Insurance and Mediation

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.