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.
Monday, August 10, 2009
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.
Wednesday, December 17, 2008
Empirical Research Confirms that Negotiated Results are Superior to Going to Trial
Recently, there was a report published of empirical research confirming that settlement is preferred to trial because the potential result is statistically found to be a better economic result. The newly released study reviews the results on a large number of cases that did not settle after mediation and eventually went to trial and addresses how those cases fared in comparison to the last settlement offer or demand.
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, has published the 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,
The study actually builds, as is noted below, on prior research in four studies so that the cases analyzed totaled 9,000 in the past 44 years. It compared the results in selected cases in which the parties exchanged settlement offers, rejected the offers of the other side, and proceeded to trial or arbitration. While the large group of cases were jury trials, court trials and arbitrations were included. The study was based on the report of results from California Jury Research (formerly California Jury Verdicts Weekly), which the authors found reliable.
As it states: “The parties’ settlement positions. . . [were] compared with the ultimate award or verdict to determine whether the parties’ probability judgments about trial outcomes were economically efficacious, that is, did the parties commit a decision error by rejecting a settlement alternative that would have been the same as or better than the ultimate award.”
Prior studies were reviewed and summarized as follows:
- Priest/Klien (1984-1985): Trials occur in “close cases,” and plaintiffs and defendants equally make mistakes; plaintiffs win about 50% of the cases that proceed to trial; this is referred to as the “fifty percent implication”;
The study also found that the cost of “decision errors” in failing to accept the opportunities to settle increased between 1964 and 2004. In 1964, plaintiffs obtained worse results at trial than were available through settlement in 54% of the cases, while in 2004 it rose to 64% of the cases. During that same period, the range for defendants went from 19% in 1964 to 26% in 1984 and then declining to 20% in 2004. And, the cases in which neither party committed a decision error decreased from 27% in 1964 to 14% in 2004. Adjusted for inflation, the researchers found that a plaintiff’s decision errors increased 3 times, but a defendant’s errors were much more costly – increasing 14 fold.
Another interesting aspect of the study is the effect that statutory offers and cost shifting procedures had on the eventual results in cases going to a final decision making process. In
Another finding that may not be surprising is that in cases in which litigants were represented by attorneys who had mediation training and experience, the parties experienced lower rates of “decision error.” Indeed, plaintiffs in these cases had a “decision error” of 21%. The authors suggested more research in this area.
It is quite apparent that the most recent study has dispelled the notion that the “fifty percent implication” rules applies. It has established a new dimension of risks for both plaintiffs and defendants in rejecting opportunities to settle. Plaintiffs risk the further costs of litigation and a result that is not that much better, which likely does not justify the investment of time and money in taking a case “to the mat.” Defendants, on the other hand, have a huge downside by risking large verdicts against them if they do not appreciate the opportunity they have by a negotiated closure.
The 40 page review of the study’s results is worth careful reading. It may also be important in reviewing the advantages of settlement versus trial with our clients.
The New Lawyer - How Settlement Strategies and Opportunities Have Affected the Responsibilities and Functions of Litigation Counsel
Anyone who has been involved in the dispute-resolution mechanism knows what a laborious and often mysterious process it can be. 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. Mediation is a defined process that is recognized by attorneys and judges. 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.
During mediation, the attorney’s responsibility is both as an advocate and counselor to the client. When advocating an issue, the skills used by an attorney are different than the approach used in a courtroom. An attorney also counsels the client on issues during the mediation.
Mediation helps litigants achieve settlement. When compared to the expense of prolonged litigation, mediation may be the best deal. The client has present use of funds, rather than the hope of financial recovery later, while also saving money on pre-trial and trial costs, as well as possible appeal. Litigation costs often surprise clients, particularly if expert testimony is needed. The fees for experts are quite high, usually involving several hundred dollars per hour. During the amount of time experts need to prepare, testify at deposition and appear in court, several thousands of dollars in costs may be incurred quickly. Thus, at an early mediation, a major factor in considering whether to settle is the future expense of proceeding without settling.
If possible, it is important to work toward mediation as early as possible so that the client may reach his or her goals. Bear in mind that the client is not going to push early mediation. It is the attorney’s responsibility to recognize the advantages of an early mediation and resolution for the client. Most courts, however, distributed alternate dispute resolution materials shortly after a case is filed and either urge counsel to pass the materials on to the client or require them to do so. However, unless the attorney couples this will some counseling on the availability and value of mediation, it is questionable if receiving this material has much impact on the client.
Research shows that a key factor in litigants’ willingness to use mediation is the recommendation and encouragement of their attorneys. For example, “a majority of parties in domestic relations cases (68 percent men and 72 percent women) who chose to use mediation said their attorneys had encouraged them to try it, whereas less than one-third (32 percent men and 18 percent women) of those who rejected mediation had been encouraged by their attorneys to use it.” (R. Wisler, When Does Familiarity Breed Content? A Study of the Role of Different Forms of ADR Education and Experience in Attorneys’ ADR Recommendations, 2 Pepp. Disp. Resol. L.J. 199, 204.)
