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Insurance and Mediation, Part 2: Mediation When There is a Reservation of Rights

9/25/2010

 
In the last post, we covered some of the basic issues regarding insurance and mediation, and issues that can arise when an insurer is involved providing a defense to an insured without a reservation of rights. This post will deal with the issues that can arise in a mediation when an insurer is providing a defense, but under a reservation of rights.

When an insurer reserves rights, it is putting the insured on notice that there may be reasons that the claim is not covered. In some states, a unilateral letter from the insurer can accomplish a reservation of rights. In other states, the insured must consent in what is often called a non-waiver agreement. Of course, the law varies from state to state and guidance should always be sought from a lawyer licensed in the particular jurisdiction.


The scope of a reservation can range from relatively insignificant (such as the possibility of part of a claim not being covered) to very significant (such as an exclusion that may serve to bar all coverage). The effect of a reservation on an insurer’s position at mediation can thus range from very insignificant to highly significant.


Here are some of the issues that the mediator will need to understand, preferably before the mediation begins:


The scope of the coverage issue.
A mediator involved in a mediation will want to know the following: (1) what is the basis for the reservation of rights? (2) What is the significance of the reservation? Is it minor or a potentially major barrier to coverage? If the coverage issue is not significant, it will probably have little practical effect on the mediation. If the coverage issue is significant, it may become a focal point of the mediation.

Will coverage lawyers be involved in the mediation?
The insurer may have its coverage counsel present at the mediation, taking the position that there is no coverage. This can in effect turn the mediation into a three-party mediation, and certainly complicates the potential for resolution.

It is thus important for the mediator to know if the insurer will bring its coverage counsel to the mediation, and, if so, whether the insured will have its own coverage counsel present. Most insureds, whether they are businesses or individuals, do not have a sophisticated understanding of coverage issues. It will usually be preferable, therefore, for the insured to have its own coverage counsel present to counterbalance the expertise of the insurer’s coverage counsel.


Is defense counsel “independent counsel”?
The mediator should also determine whether the insured’s defense counsel is “independent counsel,” meaning a lawyer not simply appointed by the insurer. In some jurisdictions, when an insurer reserves rights, the insured may be entitled to such independent counsel, to be provided at the insurer’s expense.

Although all defense counsel (whether appointed by the carrier or independent) are supposed to owe their professional obligations to the insured (and not the insurer), many courts and commentators have recognized the potential conflict inherent in the “tripartite relationship” between an insurer, the insured, and appointed defense counsel. Appointed defense counsel are typically on the carrier’s panel and get a substantial amount of business from repeated appointments by the carrier. Independent counsel do not have this financial tie. This may seem like a small point, but it is important to understand the motivations of all participants.


Assuming the mediator has established who the participants will be and their potential motivations, there are many issues that can arise during the mediation that revolve around the insurance issues. The remainder of this post will discuss some of them.


Authority to settle.
Coverage issues may lead to issues regarding the carrier representative’s authority to settle. The mediator will want to explore this issue, preferably prior to the mediation. If the carrier representative will have no realistic authority to settle, then either (a) the insured will have to come out of pocket to fund the settlement (which may in turn raise issues regarding the carrier’s right to control settlement), or (b) the plaintiff will have to be willing to accept a nuisance settlement. Obviously, neither of the alternative scenarios raises an optimal opportunity to settle, so it is important to gain an understanding of the carrier’s level of authority (or apparent level) as quickly as possible.

Coverage issues may affect the amount the plaintiff is willing to accept.
If the coverage position appears to have some substantive merit, and if the insured does not have independent resources to fund a settlement or pay a judgment, the plaintiff may be willing to accept a lesser settlement than would otherwise be the case. This can be a touchy issue, particularly for the claimant and the insured, and should be approached carefully by a mediator.

