How does the subject matter of a mediation affect the process? Does it make a difference in how you approach the mediation, select the mediator, and conduct the mediation? I think it does in a number of ways. Here are my thoughts.
Selection of the Mediator
This may be the most important factor relating to subject matter. Mediators with subject matter experience likely have an edge over those who do not. I am not saying that someone who is unfamiliar with the subject matter or law that governs the case cannot be effective; however, in some cases it really helps to have a mediator who knows how an industry works (e.g., insurance) or the law (e.g., intellectual property or employment disputes). I have been involved in many mediations (sometimes I represent the client in insurance issues but there is an underlying case that is the subject matter of the mediation) and it is really helpful to have a mediator who has already developed a body of knowledge and insight into the area of law which is at issue. It can give the parties – all sides – an edge towards resolution to have a mediator with that special knowledge.
Economic v. Emotional Claims
Cases with simply economic damages – a business dispute for example – require a different approach from those which involve emotional claims. Some mediators are very good at evaluating business losses, but lack the ability to connect with wrongful death or serious injury cases or other cases in which there is a high emotional component. I have found that some mediators just do not have sensitivity to emotional claims, while others seem to sense those that have real value and are able to accept monetary evaluations that reflect how a jury might respond to these claims.
Of course, the type of emotional claim is a consideration. For example, a wrongful death claim involving a young widow with three children or the loss of a long-standing spouse; both require serious thought on how to value those claims. And in my insurance bad faith cases there are often serious emotional claims based on an insurer’s refusal to pay, delay in paying, or attempting to “low ball” a claim involving serious injury or the loss of a home in a personal property damage claim. A mediator in these cases must be able to relate to these claims and deal with their compensation as an element of the damages component of the case being mediated.
Business Claims
Business cases require a mediator who has a business sense. Judges and lawyers who have been involved in business litigation while practicing or who have been heavily involved in the business side of the practice normally have a better insight into the these cases. I am not saying that those who do not cannot mediate business disputes, but it makes sense in complex business cases to select a mediator who has a head start on getting educated about the case.
Partnership and Closely Held Corporations and Family Business Matters
I do some mediating from time to time. It is not my regular diet as I still enjoy the advocacy of litigation and the challenge of representing clients. One of my most difficult assignments as a mediator, however, was a family business matter involving a closely held corporation. The sister had founded the company and the brother had come in after some time to run it. The sister was the marketing and sales force, while the brother controlled the financing and administration. The father was also a numbers person and worked with the brother. As time went on, the brother and sister did not see eye to eye about much; they could hardly be in the same room. The dispute threatened to sink the company, and outside investors were involved. I was asked to mediate. What a difficult case. Despite my efforts, I could not bring the brother and sister to a center point. The father refused to help. After premediation exchanges and a full day of mediation, I had to declare an impasse.
My sense is that I would have done better and had a greater chance of success if I had involved another mediator who had experience in family disputes, and perhaps even a non-lawyer. There are professionals out there who specialize in working with families who are wealthy and have ongoing business relationships or who are involved in ongoing businesses in which there are intrapersonal issues that impact the family business.
I tried to get these folks to entertain the idea of involving someone like I have described, but they were so far into the personal issues that it was too late. Had I recognized the severe schism between the brother and sister before the mediation, I may have been able to involve another professional who could help in getting the parties to see the issues and coming to grips with a solution that would save the business. Next time!
Class Actions
Here, experience counts. There are special issues which arise in these cases, including damages assessments and evaluation of the class claims, administrative issues pertaining to the evaluation of the individual claims of class members and means of distribution, apportioning the payments among various defendants, and attorneys’ fees, just to name a few. While I have not been involved in the mediation of a large class claim, I do know from my colleagues that there are some excellent mediators who have had considerable experience with mediating these disputes. So it seems appropriate to search these mediators out and consider them for class actions.
Injury Cases with Multiple Defendants
I find that injury cases with multiple defendants need a special kind of mediator – one who is skilled in dealing with typical plaintiff/defendant conflicts, as well as disputes between defendants and their carriers. Often there will be coverage issues with some of the insurers for the defendants, so those may be involved as well. Thus, you may have at least three layers of disputes: a) issues pertaining to the value of the plaintiff’s claim, b) issues pertaining to the apportionment of the loss among the defendants based on tort or contract concepts (tort as it pertains to the apportionment of the loss and contract based on contractual obligations among the defendants and indemnity provisions), and c) disputes between a defendant and its insurer.
Mediators in these cases must be able to stay organized, keep dialogue going at all levels, and create a plan for bringing all the disputes to a head and resolving them at all levels. These are very challenging cases, and you need a mediator who is willing to roll of up his or her sleeves and stay with the process. Sometimes, the ultimate resolution may not happen all at once. For example, there can be an agreement to resolve the main case, but disputes remain among the defendants and their carriers. A creative mediator will know how to manage this type of mediation even if the complete resolution is done piecemeal.
Injury Claims with Complex Liens
Lien claims can provide big hurdles to the resolution of an injury case. Workers’ compensation insurers, health insurers, and the government all can stick their noses into a case and stymie the resolution process. I have found that it helps if before the mediation, as plaintiff’s counsel, to have contacted any lien claimants, advised them of the mediation, invited them to attend, and discussed numbers for resolving those lien claims as soon as it is apparent that the parties are headed for a mediation. Once that is done, you should have a discussion with the mediator before the first mediation session about your progress in trying to resolve these claims, and alert the mediator as to the status of your negotiations. If there are anticipated hurdles then the mediator may want to contact that lien claimant or its counsel before the mediation to identify the issues and prepare him or herself for dealing with them at the mediation session.
Monday, December 14, 2009
Friday, November 13, 2009
Using Experts or Consultants at Mediation
One of the best techniques for settling cases at mediation is to take a consultant or expert witness with you to the session or at least have them available by telephone. I have used this approach in many cases with considerable success. The manner in which this is done varies depending on the complexity of the case, the extent of the consultant’s or expert’s involvement, and what disputes or unresolved issues depend on expert testimony.
Here are some examples:
• In an insurance long term disability bad faith case, plaintiff suffered from a serious inflammatory bowl disease. There were issues about the nature and extent of her medical problems, and the affect it had on our public defender client, who was frequently under the stress and pressures of her courtroom and client work. Her gastroenterologist was several hours away from the mediation site. We interviewed him on video for the mediation in a mini direct examination and offered the defense the opportunity to talk to him on the phone – with the interview protected by the confidential nature of the proceedings – to ask any questions for clarification. They did. The conversation lasted about 45 minutes, and the case settled well at the end of the day.
• In a complicated tax shelter fraud case involving the use of life insurance in what was touted to be a legitimate tax free deferred compensation program, our life insurance consultant attended the mediation with us to help the mediator understand the case, evaluate the defense’s position, and review the settlement terms. It turns out the representative of the defendant and our consultant had a long time relationship of trust. That certainly helped in achieving a settlement. Even if that had not been the case, our consultant was invaluable in assisting us in getting to a settlement
• In a wrongful death case involving an charming 25-year-old eldest daughter of a Filipino family, we had two consultants – one an “all purpose” coordinating consultant on highway design and other issues (he helped coordinate and interpret the work of the those serving as expert trial witnesses), and another on the Filipino culture and the role of the family in that culture. The second expert was very persuasive on emphasizing the expectations of parents in that culture for the support of their children, particularly the eldest, as the parents grow older and less able to care for themselves. This was an important part of our case for economic and non-economic damages. Both experts were outstanding, and we got an excellent result for our clients in the settlement.
There are other examples of how consultants and experts can be used at mediation. For instance, we often prepare a mediation video with 20-40 minute mini direct examinations of experts or consultants [even if the consultant is not going to be an expert trial witness] to explain our position or provide information to the defense about technical or medical issues in the case. We use consultants in some cases where there may be several expert trial witnesses eventually, but we use a consultant to address multiple expert issues. We have medical consultants who work with our firm who have broad knowledge and can provide an overview of the case without requiring us to call on several witnesses or treating physicians and incur that expense for the mediation. Sometimes the consultant will use the records and reports of the treating physicians or expert trial witnesses (if they have been obtained) to portray the issues and provide an analysis. Again, we use the protection of the mediation’s confidentiality when these consultants are used. In most cases, I get an agreement from the defense that we can bring this consultant to the mediation for this purpose and that the defense will honor the confidentiality protection. I have never had my opposition decline to accept this offer.
To me, using consultants and experts at mediation is a very positive tool in specific cases in which there are medical or technical issues that need to be addressed. In doing so, we need to be efficient so the consultant can provide effective way to assist the mediator and your opposition in understanding your client’s case.
Here are some examples:
• In an insurance long term disability bad faith case, plaintiff suffered from a serious inflammatory bowl disease. There were issues about the nature and extent of her medical problems, and the affect it had on our public defender client, who was frequently under the stress and pressures of her courtroom and client work. Her gastroenterologist was several hours away from the mediation site. We interviewed him on video for the mediation in a mini direct examination and offered the defense the opportunity to talk to him on the phone – with the interview protected by the confidential nature of the proceedings – to ask any questions for clarification. They did. The conversation lasted about 45 minutes, and the case settled well at the end of the day.
