Critics of the restatement of the law, liability insurance (RLLI) published by the American Law Institute (ALI) this June point out that its provisions often deviate from established state rules. Focusing on the issues of misrepresentation in procurement, reservations of rights, notice conditions and settlement credits, this article highlights four key differences between the RLLI’s provisions and established Pennsylvania liability insurance law. These examples show both that the RLLI conflicts with settled Pennsylvania insurance law, and that the RLLI overrides important Pennsylvania public policy considerations.
Sections 7, 8 and 9: Misrepresentation
Section 7 of the RLLI lays out the test under which an insurer may rescind an insurance policy or deny a claim based on a misrepresentation made by a policyholder in its insurance application. To meet the RLLI test, the insurer must show that the misrepresentation is both material under Section 8, and that it “reasonably” relied on the misrepresentation “under the circumstances” under Section 9. The RLLI provides that a misrepresentation is “material” if “but for the misrepresentation, a reasonable insurer in the insurer’s position would not have issued the policy or would have issued the policy only under substantially different terms.” The RLLI’s proposed tests under Sections 7, 8 and 9 combine to impose an objective “reasonableness” standard and unprecedented burden on insurers seeking to rescind insurance contracts when policyholders have made material misrepresentations in procuring insurance coverage.
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