The insured needs to understand its risks if there are coverage issues.
Some insureds refuse to realize that insurance policies do not cover every claim. If the carrier’s coverage obligations appear questionable, then the mediator may need to give that feedback to the insured. As noted above, it also helps if the insured has its own coverage counsel present. It may be that the insured will need to fund all or part of a settlement to make it happen.

The carrier’s risk of a wrong guess on coverage.
  Although some insureds may not understand legitimate coverage issues, my experience suggests it is at least equally likely that the carrier will be taking a questionable coverage position. Many coverage lawyers who represent carriers seem to take extremely aggressive and questionable coverage positions, and cling them just as aggressively even when the potential weakness of those positions is brought to their attention.

 A mediator faced with such a position may want to remind the carrier representatives of some fundamental realities. First, an insurer, regardless of its reservation of rights, generally has an obligation to protect the interests of its insured. Second, the duty to defend is typically interpreted more broadly than the duty to indemnify. Thus, even if a carrier has a colorable coverage position, chances are that the carrier will be on the hook for defense costs, which can be significant. This fact may lead a carrier to compromise to avoid further defense costs. Third, any ambiguities in the policy will be construed against the carrier.

 If a carrier is taking an extremely aggressive position, refusing to provide a defense, or threatening to pull a defense, it may help to remind the carrier that it had better guess right on all counts. In other words, if the carrier is refusing to do anything, its position had better be correct that there is no duty to the insured -- to defend or indemnify -- or it may be exposed to liability under the policy and sometimes outside of the policy.

The insurer’s potential exposure for excess liability. An insurer that unreasonably refuses an offer to settle within its policy limits risks being held liable for any subsequent judgment, even if the judgment exceeds its policy limits. This is another factor that can come into play during settlement negotiations. Claims handlers usually are averse to exposure for “extra contractual” liability, or exposure beyond policy limits. Thus, a settlement offer from the plaintiff within policy limits may put pressure on a carrier even if it has a coverage position. (See the discussion above about the carrier’s risk of making a wrong guess).

Will the settlement resolve the coverage issues?
A carrier may try to resolve the underlying liability claim while seeking to retain the right to contest coverage with the insured. Obviously, this is not an optimal situation for the insured, because it will be trading litigation where the defense is being paid for by the insured for coverage litigation, in which the insured will have to pay its own counsel.

For a carrier with thoughtful claims handlers, a settlement that leaves coverage issues unresolved is probably not a good situation for the carrier, either. The carrier will still be looking at paying fees to litigate with its insured, instead of closing its file. A mediator should try to make every effort to resolve the entire dispute, including the coverage issues.


Conclusion.
When there are coverage issues, mediation becomes much more difficult. In such circumstances, a mediator needs to understand the motivations of all of the parties, including the carrier. The mediator needs to understand the basis for the carrier’s coverage position, and to try to develop an understanding of whether it is strong or weak. Even when there are coverage issues involved, the parties will often all have substantial reasons to want to settle the dispute. Although a mediation involving coverage issues becomes more difficult, it is not impossible to reach a resolution.

Insurance and Mediation

9/18/2010

 
Insurance is often an issue in mediation. In such instances, it is helpful to have an understanding of some of the dynamics that may arise because of the insurer’s participation in the case. As counsel, I have represented both insurers and policyholders (insureds) in litigation and in mediation (not at the same time, of course!).  Presently, I represent only policyholders, but I have an appreciation of the issues that insurers face under various circumstances.

 
This series of blog posts will examine some of the ways insurers can become involved in litigation and mediation and some of the resulting dynamics. Of course, these are general observations and are not intended to constitute legal advice. An insurer’s legal obligations (indeed, any party’s legal obligations) can vary substantially from state to state. It is thus important for parties to get legal advice from counsel in the particular jurisdiction.