• In a complicated tax shelter fraud case involving the use of life insurance in what was touted to be a legitimate tax free deferred compensation program, our life insurance consultant attended the mediation with us to help the mediator understand the case, evaluate the defense’s position, and review the settlement terms. It turns out the representative of the defendant and our consultant had a long time relationship of trust. That certainly helped in achieving a settlement. Even if that had not been the case, our consultant was invaluable in assisting us in getting to a settlement
• In a wrongful death case involving an charming 25-year-old eldest daughter of a Filipino family, we had two consultants – one an “all purpose” coordinating consultant on highway design and other issues (he helped coordinate and interpret the work of the those serving as expert trial witnesses), and another on the Filipino culture and the role of the family in that culture. The second expert was very persuasive on emphasizing the expectations of parents in that culture for the support of their children, particularly the eldest, as the parents grow older and less able to care for themselves. This was an important part of our case for economic and non-economic damages. Both experts were outstanding, and we got an excellent result for our clients in the settlement.
There are other examples of how consultants and experts can be used at mediation. For instance, we often prepare a mediation video with 20-40 minute mini direct examinations of experts or consultants [even if the consultant is not going to be an expert trial witness] to explain our position or provide information to the defense about technical or medical issues in the case. We use consultants in some cases where there may be several expert trial witnesses eventually, but we use a consultant to address multiple expert issues. We have medical consultants who work with our firm who have broad knowledge and can provide an overview of the case without requiring us to call on several witnesses or treating physicians and incur that expense for the mediation. Sometimes the consultant will use the records and reports of the treating physicians or expert trial witnesses (if they have been obtained) to portray the issues and provide an analysis. Again, we use the protection of the mediation’s confidentiality when these consultants are used. In most cases, I get an agreement from the defense that we can bring this consultant to the mediation for this purpose and that the defense will honor the confidentiality protection. I have never had my opposition decline to accept this offer.
To me, using consultants and experts at mediation is a very positive tool in specific cases in which there are medical or technical issues that need to be addressed. In doing so, we need to be efficient so the consultant can provide effective way to assist the mediator and your opposition in understanding your client’s case.
Monday, October 26, 2009
Top 10 Reasons Why Cases Do Not Settle at Mediation
Here are my top ten reasons why cases do not settle at mediation with some brief comments about each. You probably can add more. But give these some thought.
No. 10: You are not ready. This is an obvious reason, so not much need be said. It is better to postpone a scheduled mediation if you believe that you are simply not at a readiness level that will maximize your client’s chance for a productive and successful day.
No. 9: Your client is not prepared. What have you done to educate your client about the mediation process and its important aspects? Is your client prepared to discuss the economics of settlement? Are his/her expectations reasonable? Is your client willing to listen to the other side and the mediator about the issues? Does your client understand this is a non-binding process in which he/she does not have to testify or even say anything, and that the mediator is not a decision maker? Have you explained how the process works, so that your client understands this is not like being in court? Most importantly, does your client understand the concept of confidentiality? Finally, if your client is going to say anything, have you rehearsed what is to be said and planned for it?
No. 8: Your opposition is not prepared or does not understand your case. Sometimes this is difficult to assess. I have on occasion called opposing counsel to determine for myself if he or she understands the case or issues, and also if the claims representative or client representative is well informed on the issues and will be present to participate in the mediation. I want the check writer there. If there are problems in this arena, I call the mediator to see what can be done to insure that the client representative has authority to negotiate in the financial arena into which I believe the case falls.
No. 7: The mediator is not prepared or ineffective. Frankly, I have experienced a few situations in which I was sorry that the chosen mediator was selected. This is particularly true when the mediator a) limits his or her participation in caucuses with your client and you (e.g. does not provide constructive guidance on how to posture demands and responses to offers), or simply wants to be a messenger to transmit demands and offers back and forth. There are some occasions in which the mediator has been ineffective and I have had to guide the mediator during the mediation. Believe it or not, in the couple of instances in which this has happened, we have achieved a settlement. Essentially, however, we were negotiating directly with an intermediary to carry the mail back and forth. That is not my idea of how a mediation should be conducted!
No. 6: The emotions of the parties or their counsel interfere with the process. We all know that in many cases, the emotions of the parties run high. In those cases, a mediation is likely to fuel them despite the best counsel from a lawyer. First, it is important for you to assess if this will be the situation on your client’s mediation day. Second, if that is the case, then obviously you need to counsel the client to see if emotions can be tempered. You might also discuss potential hot points with opposing counsel and involve the mediator so that tensions can be tempered and the day managed with the clients in control. Most important is to be honest in assessing the circumstances so that you can anticipate any problems of this kind interfering with the process.
No. 5: The parties do not understand the economics of the case. This is a common problem in mediation. Clients must understand and be prepared for talk about dollars and cents. What is the realistic potential for damages if liability is found? What are the various scenarios for a jury or court on the damages issues? Given these, what is it going to cost to get there, and what numbers might a party see at the end of the day? The defense must also understand the exposure. I respectfully refer you to the September 2008 Journal of Empirical Legal Studies (Vol. 5, No. 30, pp. 451-491), a joint venture of Cornell Law School and the Society of Empirical Studies, in which there are published results of a quantitative evaluation of “the incidence and magnitude of errors made by attorneys and their clients in unsuccessful settlement negotiations.” The study entitled, “Let’s Not Make A Deal: An Empirical Study of the Decision Making In Unsuccessful Settlement Negotiations,” was done by two faculty members and a graduate student from the Wharton School of Finance, University of Pennsylvania. The study analyzed 2,054 California cases in which the plaintiffs and defendants participated in settlement negotiations unsuccessfully and proceeded to arbitration or trial, and compared the parties’ settlement positions with the award or verdict. The study “reveal[s] a high incidence of decision-making error by both plaintiffs and defendants in failing to reach a negotiated resolution.” I discussed this study in my December column last year.
No. 4: The parties lack credibility. The Three C’s of mediation are: Credibility, Confidentiality, and Communication. I work very hard to gain the confidence of my opposition and avoid hostilities. Our clients may disagree, vent, and be angry during the litigation, but counsel must establish a credible basis for dealing with each other. If so, there is a high chance that the mediation day will be successful. If not, then the mediator should know that the parties are having difficulty communicating, and the lawyers are too!
No. 3: The parties are not candid with each other and the mediator. Misleading a mediator or an adversary will only lessen the ability of the parties to work together. Advocacy at mediation is different from advocacy in the ordinary process of litigation. I don’t mean to suggest that being dishonest is acceptable in any way at any time. However, the spin doctors don’t do well at mediation. It is important to recognize the issues, and discuss them candidly and honestly with the mediator and even the opposition. Open discussion leads to a fair assessment of the case which leads to resolution.
No. 2: Client expectations are too high. This is a corollary to the principle that the parties understand the economics of the case. A plaintiff may have expectations of a recovery which are not justified given the picture regarding liability, causation and damages – and maybe even collection. A defendant may believe that a mediation is a “fire sale” for the plaintiff. On both sides the costs of proceeding must be assessed. Without a clear understanding of the economics of the case, the parties cannot bargain responsibly.
No. 1: Counsel is unable to control the client. We have all had experiences in which a client simply will not process the information we provide, as well as our advice and counsel. Each of us all has ways to get around and pierce through the stubborn exterior of a client. But sometimes we are not as successful as we would like. I do not hesitate to have a private conversation with our mediator about the expectations for client behavior. Often I find a mediator can have a great influence on a client by repeating – perhaps in different words – the message about the case that the client seems to resist hearing.
No. 10: You are not ready. This is an obvious reason, so not much need be said. It is better to postpone a scheduled mediation if you believe that you are simply not at a readiness level that will maximize your client’s chance for a productive and successful day.
No. 9: Your client is not prepared. What have you done to educate your client about the mediation process and its important aspects? Is your client prepared to discuss the economics of settlement? Are his/her expectations reasonable? Is your client willing to listen to the other side and the mediator about the issues? Does your client understand this is a non-binding process in which he/she does not have to testify or even say anything, and that the mediator is not a decision maker? Have you explained how the process works, so that your client understands this is not like being in court? Most importantly, does your client understand the concept of confidentiality? Finally, if your client is going to say anything, have you rehearsed what is to be said and planned for it?
No. 8: Your opposition is not prepared or does not understand your case. Sometimes this is difficult to assess. I have on occasion called opposing counsel to determine for myself if he or she understands the case or issues, and also if the claims representative or client representative is well informed on the issues and will be present to participate in the mediation. I want the check writer there. If there are problems in this arena, I call the mediator to see what can be done to insure that the client representative has authority to negotiate in the financial arena into which I believe the case falls.
No. 7: The mediator is not prepared or ineffective. Frankly, I have experienced a few situations in which I was sorry that the chosen mediator was selected. This is particularly true when the mediator a) limits his or her participation in caucuses with your client and you (e.g. does not provide constructive guidance on how to posture demands and responses to offers), or simply wants to be a messenger to transmit demands and offers back and forth. There are some occasions in which the mediator has been ineffective and I have had to guide the mediator during the mediation. Believe it or not, in the couple of instances in which this has happened, we have achieved a settlement. Essentially, however, we were negotiating directly with an intermediary to carry the mail back and forth. That is not my idea of how a mediation should be conducted!
