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Litigation and Uncertainty: The "More Than Twenty Percent Rule"?

5/11/2013

If you have read my prior posts, you know that I am a firm believer in the "twenty percent rule," which means that no matter how good your case is, there is always at least a twenty percent chance you will lose in litigation. In this post, I'd like to offer some additional thoughts on uncertainty in the current litigation environment.

These observations should be taken with a grain of salt. They are the views of one lawyer/mediator and thus are subjective and necessarily based on a limited sample size. They may simply reflect the views of an older person. To quote Bob Dylan: "I was so much older then/I'm younger than that now."

With that said, it seems to me that there is more uncertainty regarding the outcome of commercial litigation now than there was 20 years ago. The change is subtle and varies among jurisdictions.

In the federal court system, judges seem much more willing to decide cases on summary judgment than they were even ten years ago. I have read more and more decisions where federal judges essentially just decide the entire case (including damages) on summary judgment even though the case seems to have rather obvious issues of fact that should be tried.

On the one hand, some would argue that this adds to certainty, as it means the case is not put in the hands of a six person jury. On the other, it means that one person is going to decide the entire case.

Federal judges tend to be well-qualified and experienced, and they try to get it right. However, all judges are human and do not always decide cases correctly. In the insurance area (one of my primary practice areas), there are countless examples of federal judges making incorrect guesses regarding state insurance law. (For the non-lawyer readers, federal courts deciding state law questions are required to apply the law of the state in which they sit, and may have to guess how the state courts would decide if there is no clear state court precedent).

I am currently writing a law review article on this subject, but my article on insurance coverage for construction defects covers one area where the federal courts repeatedly incorrectly applied Georgia law until corrected by the Supreme Court of Georgia. There are many other examples.

If you think you are protected by an appeal, think again. Reversals in the federal system are becoming very rare. Although federal appellate courts are supposed to review cases granting summary judgment de novo (meaning to take a fresh look at the issue), this now seems much more theory than practice.

In the state court system, results are also uncertain. Most state court trial judges carry enormous case loads, and have had to deal with staff cuts. Cases involving hard legal issues merit careful thought and study, but the practical realities can intrude.

In Georgia where I practice, appellate review in the state court system is more likely to result in a reversal than in the federal system. However, the results are still not predictable.

The legal profession must share some of the blame. Throughout most of my career, it was standard practice for lawyers to conduct a thorough legal analysis of all but the most routine issues before filing a case or an answer. Today, clients rarely want to pay for this even though, in reality, a thorough legal analysis almost always results in better strategic decisions and better results.

Many lawyers thus file briefs that do not adequately address the issues, and overworked judges with few resources decide cases without the benefit of being provided sound legal analysis and sometimes even citations to controlling precedent. Westlaw and Lexis, the two large providers of legal databases, now make access to the parties' briefs in cases accessible. Thus, when one runs across a questionable court decision, it is often possible to review the briefs filed by the parties in advance of that decision. There are instances where questionable decisions seem to have resulted from the lawyers simply not making the correct arguments. Unfortunately, the resulting decisions become precedent, which only adds to the uncertainty.

What does all this mean for mediation? If a lawyer or a party is absolutely certain about its legal position, it should be very careful. There are certain cases where there is a controlling precedent directly on point, but they are relatively rare. Other than such cases, the chances of a court getting it "right" (from your point of view) are probably less certain than in the past.

Thus, when a mediator suggests that the result may be less certain than you may think, pay attention. The "twenty percent rule" may be creeping closer to the "twenty-five percent rule."

When Is the Right Time to Mediate? Know Thyself (or Your Client)

3/24/2013

The timing of a mediation is important and can substantially alter the chances of reaching a settlement. I have generally suggested that mediation should be held as soon as the parties have sufficient information to make informed decisions about a settlement. This post will offer some additional thoughts this basic issue.

Mediators rarely have the ability to control the timing of mediation. If one of the parties does not seem ready to settle, a mediator can suggest the further exchange of information and that the mediation be continued at a later date. Unfortunately, this is often not practical. Once the parties have decided to mediate, at least one of the parties is likely to view mediation as a one shot proposition. With this reality, the parties and counsel need to be as prepared as possible to move forward.

Although every person is different, there are certain patterns, or types, that one often sees in client representatives for mediation, which, in turn, present different needs for effective mediation preparation. Counsel need to be sensitive to these needs and client representatives may wish to engage in some candid introspection so that they recognize the information they will need to move forward. There is no right or wrong here, but simply a recognition that people are different.

