On May 22, 2018, after many years of debate, the American Law Institute adopted the Restatement of the Law on Liability Insurance. Lawyers likely remember learning about restatements in law school. The volumes were learned tomes presenting summaries of the law on a particular subject, prepared by judges, academics and distinguished attorneys. Their mission was “to present an orderly statement of the general common law.” Courts regarded them as authoritative, and professors told their students to regard them with reverence. No longer. In 2015, in a dissent in Kansas v. Nebraska, 135 S. Ct. 1042, 1064 (2015), the late Justice Scalia wrote “… modern Restatements … are of questionable value, and must be used with caution …”

This probably will be the fate of the RLLI, which has encountered a storm of controversy. This article does not take a side on whether the RLLI is right or wrong but discusses why there is a controversy and how Texas—and some other states—are likely to deal with the RLLI.

What is so controversial? Probably the most disputed part of the RLLI is Section 3. The old rule was, that, if a judge found contract language to be unambiguous, the court should apply that language without allowing extrinsic evidence to be used to attempt to create an ambiguity. Now a reporter's comment indicates that a court can use “custom, trade and usage” evidence to interpret policies. Then there is Section 24, which some still read as placing a duty upon insurers to make settlement offers, even if no demand has been made, though language explicitly stating this was deleted in the final draft. Another controversial provision disliked by carriers makes them liable for the misconduct of the defense counsel. It is not only carrier-side lawyers that are unhappy with the final product. The RLLI adopts the “pro rata by years” method for allocation of indemnity costs with respect to long tail insurance coverage claims. Policyholder attorneys had fought for the “all sums” or “pick and choose” allocation method.

Indeed, while other restatements have received criticism, the criticism received by the RLLI seems to be worse than any other. One month before it was adopted, the president of the ALI received a letter from the governors of South Carolina, Maine, Iowa Nebraska, Utah and Texas stating, “Rather than offering a reliable and authoritative summary of existing law, the draft restatement proposes changes to established legal principles governing liability insurance contracts and disputes. Many of these proposed changes are properly within the prerogative of our state legislatures, at odds with established common law or both … if the ALI does not significantly revise or rescind the Draft Restatement, this implicit usurpation of state authority may require legislative or executive action.” This was strong language indeed.

In July 2018, the Ohio Legislature did act. It adopted an amendment to its Insurance Code that read:

The “Restatement of the Law, Liability Insurance” that was approved at the 2018 annual meeting of the American Law Institute does not constitute the public policy of this state and is not an appropriate subject of notice.

In 2018, Tennessee, Michigan and Kentucky all passed legislation stating the RLLI could not change the common law of their states. In April 2019, North Dakota passed a bill rejecting the RLLI, and Arkansas seems to be poised to do so, as well.

Texas is well aware of the RLLI. Indeed, following up on the April 2018 statement in the governors' letter that legislative action may need to be taken, there are now three bills in the Texas Legislature concerning the RLLI. Actually two bills concerns all restatements, but it is obvious that the RLLI was their focus. HB 2757 would amend the Civil Practice and Remedies Code and reads:

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

In the Senate, SB 2303, is in a similar vein. HCR 58 is a resolution supported by insurance carriers.The resolution reads in part:

“The ALI's most recent Restatement is neither consistent with well-established insurance law nor respectful of the role of state legislators in establishing legal standards and practice for the insurance industry, and it is not worthy of recognition by the courts as an authoritative reference.”

All of these bills are winding their way through the Legislature, and they may pass. Yet, are they really needed? Who would argue that a Texas court would, in fact, be influenced by the RLLI? Texas law is clear regarding the interpretation of the reasonableness of settlement demands. This is a matter of stare decisis. Why would a Texas Court look to the RLLI on this when the state has been developing case law in the area since the Stowers decision? Texas long ago ruled that carriers were not responsible for the misconduct of defense counsel. Is the RLLI going to change this? Not likely. Moreover, some parts of the RLLI actually harmonize with current Texas law. For example, the RLLI advocates that a counsel owes loyalty to his insured client, rather than the carrier who hired the counsel. This is upsetting to those who practice in the so-called “dual-loyalty” states. Yet this has long been the law in Texas.

Who knows what the future will bring for the RLLI in Texas or in any other state? It does appear, however, that it will not fully be accepted as “an orderly statement of the general common law.” Those days are over.

Stephen Pate is a partner in the insurance coverage practice at Cozen O'Connor in Houston. Over a 30-year career in coverage work, Pate has tried more than 45 first-party extracontractual cases to verdict.