No. 6: The emotions of the parties or their counsel interfere with the process. We all know that in many cases, the emotions of the parties run high. In those cases, a mediation is likely to fuel them despite the best counsel from a lawyer. First, it is important for you to assess if this will be the situation on your client’s mediation day. Second, if that is the case, then obviously you need to counsel the client to see if emotions can be tempered. You might also discuss potential hot points with opposing counsel and involve the mediator so that tensions can be tempered and the day managed with the clients in control. Most important is to be honest in assessing the circumstances so that you can anticipate any problems of this kind interfering with the process.
No. 5: The parties do not understand the economics of the case. This is a common problem in mediation. Clients must understand and be prepared for talk about dollars and cents. What is the realistic potential for damages if liability is found? What are the various scenarios for a jury or court on the damages issues? Given these, what is it going to cost to get there, and what numbers might a party see at the end of the day? The defense must also understand the exposure. I respectfully refer you to the September 2008 Journal of Empirical Legal Studies (Vol. 5, No. 30, pp. 451-491), a joint venture of Cornell Law School and the Society of Empirical Studies, in which there are published results of a quantitative evaluation of “the incidence and magnitude of errors made by attorneys and their clients in unsuccessful settlement negotiations.” The study entitled, “Let’s Not Make A Deal: An Empirical Study of the Decision Making In Unsuccessful Settlement Negotiations,” was done by two faculty members and a graduate student from the Wharton School of Finance, University of Pennsylvania. The study analyzed 2,054 California cases in which the plaintiffs and defendants participated in settlement negotiations unsuccessfully and proceeded to arbitration or trial, and compared the parties’ settlement positions with the award or verdict. The study “reveal[s] a high incidence of decision-making error by both plaintiffs and defendants in failing to reach a negotiated resolution.” I discussed this study in my December column last year.
No. 4: The parties lack credibility. The Three C’s of mediation are: Credibility, Confidentiality, and Communication. I work very hard to gain the confidence of my opposition and avoid hostilities. Our clients may disagree, vent, and be angry during the litigation, but counsel must establish a credible basis for dealing with each other. If so, there is a high chance that the mediation day will be successful. If not, then the mediator should know that the parties are having difficulty communicating, and the lawyers are too!
No. 3: The parties are not candid with each other and the mediator. Misleading a mediator or an adversary will only lessen the ability of the parties to work together. Advocacy at mediation is different from advocacy in the ordinary process of litigation. I don’t mean to suggest that being dishonest is acceptable in any way at any time. However, the spin doctors don’t do well at mediation. It is important to recognize the issues, and discuss them candidly and honestly with the mediator and even the opposition. Open discussion leads to a fair assessment of the case which leads to resolution.
No. 2: Client expectations are too high. This is a corollary to the principle that the parties understand the economics of the case. A plaintiff may have expectations of a recovery which are not justified given the picture regarding liability, causation and damages – and maybe even collection. A defendant may believe that a mediation is a “fire sale” for the plaintiff. On both sides the costs of proceeding must be assessed. Without a clear understanding of the economics of the case, the parties cannot bargain responsibly.
No. 1: Counsel is unable to control the client. We have all had experiences in which a client simply will not process the information we provide, as well as our advice and counsel. Each of us all has ways to get around and pierce through the stubborn exterior of a client. But sometimes we are not as successful as we would like. I do not hesitate to have a private conversation with our mediator about the expectations for client behavior. Often I find a mediator can have a great influence on a client by repeating – perhaps in different words – the message about the case that the client seems to resist hearing.
Friday, September 4, 2009
Getting Past the Impasse at Mediation
You and your client have mediated for a full day. The mediator has worked hard. But there is no deal and the parties are still a ways apart. An impasse has been reached, and the prospects for breaking through look dim. What happens next?
There are a number of possibilities and skilled mediators know how to deal with what you would hope is a temporary “blip”’ in the negotiations.
First of all, your client should be prepared for this. I normally tell my clients that this is our first day of real negotiations. We would not be going if we were not prepared and interested in settling. But we are just one side. The defendant(s) may or may not have the right attitude about settlement, or may be fighting among themselves as to their respective shares.
Second, I have a basic operating principal in mediations. If the parties are talking there is hope, so KEEP TALKING if you are interested in getting the job done and a resolution of your clients’ case.
So what are the alternatives if the parties reach the end of the day or it’s apparent during the mediation day that they are stuck and the process has bogged down?
No. 1: Use a “mediator’s field of play”: Here the mediator proposes a “demand” and “offer” which each side must accept. That is, the plaintiff must agree to make the proposed “demand” and the defense (if more than one then perhaps a joint offer) agrees to the proposed offer. Once that occurs then the parties negotiate further. This approach is used when the plaintiff is holding back and making “demands” that are too high and the defense is standing on an offer that one might characterize as “way too low.” That is, each side is being unrealistic. The approach I describe forces the parties into an appropriate mediating range or “field of play” that allows them to get back to mediating.
No. 2: Adjourn and come back another day: This often happens. Perhaps there is more discussion that needs to take place between lawyer and client, or the parties need more discovery. However, if there is real interest in a settlement among all parties, a second session after some time passes and some additional work is done, often can lead to resolution.
No. 3: Separate sessions with the parties: If there are disagreements among several defendants, but overall they have a sense of what collectively might result in a settlement, perhaps a separate settlement session with the defendants will allow them to discuss their respective shares.
No. 4: The mediator works the phones: Here the mediator takes the responsibility of continuing negotiations by calling the parties separately and discussing resolution. This can work in the situation where the parties are close but closure does not occur. Maybe the defendant or defendants need to request additional authority, and cannot accomplish this during the mediation day. Or perhaps the mediator wants some time to talk to the parties separately without the time pressures of a work day. The disadvantage is that the mediator loses the face-to-face encounter, and also has the inconvenience of trying to reach counsel, who are often occupied during the business day. This becomes more of a problem when there are time differences. But continuing the mediation process is better than abandoning it. Perhaps the mediator can even bring the parties back to a face-to-face process if he runs out of nickels for the phone call!! (I remember when.)
No. 5: A mediator’s proposal: This is the last resort for a mediator to settle a case where the parties are reasonably close but are unable to make the final move to closure. Here the mediator proposes a number and the terms of a settlement. Both sides are advised of such and given the opportunity to accept or not. If the parties accept the mediator’s proposal, then the deal is done. If not, there is no settlement. In my experience, mediators are reluctant to do a mediator’s proposal unless there is a real chance the parties will accept it. These are normally very reasonable proposals which are irresistible in most cases. I cannot remember a case in which a mediator’s proposal was not accepted by the parties, but then this approach is not one that occurs with great frequency. Used properly by a mediator it can be an effective tool for resolution.
There are other approaches as a mediation is subject to the creativity of the mediator and the parties. But as long as the parties “keep talking” there is hope for a settlement. After all, as noted in previous columns, history and statistics demonstrate that the parties are likely to do better by settlement than concluding the matter by arbitration or trial.
There are a number of possibilities and skilled mediators know how to deal with what you would hope is a temporary “blip”’ in the negotiations.
First of all, your client should be prepared for this. I normally tell my clients that this is our first day of real negotiations. We would not be going if we were not prepared and interested in settling. But we are just one side. The defendant(s) may or may not have the right attitude about settlement, or may be fighting among themselves as to their respective shares.
Second, I have a basic operating principal in mediations. If the parties are talking there is hope, so KEEP TALKING if you are interested in getting the job done and a resolution of your clients’ case.
So what are the alternatives if the parties reach the end of the day or it’s apparent during the mediation day that they are stuck and the process has bogged down?
No. 1: Use a “mediator’s field of play”: Here the mediator proposes a “demand” and “offer” which each side must accept. That is, the plaintiff must agree to make the proposed “demand” and the defense (if more than one then perhaps a joint offer) agrees to the proposed offer. Once that occurs then the parties negotiate further. This approach is used when the plaintiff is holding back and making “demands” that are too high and the defense is standing on an offer that one might characterize as “way too low.” That is, each side is being unrealistic. The approach I describe forces the parties into an appropriate mediating range or “field of play” that allows them to get back to mediating.
No. 2: Adjourn and come back another day: This often happens. Perhaps there is more discussion that needs to take place between lawyer and client, or the parties need more discovery. However, if there is real interest in a settlement among all parties, a second session after some time passes and some additional work is done, often can lead to resolution.
No. 3: Separate sessions with the parties: If there are disagreements among several defendants, but overall they have a sense of what collectively might result in a settlement, perhaps a separate settlement session with the defendants will allow them to discuss their respective shares.
No. 4: The mediator works the phones: Here the mediator takes the responsibility of continuing negotiations by calling the parties separately and discussing resolution. This can work in the situation where the parties are close but closure does not occur. Maybe the defendant or defendants need to request additional authority, and cannot accomplish this during the mediation day. Or perhaps the mediator wants some time to talk to the parties separately without the time pressures of a work day. The disadvantage is that the mediator loses the face-to-face encounter, and also has the inconvenience of trying to reach counsel, who are often occupied during the business day. This becomes more of a problem when there are time differences. But continuing the mediation process is better than abandoning it. Perhaps the mediator can even bring the parties back to a face-to-face process if he runs out of nickels for the phone call!! (I remember when.)