1. The Pragmatist. This representative views litigation as a reality that should be resolved as quickly as possible. Once a pragmatist has the big picture, the settlement range becomes clear. Pragmatists will not insist on having every last piece of information and make decisions easily. Pragmatists are among the easiest representatives in mediation, although they may become frustrated if the other side is not equally ready to move forward. A pragmatist will be ready to mediate early in litigation, or perhaps even in advance of litigation.

2. The Stickler. A stickler wants as much certainty as possible before making a decision. Certainty means information and proof. Sticklers are openly skeptical of the opposing party's case and will insist that the opposing party be put through the paces to prove its position. Sticklers tend to identify strongly with their side and are reluctant to accept any possibility that their side might not prevail. Sticklers can be difficult in mediation, but, on the other hand, their approach can sometimes be effective. Sticklers will generally not be ready to mediate until a substantial amount of information has been exchanged, which generally means after discovery in the litigation.

3. The Procrastinator. A procrastinator is reluctant to make a decision. As such, it is generally fine for a procrastinator if the litigation runs its course for a while. Many procrastinators are really trying to avoid being second-guessed by others in their company. Procrastinators tend to need information, but they also need buy-in from their superiors on any settlement decision. Counsel need to make sure that the information is provided and that any necessary approvals in the chain of command have been obtained. Procrastinators will often not be ready mediate until late in the litigation process. However, if necessary approvals can be obtained, they may be prepared to move forward at an earlier time.

For counsel, the key is knowing the client representative and the client. This is not always as easy as it sounds. Asking questions such as "what information do you need to move forward," and "what would you view as a win" can help. As always, being a lawyer is at least as much an art as it is a science.

For client representatives, some candid introspection may be in order. If you do not feel ready to move forward, tell your counsel and let counsel know what more you need to make a decision.

Again, there is no right or wrong here. We are all human, and all of us probably have a bit of the pragmatist, the stickler, and the procrastinator in our DNA. Knowing your needs and tendencies (or those of your own client) will help prepare for (and time) a successful mediation. To quote Adam Smith: "The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer.”

In addition to knowing one's self, one has to make a judgment about the other side and when it will be ready to mediate. If one side is represented by a pragmatist and the other by a stickler, an early mediation is likely to fail because the stickler will not yet have enough detail to go forward. A candid exchange between counsel can help address this issue, but, again, doing so is as much an art as it is a science.

A Good Mediator Needs Iron in the Pants

11/14/2010

I was recently reminded that a good mediator needs iron in the pants (or, if applicable, skirt). What does this mean? It means that successful mediations often take time, and a mediator needs to be able to keep the mediation going and to stick with it.

So long as the parties are making progress, a mediator should press forward. Often, this makes for long days. I recently participated in a mediation that concluded at 10:30 p.m. I think my personal record is 1:30 a.m. Both cases settled.

Sometimes it makes sense to continue the mediation to another day. However, that is not always possible. Representatives may have flown in from out of town and may not be able to stay another day. Continuing the mediation to another day may also risk losing any momentum that has developed toward settlement, but that depends on the particular circumstances.

In any event, iron in the pants is a good quality for a mediator to have.

The Dark Side of Mediation: How a Mediator Can Lose Credibility

10/22/2010

I once had a case in mediation where my client was willing to make a major concession that went far beyond standing on its legal rights, which, in this particular instance, were quite clear. The mediator appreciated our approach, thanked us for being reasonable, and went to the other room.

However, after meeting with the other side, the mediator informed us that the other side did not think that this was a major concession, even though the mediator readily acknowledged that it was.

Apparently unable to move the other side off of an unreasonable position, the mediator started asking my client to make additional compromises. It was almost as if the mediator was saying, "Well, I can't talk any sense into them, so I'll try beating on you for a while, even though I think you are right." Needless to say, this went over in our room like a lead balloon.

The mediator's attitude seemed to be that the other party's subjective beliefs were entitled to at least equal weight with any objective evaluation of the law. Emotions and subjective beliefs are of course often at issue in mediations. But a mediator has to be able to deal with them, not just give in to them.

By giving equal -- if not controlling -- weight to the other party's subjective beliefs as to an objective view of the law, the mediator completely lost credibility with my side. The parties made no progress, probably ended up further apart, and the mediation was a failure.

