reflect the controversy that underlies this question." After carefully weighing the Restatement and other authority, that court adopted § 21’s approach opposing recoupment, as did the U.S. District Courts for the Northern District of Georgia and for the Southern District of Indiana.
The Nevada Supreme Court’s contrary decision allowing recoupment offers an instructive example of a court making a principled rejection of the ALI’s position on a legal question in light of the governing law in that state. The court noted that the Restatement of Liability Insurance opposed recoupment because of “‘special considerations of insurance law’ that make insurance policies fundamentally different from other contracts.” But the court decided that this “reasoning is inconsistent with our precedent that ‘legal principles applicable to contracts generally are applicable to insurance policies’” and therefore favored the ordinary contract rule set forth in § 35 of the Restatement Third of Restitution and Unjust Enrichment. By carefully setting out the various positions on this issue, the Restatement of Liability Insurance helped the court make an informed decision in light of Nevada law. (A strong dissenting opinion advocated the position taken in the Restatement of Liability Insurance.)
But the principles of Nevada law that led the Nevada Supreme Court to reject the Restatement of Liability Insurance’s approach on recoupment recently spurred the court to follow the Restatement’s position on another issue. This question concerned whether the liability of an insurer that breached its duty to defend, but did not act in bad faith, should be capped by the policy limit plus any defense costs incurred by the insured, or whether the insurer should instead be liable for consequential damages related to its breach. In this case, Nevada’s commitment to ordinary contract principles were consistent with the Restatement’s position in § 48 (Damages for Breach of a Liability Insurance Policy) allowing consequential damages.
Another area in which the Restatement has aided courts involves insureds who fail to report claims in a timely manner. Generally, the notice-prejudice rule prevents an insurer from denying coverage to an insured who fails to provide timely notice of a claim unless the failure hinders the insurer’s ability to investigate or defend the claim. But a claims-made-and-reported policy includes a term conditioning coverage on the insured reporting the claim within a specified period. The Kentucky Court of Appeals recently had to decide whether to apply the notice-prejudice rule to a claims-made-and-reported policy that conditioned coverage in this manner, a novel question under Kentucky law. Using § 35 (Notice and Reporting Conditions), the court concluded that the notice-prejudice rule does not apply to a claims-made-and-reported policy and that an insurer may deny coverage under such a policy without having to show that it was prejudiced by the insured’s failure to report during the specified period. Two separate decisions by the U.S. District Court for the District of Vermont, applying Vermont state law, cited the Restatement in reaching the same conclusion.
Meanwhile, both the Texas Supreme Court and the Georgia Supreme Court have recently cited § 27 (Remedies for Breach of the Duty to Make Reasonable Settlement Decisions) in cases involving questions about settlements. It is especially significant that the Texas Supreme Court favorably cited the Restatement because Texas is one of several states that have enacted laws singling out the Restatement of Liability Insurance. In 2019, at the instigation of a powerful insurance industry lobbyist, Texas enacted Texas Civil Practice & Remedies Code § 5.001(b), which states, “In any action governed by the laws of this state concerning rights and obligations under the law, the American Law Institute’s Restatements of the Law are not controlling.”
As the above citation would seem to demonstrate, the practical effect of § 5.001(b)’s language is very limited. Statutes like Texas’ that say the Restatement is not “controlling law” simply express a truism. No Restatement is controlling law. The legislative history makes clear that Texas courts may still “continue to read Restatements, to consider Restatements, and to cite and quote from Restatements where relevant to the adjudication of controversies,” as the Texas Supreme Court did here.
The many cases citing the Restatement of Liability Insurance illustrate its role as a resource for the courts when they must exercise discretion in interpreting the law. In no case has a federal or state court treated the Restatement as controlling law—instead, courts have used the Restatement as an informative tool for understanding a complex field of law and for arriving at principled decisions when there are gaps in the law and no controlling precedent on point. In some contexts, the Restatement has been used by a court in a decision favoring the insurer. In other contexts, a decision favored the insured. Often, courts simply use the Restatement for useful background.
For these reasons, even insurance companies that have expressed doubts about the ALI’s work have found it useful to cite the Restatement of Liability Insurance. The Nevada cases discussed above are instructive. In the case on recoupment, for example, the insurer favored the position in the Restatement Third of Restitution and Unjust Enrichment—which was ultimately adopted by the Nevada Supreme Court—rather than the approach taken by the Restatement of Liability Insurance. But the insurer’s brief cited to the Reporters’ Note for § 21 of the Restatement of Liability Insurance in discussing the key California case on which its argument relied. And all stakeholders, including insurers, can benefit when Restatements bring greater clarity to the law. For instance, in a footnote in the case regarding consequential damages, the Nevada Supreme Court relied on § 13 of the Restatement of Liability Insurance to clarify that an insurer cannot use facts outside the complaint to justify its refusal to defend. An insurance company is now relying on that discussion of § 13 in a separate case seeking contribution and indemnification for defense and settlement costs from another insurer.
Recent decisions also belie claims that the Restatement of Liability Insurance lacks support in the case law. In the U.S. District Court for the District of South Dakota, an insurer objected that the court erred in relying on § 12 (Liability of Insurer for Conduct of Defense). According to the insurer, “the American Law Institute created the section ‘out of a complete absence of precedent.’” But after reviewing the case law, the court explained that “that is simply not true” and emphasized that there “are cases supporting the Restatement’s position that insurer[s] can be liable for overriding defense counsel’s independent professional judgment.” As the court observed when it followed § 12, “[t]he authority on this point might not be overwhelming, but the American Law Institute did not fashion § 12(2) out of whole cloth” as the insurer contended.