No. 5: A mediator’s proposal: This is the last resort for a mediator to settle a case where the parties are reasonably close but are unable to make the final move to closure. Here the mediator proposes a number and the terms of a settlement. Both sides are advised of such and given the opportunity to accept or not. If the parties accept the mediator’s proposal, then the deal is done. If not, there is no settlement. In my experience, mediators are reluctant to do a mediator’s proposal unless there is a real chance the parties will accept it. These are normally very reasonable proposals which are irresistible in most cases. I cannot remember a case in which a mediator’s proposal was not accepted by the parties, but then this approach is not one that occurs with great frequency. Used properly by a mediator it can be an effective tool for resolution.
There are other approaches as a mediation is subject to the creativity of the mediator and the parties. But as long as the parties “keep talking” there is hope for a settlement. After all, as noted in previous columns, history and statistics demonstrate that the parties are likely to do better by settlement than concluding the matter by arbitration or trial.
Monday, August 10, 2009
Negotiating and Settling Insurance Bad Faith Cases
I’ve been handling bad faith insurance cases for almost my entire career. Initially the majority of cases encompassed the “duty to settle—excess liability cases” wherein the insurer became responsible for the entire amount of a judgment against its insured because the insurer acted imprudently or unreasonable by failing to accept a demand from a plaintiff for the policy limits or less. The basis for this liability was the implied covenant of good faith and fair dealing which exists in all contracts, but which has a special meaning in insurance policies. This covenant of good faith serves as the foundation for the expansion of insurers’ legal responsibility into the realm of tort liability stemming from its “bad-faith” conduct. If the insurer breaches the covenant of good faith by wrongfully handling an insurance claim under the applicable standard, a tort is committed.
In the early 70’s, the California Supreme Court applied these concepts to first party insurance relationships, i.e. where the insurer has promised to pay an insured for a covered loss. This type of coverage is found in all types of insurance relationships: commercial and personal property insurance, medical pay insurance, life, health and medical insurance, and other “direct reimbursement” insurance situations.
When the insurer’s conduct constitutes a tort, the plaintiff can recover damages for injuries that were proximately caused by that conduct, whether or not the injuries could have been anticipated when the contract was executed. Thus, in addition to contract damages, the insured may be able to recover extra-contractual damages, which are damages beyond those usually permitted for a breach of contract using the tort measure of damages. These include compensatory damages, damages for emotional distress, economic losses, and even attorneys’ fees. Moreover, punitive damages may be awarded in certain instances tort claims where a higher degree of misconduct is proven.
The potential exposure to punitive or exemplary damages is the greatest danger to an insurer defending an extra-contractual claim. For example, courts have allowed the recovery of punitive damages when the insurer's breach is accompanied by an independent tort or where a serious wrong of a tortious nature has been committed and the public interest would be served by the deterrent effect of punitive damages.
GENERAL PRINCIPLES
Insurance bad faith cases fall primarily into two categories: first-party and third-party cases. First-party cases evolve from coverage in which the insurance company is obligated to indemnify or reimburse its insured directly. Third-party cases involve underlying claims which trigger an insurer’s obligations to protect an insured against lawsuits by others. It involves the basic obligations of the insurer to defend and indemnify the insured, and to settle such cases when a reasonable opportunity to do so is presented. The right to coverage is triggered by strangers to the insurance relationship who bring a suit against the insured. It draws on traditional tort concepts of fault, proximate cause and duty. “In liability insurance, by ensuring personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks.”
Within the framework of the third-party claim is the “duty to defend” case, which involves claims by an insured against an insurer for breach of the obligation to defend the insured when suit is brought against it. This case may arise even if the insurer has no duty to indemnify under the same coverage since the duty to defend is broader than the duty to indemnify. The former is triggered by the potential for coverage; the latter is triggered by actual coverage.
Many types of property and casualty policies contain both first and third-party coverage. For example, an auto policy which protects the insured against the risk of property damage to its vehicle, may also provide for medical expense coverage (called medical payments coverage), and normally contains uninsured and underinsured motorist coverage. The latter allows the insured to bring a claim against its own insurer if the insured is the victim of an accident in which the offending driver’s vehicle has no insurance or the applicable liability insurance limits are insufficient to compensate the insured for the injuries suffered in the accident. Unreasonable conduct in the processing or handling of these claims may expose an insurer to a “bad faith” claim.
The focus of a third-party case is on the insurer’s refusal to settle a claim or lawsuit against its insured within the limits of liability of the insurance policy and a judgment in excess of the liability limits results from a trial. As a result, the insured’s personal assets are exposed because of the insurer’s failure to settle within the framework of the liability protection when it was prudent to do so.
The classic breakdown of the first-party insurance bad faith case is represented by a three-tiered analytical framework: 1) breach of the insurance contract; 2) the tort of insurance bad faith (or other tort converting the contract action to a tort claim); and 3) the punitive damage claim. Theoretically, this is a mixture of legal theories and remedies.
The first tier involves whether a breach of the policy’s terms has occurred (i.e., a breach of contract) and, if so, what policy benefits (i.e., contract damages) are owed. Contract damages are limited to those damages reasonably contemplated by the parties at the time the bargain is struck. Such damages are ordinarily limited to the payments or benefits due under the policy and do not include future contract benefits or damages for emotional distress or punitive damages.
The second tier involves looking at the conduct of the insurer in handling the claim or matters entrusted to it; has the tort of insurance bad faith been committed? If so, what extra-contractual compensatory damages (financial injury resulting in economic losses coupled with emotional distress and attorneys’ fees) have resulted from this conduct?
The punitive damage claim is not a separate legal claim but a remedy appended to a tort claim. In insurance bad faith law, the right to pursue punitive damages exists only if an underlying tort, such as insurance bad faith, is established. Without the underpinning of the tort claim, no punitive damages are available.
The third tier requires examining again the conduct of the company and determining, by the requisite burden of proof, if punitive damages would be awarded under the applicable standard. In California, that requires proof of “malice, fraud or oppression” by “clear and convincing” evidence.
Thus, a bad faith claim has these three very separate and distinct components: A breach of contract is not bad faith – there must be an examination of the conduct of the company to determine if the manner of handling the claim was consistent with “good faith” principles. However, proof of bad faith is not enough to impose punitive damages – “something more” is required, which has been expressed as an “evilness” in the corporate scheme of things, or the “collective corporate conduct.”
The different standards and burdens applied must be evaluated. If not, they offer the defense an excellent opportunity to “compartmentalize” the case and defeat the plaintiff’s effort to obtain relief for the wrongs done in an amount sufficient to accomplish the goal of giving notice that such conduct should be stopped.
LOOKING AT LIABILITY FOR BAD FAITH
Assuming that there is contractual liability, the next question is whether the compensatory damages are limited to the contract standard as contemplated at the time of the agreement or the tort standard based on proximate cause and foreseeability.
While not an exhaustive list, the following are indicia of bad faith conduct under various standards:
• Failure to investigate a claim thoroughly;
• Failure to evaluate a claim objectively;
• Unduly restrictive interpretation of policy language or claims forms;
• Unjustified delay in payment of a claim;
• Dilatory handling of claims;
• Deceptive practices to avoid payment of a claim;
• Abusive or coercive practices to compel compromise of a claim;
• Unreasonable conduct during litigation;
• Arbitrary and unreasonable demands for proof of loss;
• Absence of a reasonable basis for delay in payment or for the denial of a claim;
• Improper refusal to defend an insured;
• Improper handling of defense of insured, resulting in loss of goodwill; and
• Deliberate misinterpretation of records or the policy to defeat coverage.
The duty to investigate is an important duty of an insurer. Hence, it can be an important part of a bad faith case. The erroneous withholding of policy benefits based on the insurer’s failure to investigate a claim may constitute a breach of the implied covenant of good faith and fair dealing. In order to protect the insured’s peace of mind and security, “an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” An insurer must “fully inquire into possible bases that might support the insured’s claim.” The investigation must be prompt, thorough, reasonable, and conducted in good faith. That is to say, the insurer must consider facts favorable to the insured’s position as well as those that favor the insurer. This is one aspect of the insurer’s duty to give equal consideration to both the insurer’s and the insured’s interests.
California has codified the duty to investigate in the Unfair Practices Statute (“UPA”) which requires the insurer “to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.” Even though no private right of action may exist under these statutes, the application of the duty to investigate remains important. The UPA confirms the industry standards. Alternatively, other standards may be adopted by the company as fair standards for processing a claim. A violation of the statutory, industry, or self-imposed standards provides support for a bad faith claim. They can serve as standards for determining the bad faith conduct of the insurer.
The Insurer’s “Good Faith Dispute” Defense
Recent cases have allowed an insurer to defend against charges of bad faith by raising the “good faith dispute” or “genuine issue” defense. That is, the insurer claims that because there is a genuine issue of fact or law regarding its liability for the claim, it is insulated from any potential bad faith liability. This is a misleading statement and may very well not be a sound argument. The “genuine issue” argument must be carefully analyzed.