This result was not surprising. A mediator needs to be an advocate: Not an advocate for either party, but an advocate for a reasonable settlement. If the mediator is willing to take positions that lack support, logic, or that appear -- without reason -- to favor one side over the other, the mediator loses credibility, just as would any other advocate.

Mediation and Insurance Part 3: Mediating Coverage Litigation

10/3/2010

This is the last of a series of posts on insurance issues that can arise in connection with the mediation and settlement of claims. The first post provided a general discussion of the issues. The second post discussed mediation of claims where the insurer is reserving rights. This post will discuss mediation of coverage litigation – a contest between the policyholder and the insurer.

There is no magic to resolving coverage disputes. There are, however, a few points that separate this type of mediation and claim from other commercial disputes.

Insurance coverage battles tend to be hard fought. There is often greater strife between policyholders and insurers than in cases involving other litigants.

From the policyholder’s perspective, the insurer gladly took the policyholder’s premium, and has now failed to perform. The insurer has forced the policyholder to engage counsel, often at considerable cost, in order to get the insurer simply to do what it should have done in the first place. A mediator may thus have to help diffuse the policyholder’s emotions.

The cause for the insurer’s attitude may be more difficult to ascertain. As a general rule, insurers seem to hire coverage lawyers with a pugilistic bent. These lawyers have probably recommended a coverage position to their client, and now have to defend it. The claims handler to whom they report may have encouraged the position, and may also be bent on defending it. The mediator will thus have to assess the strength of the carrier’s position. If the carrier’s position appears less strong than the carrier believes, the mediator’s challenge may be getting the carrier representative to understand there is some real risk.

Legal issues often predominate. More than most cases, coverage cases usually involve legal disputes. The mediator will thus want to encourage the parties to cover all outstanding legal issues in the mediation statement. In preparing for the mediation, the mediator will need to understand the legal issues fully, and may need to be prepared to offer an independent assessment at some point during the mediation.

If the issue appears to be a close question, reminding a carrier of some of the basic rules may be helpful. These rules typically include that ambiguities will be construed against the insurer, and that any exclusions will be interpreted narrowly.
The risk of a bad precedent may be significant. It must be remembered that insurance coverage disputes typically involve form contracts that tend to be litigated repeatedly. Thus, if a case involves an undecided point of law, the carrier may wish to settle, if only to avoid the risk a judicial precedent that could affect other cases.
Carrier representatives often need to justify a settlement internally. Insurance companies often have complicated reporting structures with multiple levels of authority. If a claims representative initially took an aggressive position regarding a claim, it is a safe bet that the representative has duly reported and defended the position to superiors. If a settlement would result in a substantial change in the company’s internal evaluation, the claims representative will need to justify it.

A mediator can be very useful in this regarding in providing feedback. If the feedback is specific and well-reasoned, it may provide the claims handler with the information necessary to change the internal evaluation, and hence to allow the case to settle.

However, it may well be impossible for the carrier to process this feedback during a mediation session. Therefore, coverage cases are more likely to involve multiple sessions than other cases.

Look for signs of flexibility coming into the mediation. Insurance companies often mediate coverage disputes when there is some concern that their position will not be sustained. The mediator should determine if the carrier has recently replaced its counsel or brought in additional counsel, as such a change may also reflect either concern or a changing attitude. Similarly, the mediator should determine if the claims handler has been in the case since the beginning or is new. A new claims handler may also signal a different attitude.

Bad faith, or extra-contractual liability, can be significant. As discussed in the second post in this series, carriers typically want to avoid exposure for bad faith, or, as the carriers sometimes put it, extra-contractual liability. If the policyholder is claiming bad faith, the mediator will want to understand the basis for the claim and the strength of the claim under applicable law (bad faith risk can vary substantially from state to state).

If the risk of bad faith appears minimal, the carrier is probably not going to give it much weight during negotiations. If there appears to be some real risk, then avoiding extra-contractual exposure, may motivate the carrier to settle. At the same time, the insured will need to understand that it is far easier to settle a claim if any settlement payment is “contractual” and not “extra-contractual.”

Insureds need to understand they can lose, too. Insurance carriers tend to be represented by coverage experts. Carriers do not lose every coverage battle. On the contrary, they often win.

Insureds may want to see things only their way. They may not understand the legal nuances relied upon by the carrier. Mediators can help insureds understand these issues, but, most importantly, that a win is probably not a sure thing.

Mediating coverage litigation does provide a challenge. However, a good mediator, particularly one that understands the coverage issues, will probably be able to help the parties reach a settlement.

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.

Author

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