The Reporters, members, and Advisers who worked on this project should be proud that so many courts around the country are already finding the Restatement helpful in resolving difficult legal questions. Drafting a Restatement requires making difficult judgments when the case law on a particular question is close. But our long and careful drafting process, and the commitment and expertise of our project participants, ensure that each position in a Restatement reflects the considered judgment of The American Law Institute.
 Burka v. Garrison Prop. & Cas. Ins. Co., 521 F. Supp. 3d 97, 2021 WL 681119, at *9 (D. Me. 2021).
Id.at *9 n.23.
 Victor E. Schwartz & Christopher E. Appel, Restating or Reshaping the Law?: A Critical Analysis of the Restatement of the Law, Liability Insurance, 22 U. Pa. J. Bus. L. 718, 721 (2020); see also National Association of Mutual Insurance Companies, Our Positions | American Law Institute (ALI), https://www.namic.org/Issues/american-law-institute (last accessed Sept. 29, 2021).
 Travelers Indem. Co. v. Mitchell, 925 F.3d 236, 241, 246 (5th Cir. 2019) (citing Final Draft No. 2).
 W. Hills Dev. Co. v. Chartis Claims, Inc., 360 Or. 650, 653 (2016) (citing Tentative Draft No. 1).
 Hayes v. Wisconsin & S. R.R., 514 F. Supp. 3d 1055, 1060 (E.D. Wis. 2021).
Id. at 1064; Am. Fam. Ins. Co. v. Almassud, 522 F. Supp. 3d 1263, 2021 WL 1116328, at *4 (N.D. Ga. 2021); Selective Ins. Co. of Am. v. Smiley Body Shop, Inc., 260 F. Supp. 3d 1023, 1033 (S.D. Ind. 2017) (citing a discussion draft), motion for clarification, correction, and reconsideration granted in part on other grounds, Selective Ins. Co. of Am. v. Smiley, No. 116CV00062JMSMJD, 2017 WL 5197963 (S.D. Ind. July 28, 2017).
 Nautilus Ins. Co. v. Access Med., LLC, 482 P.3d 683, 689 n.7 (Nev. 2021) (en banc) (quoting Restatement § 21 cmt. b).
Id. at 695 n.7, 696 n.8 (Cadish, J., dissenting).
 Century Sur. Co. v. Andrew, 432 P.3d 180, 186 (Nev. 2018) (en banc) (citing Proposed Final Draft No. 2).
 Darwin Nat’l Assurance Co. v. Kentucky State Univ., No. 2019-CA-1811-MR, 2021 WL 1045716, at *5 (Ky. Ct. App. Mar. 19, 2021).
 Inn-One Home, LLC v. Colony Specialty Ins. Co., 521 F.Supp.3d 495, 506 (D. Vt. 2021), appeal filed (No. 21-791); ALPS Prop. & Cas. Ins. Co. v. Unsworth LaPlante PLLC, No. 5:20-CV-101, 2021 WL 2125368, at *3-6 (D. Vt. Jan. 25, 2021).
 In re Farmers Texas Cty. Mut. Ins. Co., 621 S.W.3d 261, 273, 275 (Tex. 2021); GEICO Indem. Co. v. Whiteside, 311 Ga. 346, 354, 361 n.24 (2021).
 Texas House Journal, 86th Legislature, Regular Session, Proceedings, Seventy-Second Day (May 23, 2019), at 5041-42 (https://journals.house.texas.gov/HJRNL/86R/PDF/86RDAY72FINAL.PDF).
 Nautilus Ins. Co.’s Opening Br. at 9 n.2, Nautilus Ins. Co. v. Access Med., LLC, 482 P.3d 683 (Nev. 2021) (No. 79130).
 Century Sur. Co. v. Andrew, 432 P.3d 180, 184 n.4 (2018) (en banc) (citing Proposed Final Draft No. 2).
 Appellants’ Opening Brief at 8-9, 41-42, Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co. (Nov. 12, 2020) (No. 81428).
 Sapienza v. Liberty Mut. Fire Ins. Co., No. 3:18-CV-03015-RAL, 2019 WL 5206289, at *4 (D.S.D. Oct. 16, 2019).
- ALI Council's Jan. meeting finishes today. In order for any portion of a project draft to be fully approved and the… https://t.co/D18iI9TSd1@AmLawInstJan 21
- In one week, ALI member Kristin Nicole Henning @GeorgetownLaw will discuss her book 'The Rage of Innocence: How Ame… https://t.co/ZdW9Inv0Sa@AmLawInstJan 21
- Patricia Lee Refo @SWLawNews was awarded the Medal of Honor from @worldjurist for her work promoting the rule of la… https://t.co/GIReq0oFJH@AmLawInstJan 21
- Today's ALI Council meeting includes project discussions on Model Penal Code: Sexual Assault, Policing, Property,… https://t.co/usrEXqSOHJ@AmLawInstJan 20
- M. Elizabeth Magill has been nominated as the ninth president of @penn. A full vote on Magill’s nomination will tak… https://t.co/ZFtjJhNPAp@AmLawInstJan 20