The “genuine issue” doctrine arose as a defense to a claim of bad faith. It was created by the Ninth Circuit Court of Appeals, allowing district courts to conclude as a matter of law that an insurer’s denial of a claim is not unreasonable, so long as there is a “genuine issue as to the insurer’s liability.” Up until the January 2001 decision in Guebara v. Allstate Insurance Co., the Ninth Circuit had always interpreted the “genuine issue” to mean an uncertainty as to the applicable law. California courts adopting and applying the “genuine issue” doctrine applied it to coverage disputes arising from questions of law, i.e., disputes over policy interpretation or areas of unsettled and uncertain law.
However, more recently, in Wilson v. 21st Century Ins. Co., the California Supreme Court reversed the trial court’s granting of summary judgment in a case in which plaintiff/insured sought the $100,000 policy limits in underinsured motorist benefits as a result of a motor vehicle accident with an automobile driven by a drunk driver. 21st Century based its motion on the “genuine dispute” as to the value of the claim. The California Supreme Court rejected their position, observing that:
The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. … “The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable-for example, where even under the plaintiff's version of the facts there is a genuine issue as to the insurer's liability under California law. [Citation] ... On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.” [Citation] Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured's claim only where the summary judgment record demonstrates the absence of triable issues [Citation] as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.
To overcome the “genuine issue” doctrine, it is critically important to disabuse trial courts of any misconceptions about the extent of the doctrine in the first instance. In fact, the “genuine issue” rule is not a “rule” at all. It is a principle which has a limited and defined application. It is to be applied on a “case-by-case basis” and can only be applied if the underlying facts creating the so-called “genuine issue” are undisputed. Thus, if any of the underlying facts are in dispute, as a matter of law, the “genuine issue” defense cannot be applied. Even then, the principle only “may” apply.
Insurance companies have increasingly relied on what they perceive as an emerging “defense” to their denials or wrongful handling of claims from their insureds: the “good faith dispute.” Initially, this doctrine arose in the context of a genuine coverage dispute, in which the Ninth Circuit advanced the proposition that a “genuine dispute” as to coverage suggests that an insurer acted reasonably. However, the doctrine is greatly overstated by insurance companies, as confirmed by Wilson. Indeed, prior to Wilson, there was a notion in at least one case that the principle was being relied on too heavily, and being misapplied. At least one case has held that even reasonable conduct can expose a carrier to bad faith in certain circumstances.
The cases concede that this doctrine cannot be applied if:
• The insurer is guilty of misrepresentation in handling the claim;
• The insurer’s employees lie during deposition or discovery or to the insured;
• The insurer dishonestly selected its experts;
• The insurer’s experts are unreasonable; or
• The insurer fails to conduct a reasonable investigation.
These are important concepts to understand when negotiating an insurance bad faith case in which the “genuine issue” doctrine is being relied on by the carrier. Unless it is abundantly clear that it applies, it is important to strenuously argue against its imposition. Certainly Wilson helps in taking that approach.
CAN YOU CONVERT THE CONTRACT CLAIM TO A TORT CLAIM?
It is obvious from the above that either using traditional tort principles or those requisites for the tort of insurance bad faith, it is critical to the recovery of extra-contractual damages to convert the contract claim to a tort. This requires going outside the four corners of the contract and examining carefully the conduct of the insurer in administering and managing the claim.
Requirement of Financial Loss
Past cases have discussed the question of whether the claim for insurance bad faith is a personal injury or economic claim (i.e., property claim). Decisions have generally described it as the latter. As a result, financial injury must occur before there can be an award for emotional distress. Such a requirement is said to reduce the danger of frivolous or fictitious claims.
Recovery of Damages for Emotional Distress
As a general proposition, the requirement of financial injury provides verification of an accompanying claim for emotional distress. As one California Court of Appeal stated:
The principal reason for limiting recovery of damages for mental distress is that to permit recovery of such damages would open the door to fictitious claims, to recovery for mere bad manners, and to litigation in the field of trivialities.... Obviously, where, as here, the claim is actionable and has resulted in substantial damages apart from those due to mental distress, the danger of fictitious claims is reduced, and we are not here concerned with mere bad manners or trivialities but tortious conduct resulting in substantial invasions of clearly protected interests.
In order to recover for emotional distress in a case involving insurance bad-faith, it is not necessary that it be severe.
Similarly, in order to recover for emotional distress, it is not necessary to prove that the emotional distress is proximately caused by a financial loss, only that both emotional distress and financial distress were caused. As one court noted:
[P]laintiff in a bad faith case must prove some economic loss as a means of validating the seriousness of his or her emotional distress. Once economic loss is shown, however, the plaintiff is entitled to recover for all emotional distress proximately caused by the insurer’s bad faith without proving any causal link between the emotional distress and the financial loss.
Recovery of Attorneys’ Fees
In a bad faith action, the insured may recover attorneys’ fees that incurred in the insured’s action to recover benefits under the insurance policy. However, fees that are the result of the insured’s efforts to collect extra-contractual damages (i.e., emotional distress damages) are not recoverable. Attorneys’ fees are only recoverable under the tort-based cause of action, not the contract-based cause of action. The rationale for allowing recovery of attorneys’ fees for the tortuous refusal to pay benefits is found in Brandt v. Superior Court of San Diego: “[A]ttorney’s fees...are recoverable as damages resulting form a tort in the same way that medical fees would be part of the damages in a personal injury action.” These include attorneys’ fees for defending a bad faith award on appeal.
THE SEVEN POINT TEST FOR EVALUATING A “BAD FAITH” CASE
Here is a quick checklist for looking at the potential for bad faith and punitive damages in an insurance tort case:
1. What is the personal plight of the insured/claimant plaintiff? In short, how sad is the story? Will the story justify “ringing the bell” in the minds of the jury?
2. What is the amount of the contract claim? Is the amount sufficient to justify a substantial compensatory award? Is the fact that plaintiff has been deprived of these sums sufficient justification for a significant emotional distress award?
3. What is the amount of compensatory damages that is likely to be awarded for economic loss, emotional distress and attorneys’ fees? The greater the amount of compensatory damages, the larger the potential for punitive damages. This is particularly true in a “cap” state such as Indiana in which three times the compensatory award may pose a much greater exposure to punitive damages than the monetary cap of only $50,000.
4. How long has the plaintiff been a policyholder (in a suit by an insured)? A jury will expect the insurer to “give slack” to an insured who has been a policyholder for a substantial period of time. Reluctance by the insurer to give the benefit of the doubt to long-standing insureds who have continued to fuel the company coffers with premium payments may create a jury climate for a punitive claim.
5. What is the length of time from claim to compensation? The longer the period from the time of the initial injury to trial (or payment of what was rightly owed), the higher the punitive potential. A lengthy period of denial only bolsters the perception that insurance company claims personnel are taught to hold on to the insurer’s money for as long as possible in order to maximize profits.
6. What is the likely credibility of the company witnesses? The story of the claims handling is influenced by the believability of the insurance company’s witnesses, who may be subject to impeachment and/or may be shown to have taken an adversarial posture against the insured, which is inconsistent with the principles of good faith claims handling.
7. What is the overall perception of the insurance company? That is, what picture will the jury have of the insurer? Promises of “Good Hands,” “Good Neighbor” and “Piece of the Rock” give the jury the impression that the insurer can be trusted, but these advertising slogans may be perceived as just marketing tools for attracting customers, with no intention of meeting these standards of customer concern, care or treatment. Also, if the insurer is perceived as being very wealthy (even if the jury will not hear evidence of financial wealth until a later aspect of the trial), this perception can affect the jury’s determination.
STRATEGY FOR NEGOTIATIONS
The environment for seeking redress for insurance company wrongs is not always “plaintiff friendly.” While juries may be sympathetic, the barriers posed by evidentiary rules, punitive “caps,” and the views of judges and appellate courts to class actions or large punitive “windfalls” must be evaluated before committing your law firm to these suits. They require careful planning and consideration before filing.
Tort reform and the courts’ approaches to punitive damages claims have made some carriers feel more secure that bad faith and punitive damages are not a threat as they were in the 1970’s and 1980’s when insurance bad faith cases matured.
Now, there are still cases where punitive damages are warranted, but the commitment of time, money and the client’s emotional and physical resources is large. For example, Ray Bourhis, a well known insurance bad faith lawyer in San Francisco, has written a telling story of one of his more recent insurance bad faith cases. Anyone doing insurance bad faith work is well advised to read this book.
Insurance bad faith cases offer an early opportunity for resolution for several reasons. First of all, they are expensive to prepare and try. Capturing the case early, evaluating the damages, and looking at the down the line costs should motivate both sides to review the case to see if mediation at an early stage is prudent. Second, insurance bad faith cases present a unique opportunity for an early evaluation. If there are coverage issues, they can be evaluated by reviewing the policy provisions and the applicable law. Because there is already a “paper trail” called a “claims file,” there is an excellent source of information for preparing a chronology of claims handling and learning what was done and why. Once the pertinent files are obtained, you should have considerable information about the claims handling, and the reasoning, or lack of such, behind it.
The pertinent insurance company files can be obtained and reviewed early in the case. This may include underwriting and claims files as well as industry and company manuals as a means for evaluating how the claim was handled – that is, what was done and why. The client and client representatives, such as brokers should be interviewed and files obtained for review. On the defense side, the company personnel should be interviewed to determine the basis for underwriting and claims decisions.
