In Defense of the Restatement of Liability Insurance Law

Abstract

For most non-contractual legal claims for damages that are brought against individuals or firms, there is some form of liability insurance coverage. The Restatement of the Law Liability Insurance is the American Law Institute’s first effort to “restate” the common law governing such liability insurance policies, and we are the reporters. In a recent essay funded by the insurance industry, Yale Law Professor George Priest launched a strident critique of the Restatement project, arguing that the rules adopted in the Restatement (a) are radically contrary to existing case law, (b) have a naïve “pro-policyholder” bias that ignores basic economic insights regarding how insurance works, and (c) will, as a result of (a) and (b), lead to increases in liability insurance premiums and disruption in coverage, to the detriment of individuals and firms that need liability insurance. This essay argues that each of these claims is false. First, the Restatement rules all are grounded in existing law, and most already apply in most jurisdictions. Second, while the Restatement rules are premised on an exhaustive and detailed legal analysis, they also are informed by and consistent with modern economic and psychological research on how insurance markets work. By contrast, Priest’s critique ignores case law and relies on an unrealistic adherence to an outdated, pre-behavioralist model of economic rationality. Finally, because the underlying premises are untrue, Priest’s predictions of market disruption are analytically unsound, and he has not provided any evidence of problems in the insurance markets in which Restatement rules already apply that could provide an empirical foundation for these predictions.

Liability insurance companies have access to the best data that could prove or disprove such claims. If the insurance industry believes that broader application of the rules adopted in the Restatement will harm liability insurance markets, it should provide disinterested empirical legal studies researchers with access to the data needed to test that belief, rather than simply attacking the Restatement. The researchers can then use the data to evaluate the comparative effects of the legal rules among which the Restatement is choosing. As an industry that prides itself on sophisticated use of data and analytics, insurers should embrace the use of data to assess which legal rules are economically efficient, rather than simply making claims when there is a paucity of empirical evidence. As economically and empirically minded legal scholars, we would welcome such evidence, and we expect that the American Law Institute would as well.

Keywords: Insurance law, Restatement of Law Liability Insurance, RLLI, common law, insurers' defense obligations & costs, bias, markets, risk, risks, contracts, doctrine of contra proferentem, misrepresentation, duty to defend or make reasonable settlement decisions, empirical & behavioral economics

JEL Classification: G22, K13, K39