 
An insurer can be involved in a dispute or litigation (and hence possibly in subsequent mediation) in three basic ways:

 
1. Defending the insured with no coverage issues involved. In such cases, the insurer is providing a defense without a reservation of rights or raising coverage issues. In such cases, the insurer is obligated to pay any settlement or judgment up to the amount of policy limits. The insurer also typically has the right to control and make any settlement without the insured’s consent. 2. Defending the insured with coverage issues. In such cases, the insurer is providing a defense under a reservation of rights.  This means that the insurer has raised coverage questions and may seek to disclaim or limit coverage. Sometimes, the lawyer defending the insured will be appointed by the insurer. Sometimes, the lawyer defending the insured will be “independent,” or selected by the insured, with the bills paid by the insurer.

 
3. Litigating a coverage case as a party.  In such a case, the insurer is actively litigating against the insured regarding whether there is coverage. The insurer may have denied coverage and may be a defendant against a coverage action brought by the insured. Conversely, the insurer may have filed a declaratory judgment against the insured asking the court to declare whether it has any coverage obligations. Sometimes the policyholder will have filed the declaratory judgment action.  In coverage litigation, the policyholder may also have brought a claim – either as a plaintiff or as a defendant asserting a counterclaim – for bad faith. The scope of insurance bad faith varies substantially from state to state. In some states, insurers are at substantial risk if they are found to have acted in bad faith. In other states, the risk is fairly minimal.

 
The remainder of this post will deal with the first situation, when the insurer is defending the insured without reservation.  The next two posts will deal with the latter two situations. When a carrier is defending without reservation, the carrier controls the defense. In most situations, the carrier will be making the decision about what to offer and how much to pay. Here are a few potentially important keys to settlement in such cases:
  •  The defense lawyer will be reporting to a claims handler for the insurer. The claims handler will make the decision about what to offer and what to pay. It is important that the claims handler be available at the mediation to make decisions. Sometimes, this can be accomplished by having the claims handler available by telephone to control costs. However, if it is a significant claim, it is reasonable to request the claims handler to be present in person.
  • Claims handlers typically have levels of authority. This means there is a limit to what a claims handler can authorize to pay without obtaining approval from a supervisor.  Sometimes, the supervisor then has to go further up the chain, and so on.  The mediator should establish prior to the mediation what levels of authority exist, and that any necessary supervisory personnel can be contacted during the mediation (often by telephone) to make decisions. As a general rule of thumb, the more substantial the claim, the more important it is for the mediator to make sure that the right insurance company representatives will be available.
  •  Claims handlers often need cover.  Many insurers and claims handlers do not object to paying claims as a general rule, but are concerned about being criticized internally for paying too much.  Claims files are sometimes subject to audit, and hence second-guessing. In many instances, a claims handler will want to have a communication in the file from defense counsel recommending the settlement. It may be even more helpful for the claims handler to document that a mediator independently suggested settlement at a particular level. To put it succinctly, some claims handlers are looking for a permission slip before they agree to write a check and mediators can help provide one.
  •  Defense costs matter. Under most liability policies, the duty to defend,  or to provide and pay for a lawyer to defend the case, is independent from the duty to indemnify, or to pay settlements or judgments. In such circumstances, the defense costs do not reduce the policy limits and are not affected by the policy limits. If a case will involve substantial additional defense costs, it may motivate a carrier to pay a settlement.
  • Policy limits come into play for the plaintiff. In some difficult cases, the policy limits may be less than the plaintiff would take to settle if there were higher limits or if the insured had substantial assets. If, as in many cases, the policy limits establish the maximum the plaintiff is likely to recover, they can often be used by the mediator to establish a bracket for negotiations.
  • Policy limits can come into play for the insurer.  Policy limits generally establish an insurer’s maximum payment obligation. In many states (but check with counsel in each jurisdiction), an insurer may have exposure beyond policy limits if it had an opportunity to settle within policy limits and refused to do so without a reasonable good faith basis.  The prospect of paying more than policy limits (called making an “extra-contractual payment”) is a daunting proposition for most insurers and their representatives.  Carriers are well aware of this risk. If a mediator can obtain an offer within policy limits, this factor may come into play in producing a settlement.
  • The insurer and defense counsel owe duties to protect the insured. In some circumstances, it is important to remember that defense counsel – even though appointed and paid by the carrier – owes fiduciary duties to the insured. There is generally nothing wrong with a defense lawyer working closely with the claims handler. Nevertheless, if a relationship that appears too chummy appears to be compromising the possibility of settlement and the insured’s interests, it may be worth a gentle reminder to defense counsel and the adjuster that they are supposed to be looking out for the interests of the insured.
 