In some cases the parties might agree on limited early discovery with a view towards mediating once they have completed this preliminary discovery or informal exchange of information.
A well thought out Litigation Management Plan by both sides should lead the parties to assess when a “plateau” is reached, i.e., when the parties are ready to negotiate.
The point is that with some early effort, the parties to an insurance bad faith case should be able to explore a resolution of the case before they begin the process of protracted litigation. From all perspectives, this is just common sense since so much is already available by the time suit is filed.
One strategy I have used successfully in insurance bad faith cases is to file suit, then send the claims handler or key insurance operative a copy of the file endorsed complaint, with a brief overview of the allegations and an invitation to mediate. Sometimes I suggest some mediators, or I invite them to provide a list of acceptable mediators. In other cases, I have offered to go to whomever they chose if they pay the costs of mediation (with the mediator not knowing that only one side is paying). Any of these open the door to discussion, and in almost all cases I at least get a reply that there is interest, and we go from there to see if an agreement to mediate can be reached. On very few occasions is my invitation ignored.
In the early 70’s, the California Supreme Court applied these concepts to first party insurance relationships, i.e. where the insurer has promised to pay an insured for a covered loss. This type of coverage is found in all types of insurance relationships: commercial and personal property insurance, medical pay insurance, life, health and medical insurance, and other “direct reimbursement” insurance situations.
When the insurer’s conduct constitutes a tort, the plaintiff can recover damages for injuries that were proximately caused by that conduct, whether or not the injuries could have been anticipated when the contract was executed. Thus, in addition to contract damages, the insured may be able to recover extra-contractual damages, which are damages beyond those usually permitted for a breach of contract using the tort measure of damages. These include compensatory damages, damages for emotional distress, economic losses, and even attorneys’ fees. Moreover, punitive damages may be awarded in certain instances tort claims where a higher degree of misconduct is proven.
The potential exposure to punitive or exemplary damages is the greatest danger to an insurer defending an extra-contractual claim. For example, courts have allowed the recovery of punitive damages when the insurer's breach is accompanied by an independent tort or where a serious wrong of a tortious nature has been committed and the public interest would be served by the deterrent effect of punitive damages.
GENERAL PRINCIPLES
Insurance bad faith cases fall primarily into two categories: first-party and third-party cases. First-party cases evolve from coverage in which the insurance company is obligated to indemnify or reimburse its insured directly. Third-party cases involve underlying claims which trigger an insurer’s obligations to protect an insured against lawsuits by others. It involves the basic obligations of the insurer to defend and indemnify the insured, and to settle such cases when a reasonable opportunity to do so is presented. The right to coverage is triggered by strangers to the insurance relationship who bring a suit against the insured. It draws on traditional tort concepts of fault, proximate cause and duty. “In liability insurance, by ensuring personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks.”
Within the framework of the third-party claim is the “duty to defend” case, which involves claims by an insured against an insurer for breach of the obligation to defend the insured when suit is brought against it. This case may arise even if the insurer has no duty to indemnify under the same coverage since the duty to defend is broader than the duty to indemnify. The former is triggered by the potential for coverage; the latter is triggered by actual coverage.
Many types of property and casualty policies contain both first and third-party coverage. For example, an auto policy which protects the insured against the risk of property damage to its vehicle, may also provide for medical expense coverage (called medical payments coverage), and normally contains uninsured and underinsured motorist coverage. The latter allows the insured to bring a claim against its own insurer if the insured is the victim of an accident in which the offending driver’s vehicle has no insurance or the applicable liability insurance limits are insufficient to compensate the insured for the injuries suffered in the accident. Unreasonable conduct in the processing or handling of these claims may expose an insurer to a “bad faith” claim.
The focus of a third-party case is on the insurer’s refusal to settle a claim or lawsuit against its insured within the limits of liability of the insurance policy and a judgment in excess of the liability limits results from a trial. As a result, the insured’s personal assets are exposed because of the insurer’s failure to settle within the framework of the liability protection when it was prudent to do so.
The classic breakdown of the first-party insurance bad faith case is represented by a three-tiered analytical framework: 1) breach of the insurance contract; 2) the tort of insurance bad faith (or other tort converting the contract action to a tort claim); and 3) the punitive damage claim. Theoretically, this is a mixture of legal theories and remedies.
The first tier involves whether a breach of the policy’s terms has occurred (i.e., a breach of contract) and, if so, what policy benefits (i.e., contract damages) are owed. Contract damages are limited to those damages reasonably contemplated by the parties at the time the bargain is struck. Such damages are ordinarily limited to the payments or benefits due under the policy and do not include future contract benefits or damages for emotional distress or punitive damages.
The second tier involves looking at the conduct of the insurer in handling the claim or matters entrusted to it; has the tort of insurance bad faith been committed? If so, what extra-contractual compensatory damages (financial injury resulting in economic losses coupled with emotional distress and attorneys’ fees) have resulted from this conduct?
The punitive damage claim is not a separate legal claim but a remedy appended to a tort claim. In insurance bad faith law, the right to pursue punitive damages exists only if an underlying tort, such as insurance bad faith, is established. Without the underpinning of the tort claim, no punitive damages are available.
The third tier requires examining again the conduct of the company and determining, by the requisite burden of proof, if punitive damages would be awarded under the applicable standard. In California, that requires proof of “malice, fraud or oppression” by “clear and convincing” evidence.
Thus, a bad faith claim has these three very separate and distinct components: A breach of contract is not bad faith – there must be an examination of the conduct of the company to determine if the manner of handling the claim was consistent with “good faith” principles. However, proof of bad faith is not enough to impose punitive damages – “something more” is required, which has been expressed as an “evilness” in the corporate scheme of things, or the “collective corporate conduct.”
The different standards and burdens applied must be evaluated. If not, they offer the defense an excellent opportunity to “compartmentalize” the case and defeat the plaintiff’s effort to obtain relief for the wrongs done in an amount sufficient to accomplish the goal of giving notice that such conduct should be stopped.
LOOKING AT LIABILITY FOR BAD FAITH
Assuming that there is contractual liability, the next question is whether the compensatory damages are limited to the contract standard as contemplated at the time of the agreement or the tort standard based on proximate cause and foreseeability.
While not an exhaustive list, the following are indicia of bad faith conduct under various standards:
• Failure to investigate a claim thoroughly;
• Failure to evaluate a claim objectively;
• Unduly restrictive interpretation of policy language or claims forms;
• Unjustified delay in payment of a claim;
• Dilatory handling of claims;
• Deceptive practices to avoid payment of a claim;
• Abusive or coercive practices to compel compromise of a claim;
• Unreasonable conduct during litigation;
• Arbitrary and unreasonable demands for proof of loss;
• Absence of a reasonable basis for delay in payment or for the denial of a claim;
• Improper refusal to defend an insured;
• Improper handling of defense of insured, resulting in loss of goodwill; and
• Deliberate misinterpretation of records or the policy to defeat coverage.
The duty to investigate is an important duty of an insurer. Hence, it can be an important part of a bad faith case. The erroneous withholding of policy benefits based on the insurer’s failure to investigate a claim may constitute a breach of the implied covenant of good faith and fair dealing. In order to protect the insured’s peace of mind and security, “an insurer cannot reasonably and in good faith deny payments to its insured without thoroughly investigating the foundation for its denial.” An insurer must “fully inquire into possible bases that might support the insured’s claim.” The investigation must be prompt, thorough, reasonable, and conducted in good faith. That is to say, the insurer must consider facts favorable to the insured’s position as well as those that favor the insurer. This is one aspect of the insurer’s duty to give equal consideration to both the insurer’s and the insured’s interests.
California has codified the duty to investigate in the Unfair Practices Statute (“UPA”) which requires the insurer “to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.” Even though no private right of action may exist under these statutes, the application of the duty to investigate remains important. The UPA confirms the industry standards. Alternatively, other standards may be adopted by the company as fair standards for processing a claim. A violation of the statutory, industry, or self-imposed standards provides support for a bad faith claim. They can serve as standards for determining the bad faith conduct of the insurer.
The Insurer’s “Good Faith Dispute” Defense
Recent cases have allowed an insurer to defend against charges of bad faith by raising the “good faith dispute” or “genuine issue” defense. That is, the insurer claims that because there is a genuine issue of fact or law regarding its liability for the claim, it is insulated from any potential bad faith liability. This is a misleading statement and may very well not be a sound argument. The “genuine issue” argument must be carefully analyzed.
The “genuine issue” doctrine arose as a defense to a claim of bad faith. It was created by the Ninth Circuit Court of Appeals, allowing district courts to conclude as a matter of law that an insurer’s denial of a claim is not unreasonable, so long as there is a “genuine issue as to the insurer’s liability.” Up until the January 2001 decision in Guebara v. Allstate Insurance Co., the Ninth Circuit had always interpreted the “genuine issue” to mean an uncertainty as to the applicable law. California courts adopting and applying the “genuine issue” doctrine applied it to coverage disputes arising from questions of law, i.e., disputes over policy interpretation or areas of unsettled and uncertain law.
