I am wondering if anyone uses (2)?

Yes. But rarely for a sound reason (IMO).

And people get burned because they used ArrayList when they should have used List:

• Utility methods like Collections.singletonList(...) or Arrays.asList(...) don't return an ArrayList.

• Methods in the List API don't guarantee to return a list of the same type.

For example of someone getting burned, in https://stackoverflow.com/a/1481123/139985 the poster had problems with "slicing" because ArrayList.sublist(...) doesn't return an ArrayList ... and he had designed his code to use ArrayList as the type of all of his list variables. He ended up "solving" the problem by copying the sublist into a new ArrayList.

The argument that you need to know how the List behaves is largely addressed by using the RandomAccess marker interface. Yes, it is a bit clunky, but the alternative is worse.

Also, how often does the situation actually require using (1) over (2) (i.e. where (2) wouldn't suffice..aside 'coding to interfaces' and best practices etc.)

The "how often" part of the question is objectively unanswerable.

(and can I please get an example)

Occasionally, the application may require that you use methods in the ArrayList API that are not in the List API. For example, ensureCapacity(int), trimToSize() or removeRange(int, int). (And the last one will only arise if you have created a subtype of ArrayList that declares the method to be public.)

That is the only sound reason for coding to the class rather than the interface, IMO.

(It is theoretically possible that you will get a slight improvement in performance ... under certain circumstances ... on some platforms ... but unless you really need that last 0.05%, it is not worth doing this. This is not a sound reason, IMO.)

You can’t write efficient code if you don’t know whether random access is efficient or not.

That is a valid point. However, Java provides better ways to deal with that; e.g.

public <T extends List & RandomAccess> void test(T list) {
    // do stuff
}

If you call that with a list that does not implement RandomAccess you will get a compilation error.

You could also test dynamically ... using instanceof ... if static typing is too awkward. And you could even write your code to use different algorithms (dynamically) depending on whether or not a list supported random access.

Note that ArrayList is not the only list class that implements RandomAccess. Others include CopyOnWriteList, Stack and Vector.

I've seen people make the same argument about Serializable (because List doesn't implement it) ... but the approach above solves this problem too. (To the extent that it is solvable at all using runtime types. An ArrayList will fail serialization if any element is not serializable.)

Finally, I'm not going to say "because its is good style". That "reason" is both a circular argument ("Why is it 'good style'?") and an appeal to an unstated (and probably non-existent!) higher authority ("Who says it is 'good style'?").

(I do think it is good style to program to the interface, but I'm not going to give that as a reason. It is better for you to understand the real reasons and come to the (IMO) correct conclusions for yourself. The correct conclusion may not always be the same ... depending on the context.)