It's Mediation, Not a Trial!

9/12/2010

 
I recently had another lawyer tell me that it was impossible to have a mediation within 30 days. Heck, I was hoping to have the mediation within two weeks.

Of course, the schedules of the parties and the mediator may make scheduling a mediation within a short time frame impossible.

Scheduling concerns, however, were not all this lawyer was concerned about. He wanted to prepare a mediation statement that sounded like a brief to be filed in a United States Court of Appeals. The preparation process he envisioned sounded like the all-consuming process of preparing for a trial (something that only lawyers who have done it really understand).

This approach strikes me as a bit contrary to the fundamental nature of mediation, which is supposed to be a relatively fast and efficient means of resolving disputes. Mediation, if successful, is supposed to save clients time and money.

I am not suggesting that lawyers should avoid preparing for mediation. Far from it. However, I am suggesting that lawyers should be efficient in how they prepare. If the parties have been in litigation for a while, they should already have the basic information needed to discuss settlement. In fact, it is a fairly rare case in which the basic information and issues are not known quite early in the process.

If the parties do not have the information necessary, they should consider using the mediation process first to establish a process for exchanging that information. Although I have seen this work and have written about it before, it never ceases to amaze me how how so many lawyers seem to view mediation as a "one shot" meeting at which the case either settles or does not. Sometimes, effective mediation needs to be a process.

Turning back to the basic subject, mediation is not a trial. It is also not an appellate argument. The mediator will need the parties to lay out the basic facts succinctly, probably in a written mediation statement. If there are fundamental legal issues, the mediation statement may need to address them. Frankly, in most cases (those where there does not need to be a further exchange of information) information), the lawyers should already have done most of the background work necessary to prepare the mediation statement. The mediation statement is meant to be informative; it does not need to be a magnum opus or a work of art.

Much has been written recently about how lawyers have turned U.S. arbitration proceedings into mirror images of bench trials in the litigation system, replete with full fledged discovery, motions to compel, and the obligatory motion for summary judgment (whether warranted or not). This, critics argue, has at least undermined the "faster and cheaper" part of the "faster, cheaper, better" mantra of arbitration proponents. At least based on anecdotal comments, some companies are reconsidering using arbitration in their dispute resolution provisions for just such concerns.

It would be a shame if lawyers are causing similar considerations to creep into mediation. In the "old days," the trial was the main event in civil litigation. Today, mediation is often effectively the main event, as few parties want to bear the expense and risk of going to trial. That does not mean that going to mediation ought to be approached as going to trial. The parties need to get the necessary information to the mediator as efficiently as possible and then proceed.

It is also worth noting that clients, particularly sophisticated clients, can usually tell when a lawyer is trying to resolve a case efficiently and when a lawyer is going through unnecessary motions, perhaps (charitably) out of a quest for perfection or because "that is just how it has always been done," or perhaps (not so charitably) out of a desire to bill hours before a case settles. Regardless, this is rarely a basis for a long-term relationship.

My advice is simple: Don't turn mediation into a trial or appellate argument. Prepare well, and have the information necessary to address the issues and negotiate. But please remember mediation is supposed to be an efficient means of reaching a settlement.

    Author

    John L. Watkins is a business litigation and business attorney and a registered mediator from Atlanta, Georgia. He will be blogging here from time to time regarding mediation and dispute resolution.

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