However, more recently, in Wilson v. 21st Century Ins. Co., the California Supreme Court reversed the trial court’s granting of summary judgment in a case in which plaintiff/insured sought the $100,000 policy limits in underinsured motorist benefits as a result of a motor vehicle accident with an automobile driven by a drunk driver. 21st Century based its motion on the “genuine dispute” as to the value of the claim. The California Supreme Court rejected their position, observing that:
The genuine dispute rule does not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. … “The genuine issue rule in the context of bad faith claims allows a [trial] court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer's denial of benefits was reasonable-for example, where even under the plaintiff's version of the facts there is a genuine issue as to the insurer's liability under California law. [Citation] ... On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.” [Citation] Thus, an insurer is entitled to summary judgment based on a genuine dispute over coverage or the value of the insured's claim only where the summary judgment record demonstrates the absence of triable issues [Citation] as to whether the disputed position upon which the insurer denied the claim was reached reasonably and in good faith.
To overcome the “genuine issue” doctrine, it is critically important to disabuse trial courts of any misconceptions about the extent of the doctrine in the first instance. In fact, the “genuine issue” rule is not a “rule” at all. It is a principle which has a limited and defined application. It is to be applied on a “case-by-case basis” and can only be applied if the underlying facts creating the so-called “genuine issue” are undisputed. Thus, if any of the underlying facts are in dispute, as a matter of law, the “genuine issue” defense cannot be applied. Even then, the principle only “may” apply.
Insurance companies have increasingly relied on what they perceive as an emerging “defense” to their denials or wrongful handling of claims from their insureds: the “good faith dispute.” Initially, this doctrine arose in the context of a genuine coverage dispute, in which the Ninth Circuit advanced the proposition that a “genuine dispute” as to coverage suggests that an insurer acted reasonably. However, the doctrine is greatly overstated by insurance companies, as confirmed by Wilson. Indeed, prior to Wilson, there was a notion in at least one case that the principle was being relied on too heavily, and being misapplied. At least one case has held that even reasonable conduct can expose a carrier to bad faith in certain circumstances.
The cases concede that this doctrine cannot be applied if:
• The insurer is guilty of misrepresentation in handling the claim;
• The insurer’s employees lie during deposition or discovery or to the insured;
• The insurer dishonestly selected its experts;
• The insurer’s experts are unreasonable; or
• The insurer fails to conduct a reasonable investigation.
These are important concepts to understand when negotiating an insurance bad faith case in which the “genuine issue” doctrine is being relied on by the carrier. Unless it is abundantly clear that it applies, it is important to strenuously argue against its imposition. Certainly Wilson helps in taking that approach.
CAN YOU CONVERT THE CONTRACT CLAIM TO A TORT CLAIM?
It is obvious from the above that either using traditional tort principles or those requisites for the tort of insurance bad faith, it is critical to the recovery of extra-contractual damages to convert the contract claim to a tort. This requires going outside the four corners of the contract and examining carefully the conduct of the insurer in administering and managing the claim.
Requirement of Financial Loss
Past cases have discussed the question of whether the claim for insurance bad faith is a personal injury or economic claim (i.e., property claim). Decisions have generally described it as the latter. As a result, financial injury must occur before there can be an award for emotional distress. Such a requirement is said to reduce the danger of frivolous or fictitious claims.
Recovery of Damages for Emotional Distress
As a general proposition, the requirement of financial injury provides verification of an accompanying claim for emotional distress. As one California Court of Appeal stated:
The principal reason for limiting recovery of damages for mental distress is that to permit recovery of such damages would open the door to fictitious claims, to recovery for mere bad manners, and to litigation in the field of trivialities.... Obviously, where, as here, the claim is actionable and has resulted in substantial damages apart from those due to mental distress, the danger of fictitious claims is reduced, and we are not here concerned with mere bad manners or trivialities but tortious conduct resulting in substantial invasions of clearly protected interests.
In order to recover for emotional distress in a case involving insurance bad-faith, it is not necessary that it be severe.
Similarly, in order to recover for emotional distress, it is not necessary to prove that the emotional distress is proximately caused by a financial loss, only that both emotional distress and financial distress were caused. As one court noted:
[P]laintiff in a bad faith case must prove some economic loss as a means of validating the seriousness of his or her emotional distress. Once economic loss is shown, however, the plaintiff is entitled to recover for all emotional distress proximately caused by the insurer’s bad faith without proving any causal link between the emotional distress and the financial loss.
Recovery of Attorneys’ Fees
In a bad faith action, the insured may recover attorneys’ fees that incurred in the insured’s action to recover benefits under the insurance policy. However, fees that are the result of the insured’s efforts to collect extra-contractual damages (i.e., emotional distress damages) are not recoverable. Attorneys’ fees are only recoverable under the tort-based cause of action, not the contract-based cause of action. The rationale for allowing recovery of attorneys’ fees for the tortuous refusal to pay benefits is found in Brandt v. Superior Court of San Diego: “[A]ttorney’s fees...are recoverable as damages resulting form a tort in the same way that medical fees would be part of the damages in a personal injury action.” These include attorneys’ fees for defending a bad faith award on appeal.
THE SEVEN POINT TEST FOR EVALUATING A “BAD FAITH” CASE
Here is a quick checklist for looking at the potential for bad faith and punitive damages in an insurance tort case:
1. What is the personal plight of the insured/claimant plaintiff? In short, how sad is the story? Will the story justify “ringing the bell” in the minds of the jury?
2. What is the amount of the contract claim? Is the amount sufficient to justify a substantial compensatory award? Is the fact that plaintiff has been deprived of these sums sufficient justification for a significant emotional distress award?
3. What is the amount of compensatory damages that is likely to be awarded for economic loss, emotional distress and attorneys’ fees? The greater the amount of compensatory damages, the larger the potential for punitive damages. This is particularly true in a “cap” state such as Indiana in which three times the compensatory award may pose a much greater exposure to punitive damages than the monetary cap of only $50,000.
4. How long has the plaintiff been a policyholder (in a suit by an insured)? A jury will expect the insurer to “give slack” to an insured who has been a policyholder for a substantial period of time. Reluctance by the insurer to give the benefit of the doubt to long-standing insureds who have continued to fuel the company coffers with premium payments may create a jury climate for a punitive claim.
5. What is the length of time from claim to compensation? The longer the period from the time of the initial injury to trial (or payment of what was rightly owed), the higher the punitive potential. A lengthy period of denial only bolsters the perception that insurance company claims personnel are taught to hold on to the insurer’s money for as long as possible in order to maximize profits.
6. What is the likely credibility of the company witnesses? The story of the claims handling is influenced by the believability of the insurance company’s witnesses, who may be subject to impeachment and/or may be shown to have taken an adversarial posture against the insured, which is inconsistent with the principles of good faith claims handling.
7. What is the overall perception of the insurance company? That is, what picture will the jury have of the insurer? Promises of “Good Hands,” “Good Neighbor” and “Piece of the Rock” give the jury the impression that the insurer can be trusted, but these advertising slogans may be perceived as just marketing tools for attracting customers, with no intention of meeting these standards of customer concern, care or treatment. Also, if the insurer is perceived as being very wealthy (even if the jury will not hear evidence of financial wealth until a later aspect of the trial), this perception can affect the jury’s determination.
STRATEGY FOR NEGOTIATIONS
The environment for seeking redress for insurance company wrongs is not always “plaintiff friendly.” While juries may be sympathetic, the barriers posed by evidentiary rules, punitive “caps,” and the views of judges and appellate courts to class actions or large punitive “windfalls” must be evaluated before committing your law firm to these suits. They require careful planning and consideration before filing.
Tort reform and the courts’ approaches to punitive damages claims have made some carriers feel more secure that bad faith and punitive damages are not a threat as they were in the 1970’s and 1980’s when insurance bad faith cases matured.
Now, there are still cases where punitive damages are warranted, but the commitment of time, money and the client’s emotional and physical resources is large. For example, Ray Bourhis, a well known insurance bad faith lawyer in San Francisco, has written a telling story of one of his more recent insurance bad faith cases. Anyone doing insurance bad faith work is well advised to read this book.
Insurance bad faith cases offer an early opportunity for resolution for several reasons. First of all, they are expensive to prepare and try. Capturing the case early, evaluating the damages, and looking at the down the line costs should motivate both sides to review the case to see if mediation at an early stage is prudent. Second, insurance bad faith cases present a unique opportunity for an early evaluation. If there are coverage issues, they can be evaluated by reviewing the policy provisions and the applicable law. Because there is already a “paper trail” called a “claims file,” there is an excellent source of information for preparing a chronology of claims handling and learning what was done and why. Once the pertinent files are obtained, you should have considerable information about the claims handling, and the reasoning, or lack of such, behind it.
The pertinent insurance company files can be obtained and reviewed early in the case. This may include underwriting and claims files as well as industry and company manuals as a means for evaluating how the claim was handled – that is, what was done and why. The client and client representatives, such as brokers should be interviewed and files obtained for review. On the defense side, the company personnel should be interviewed to determine the basis for underwriting and claims decisions.
In some cases the parties might agree on limited early discovery with a view towards mediating once they have completed this preliminary discovery or informal exchange of information.
A well thought out Litigation Management Plan by both sides should lead the parties to assess when a “plateau” is reached, i.e., when the parties are ready to negotiate.
The point is that with some early effort, the parties to an insurance bad faith case should be able to explore a resolution of the case before they begin the process of protracted litigation. From all perspectives, this is just common sense since so much is already available by the time suit is filed.
One strategy I have used successfully in insurance bad faith cases is to file suit, then send the claims handler or key insurance operative a copy of the file endorsed complaint, with a brief overview of the allegations and an invitation to mediate. Sometimes I suggest some mediators, or I invite them to provide a list of acceptable mediators. In other cases, I have offered to go to whomever they chose if they pay the costs of mediation (with the mediator not knowing that only one side is paying). Any of these open the door to discussion, and in almost all cases I at least get a reply that there is interest, and we go from there to see if an agreement to mediate can be reached. On very few occasions is my invitation ignored.
Monday, May 18, 2009
Five Factors that Suggest a Case is Ripe for Mediation
Anyone who has been involved in the dispute-resolution mechanism knows it can be a laborious and often mysterious process. Somewhat over simplified, here is a good way to remove some of the labor and mystery, and describe how mediation fits into the system: Mediation allows the parties involved in the dispute to sidestep the litigation process, while also getting results. Because of the mediator’s neutrality, the settlement resolution is more likely to be perceived as just. It is a voluntary, non-binding forum in which the parties agree to conduct negotiations using a neutral intermediary who guides the parties through the legal process. The mediator has no decision-making authority. Rather, it is the mediator’s duty to work with the parties to agree on the terms for conflict resolution. Only if they want to do the parties settle.
So what types of cases are likely to settle at mediation? Here are five factors that, if present in the case, suggest it is one which should be mediated:
· The parties recognize they have more to lose than if they don’t settle. There is high risk if they do not settle. This means not only must there be a downside risk, but also the parties and their lawyers must recognize and understand that risk. If a party and/or counsel have their head in the sand or are refusing to acknowledge the loss possibility or probability, then this leads to an unrealistic evaluation of the case and a failure to appreciate the benefits of a negotiated result. It also leads to unrealistic demands or offers and responses to such. Lastly, it means a mediator is not talking or listening to reasonable minds. This state of affairs costs the parties in many respects, including the time and money for a trial that may very well fail to result in a “win” for anyone.
· There has been cooperation among the parties and their counsel during the litigation process. This is key. No doubt a case has a greater potential for settlement when the parties are “firm but fair” with one another. They cooperate without compromising their clients’ rights or position. They exchange what they know is discoverable and they diplomatically but firmly protect what is not. They prepare their client for participation in the litigation process. For example, I try not to intervene at my client’s deposition. He or she is prepared to tell the story, and tell it truthfully. I don’t need to make inappropriate speaking objections or interfere with my opponent’s questioning unless counsel is violating the rules, being rude, harassing my client, or asking questions about irrelevant or privileged matters. Then, rather than arguing on the record and creating useless transcripts, I state my position and deal with this bad behavior appropriately as the rules permit. But, if we are conducting the case within and in accordance with the rules, the prospective of a cooperative discussion about resolution is highly likely.
· The parties have engaged in sufficient discovery and an exchange of information so that you know the facts of the case. You have reached a plateau in the case; each side can look towards the door of trial court and see how the case is likely to play out. Experienced trial lawyers can do this. They “hear” the evidence, they play out the examination of witnesses in their minds, and they anticipate the argument of their opponent. They know how these arguments will sound and how a jury, court, or arbitrator might respond to them. Perhaps the parties have conducted focus groups and obtained some insight into how a jury might decide. It is the ability to anticipate the “end result” that allows a trial lawyer to properly advise his or her client as to the alternatives of resolution by trial.
· The parties have non-lawsuit reasons to settle. There may be non-lawsuit related reasons to settle. The existence of the lawsuit or a “bad” result may trigger losses in business relationships or a negative impact on a business marketing plan. The parties may also have an ongoing business relationship which would be costly to terminate. There are lots of business and personal reasons to settle, and if these are present they will motivate the parties to seek a negotiated result.
· While the liability, damages or collection issues remain, there is no clear barrier to recovery and payment of any judgment by the plaintiff. A lawsuit is a three legged stool: liability, damages and collection. All three have to be present in order for the case to have value from the plaintiff’s perspective. If any of these three legs are missing, the plaintiff has problems and needs to assess what course is the best way to move forward. Indeed, a modest settlement may be in order in such a case. But if there is no clear barrier to the plaintiff and the stool has some strength in all three legs, then the parties should be talking seriously about resolving the lawsuit. There may be a disagreement over the numbers, but that is why mediation is attractive at a timely point in the litigation process – to save the time and expense of trial, and eliminate the risk of a disappointing result.
Friday, January 16, 2009
Opening Statement at Mediation
One question that generally comes up when preparing for a mediation is whether counsel should give an opening statement in a general session before the actual negotiating begins. A subquestion is if an opening statement is advisable, what type of presentation should be given? What should be the purpose, content and tone?
In my view, an opening statement at mediation should not be given if it will create hostility or divisiveness. Sometimes a client will want a preliminary statement to assuage that client’s own anger and hostility towards the other side. That is not a valid purpose because it will not contribute to the mediation process. Anything that escalates the tensions between the parties or heightens the temperature in the room is not a desirable tool for mediation. In short, an opening statement should not be adversarial, but should be devoted to demonstrating an attitude of wanting to reach a resolution of the dispute at hand.
Otherwise, whether an opening statement is given depends on its purpose. That is, it must have a purpose first of all, and that purpose must contribute to the mediation process. The best reason for an opening statement is to add information to the process or explain the position of the party delivering it if the information is not already available, or there needs to be clarification of that party’s position. Despite a comprehensive written presentation, there may still be issues or positions that need clarification. If so, an opening statement should be used to provide additional information about a party’s case.
One of the occasions where I find an opening useful is to clarify damages claims. There may be questions about the relationship of injuries to an accident, or about special damages, past and future. There may be medical issues; questions about future medical care, rehabilitation efforts, and income earning capacity once the injuries have stabilized. These questions may have come up in a pre-mediation conference, so the parties may want to address those issues with additional information that has developed.
However, an opening statement is not a time to rehash what has been spelled out in a mediation statement or just review what the parties already have had an opportunity to absorb. The opening statement is appropriate if it will help focus the parties on the issues to be addressed at the mediation, and provide additional information useful to moving the parties closer to a bargained result.
What Should be the Tone?
Anything less than a high level diplomatic approach will only lessen the chance of settlement. This is not to say that the parties should appear to be begging for a result, but a high level of professionalism and willingness to explore settlement options should be the attitude of all involved once any joint session is over. The spirit should be: Let’s try to get it done!
An appropriate opening statement can be a valuable tool for working to a positive end result.
What Should It Contain?
The answer to this question is obvious: information that adds to the other side’s basis of information, clarifies issues or facts in the case, or makes the position of a party clearer to the mediator and other parties.
I like to use a supplement, either an outline or a PowerPoint presentation. However, these tools should be used simply to give the presentation some structure, not to overwhelm the parties with more paper or numerous slides with crammed detail. The opening statement, as I envision it, is a summary of information so that the issues and facts have a clearer focus, and the mediator and the parties can begin negotiating around their dispute.
One further point: An opening statement is often a good time to concede facts or issues. For example, I have had mediations in which the defendants said in their opening that they were not going to focus on liability because they had worked towards an apportionment among themselves. This allowed my client to focus on evaluating the case for settlement purposes and discussing damages. Obviously that was good news, and it also made the mediation day a productive discussion of some serious and real damages questions.
Be Creative; You May Involve Others!
You can be creative with an opening statement at mediation. You do not have the constraints that you have at trial. For one, you can discuss the facts without worrying about objections, admissibility or argument, although you certainly do not want to fall into an argumentative statement that will violate the appropriate “tone” that I think should be used. Second, you can involve others. Frequently I take an “all purpose” expert or consultant with me who can present an overview of the technical aspects of the case. For example, our medical consultants, retired physicians who assist in reviewing the medical aspects of our cases, sometimes attend to explain injuries, comment on causation and answer questions, while recognizing that they are not our expert trial witnesses. I also use consultants whom I regard as good “translators” of technical arenas, and who can give an overview of aspects of the case. They are highly credible, and what they present is done within the confidentiality of a mediation and with the understanding that they are not going to testify at trial, but are serving as consultants. This expert overview can be provided at a lower expense than if you asked two or three experts to attend or provide video statements for mediation purposes only.
Clearing the Opening with the Mediator
On mediation day it is the mediator’s show. So, I want to clear the agenda with the mediator before I plan on making any opening statement. The mediator may not want it. He or she may want me to forego an opening initially and save it for later in the day if it is believed some comments in a joint session will help the parties in their negotiations.
If an opening is invited, I usually give the mediator some idea of my approach to make sure it blends in with the mediator’s agenda and approach to the settlement discussions. No surprises - at least not for the mediator!
A Final Comment
You should let your client know about the difference between the opening statement at the mediation and at trial. The client may expect a gang-busters trial lawyer’s presentation. Perhaps if an opening statement is to be given, you should ask the client what his or her expectations are, and then inform them of the purpose and reasons for your presentation and generally how and what your are going to say. That way the client’s expectations are appropriate for the day, or at least for the initial joint session.
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