Mediation involves an objective intermediary who negotiates with the parties to avoid or end the highly confrontational and tension-filled process of litigation. From the plaintiff’s perspective, it is a means of essentially selling the lawsuit to a defendant, who buys off the expensive and exposure of ongoing litigation. It involves an exchange of offers and counteroffers made in more of an informal business environment, rather than a formal courtroom.
Hostility, anger, finger pointing and accusations are not part of the mediation process. Diplomacy, salesmanship and patience are the bywords. The parties and their lawyers may be firm, tough and even hard-nosed at times, but they need to do it politely and diplomatically. The parties need to be prepared for mediation by having the appropriate attitude before attending the mediation. Unlike a deposition, this is where the client enters the business process of resolving disputes and essentially steps outside of the courtroom.
It is advisable to have a pre-mediation conference several days before the mediation occurs. This is two fold process: The mediator may conference (by phone usually) with counsel for the parties, either one on one or together to discuss the mediation, insure that the parties are ready, and that mediator has what he or she needs to make the process work. Counsel should also meet with the client to discuss the process, cover important aspects and get the client ready for the negotiation and decision making process of attempting to reach a resolution of the dispute.
Three aspects are important to stress; First of all the client needs to know that this is not a binding process; there is no third party who is going to decide the case and impose that decision on the client. It is client’s decision to settle. Second, the client should understand that this is not a confrontation. No one is going to testify. It involves an exchange of information so that the parties can be informed and negotiate. Third, the client must understand that what takes place at the mediation is confidential. It may not be brought up during a court trial.
The client should also be encouraged to keep an open mind as the process takes place. Many times, the client’s perspective on settlement will change as the mediation progresses. That is good because the client hears what the other side has to say and can consider the points and counter-points of the case and factor those into the decision making process. It is important for both counsel and the client to listen to what the other side says and also to the mediator’s comments. The mediator will often comment on issues and give his or her views on each side’s case. The mediator may offer the pros and cons of settlement versus proceeding further. This provides an objective, third-party view of the matter, which may be very valuable.
As the future unfolds, more and more courts will be creating ways for litigants to enter the mediation process at an early stage. The San Francisco Superior Court recently instituted an early mediation program. The San Francisco Bar Association also has a program for early mediation. The federal court has a program of early mediation and “early neutral evaluation” for several years. The future litigation process will rely more on courts and counsel directing litigants to a mediation alternative to litigation – and the earlier the better.
One concern I have is that I am seeing some reluctance of counsel to guide a case toward the mediation process because of the economic motive of being able to continue to bill a case and earn revenues. Frankly, I have seen evidence of this with opposing counsel in some of our cases. I have also heard this concern expressed by my trial lawyer colleagues and some mediators. It is indeed troublesome when counsel will not communicate with me about mediation even after I have offered to work together to get a discovery plan, or an exchange of information so that we can each have access to what we need to evaluate the case before we discuss resolution. In these troubled economic times, when law firms are folding or letting staff go, there is a concern that the motivation for economic survival will override the professional obligations to work towards a timely and efficient resolution of a dispute.
There is nothing to lose by mediation and only much to gain, and it is our duty as lawyers to see that a case is tested in that process. Who knows, a good result on both sides may mean more business rather than less.
Monday, October 27, 2008
The Lawyer's Role in Preparing the Mediator for Mediation
Let’s not forget that as our client’s advocate at mediation we have a job to do in preparing the mediator. Before the Mediation starts, the mediator knows only what he learns from the submissions of the parties beforehand. He can learn more about the parties’ respective positions during the mediation, but it is important to give the mediator as much information about the facts of the case, the opinions of experts, the legal issues, and your client’s position in advance so that the mediation day can progress without the mediator having to probe counsel for more information that was not provided initially.
Mediation Statements
I am frequently surprised at the skimpy mediation statements that my adversaries submit. Often they submit just a few pages which outline not much more than the answer to the complaint, or they misstate or mislead the mediator as to the facts or law.
Seldom are out mediation statements less than 30 pages. They contain a detailed factual recitation that is usually in a chronological order with headnotes broken down by date range, event or some description. We try to make the factual recitation interesting so that it tells a story. In short, we tell the mediator: “This is what the court and jury are going to hear about our client’s case!”
We also include summaries of what our experts are going to say about liability and damages, often in a separate section of the mediation statement with a separate topic heading devoted to “Expert Opinions.”
Then we outline the law focusing on key cases (often attaching one or two cases with key parts highlighted for the mediator). Most often our discussion of the law is based on the jury instructions that we believe will be given by the court. If we are mediating either before a dispositive motion is filed or after it has been filed and before any hearing, we will use a separate section of the brief to advise the court why our motion will be granted or a defense motion will be denied. If our brief has been filed, we will submit a copy of key moving papers to the mediator.
The opening of our mediation statements is usually entitled, “What is This Case About?” In two or three paragraphs we try to outline the essence of the case and the claims of our client – how our client has been irreparably injured by the conduct of the defendant.
We construct our mediation statement so that after the mediator reads this introduction and the first new pages, he/she will say: “I got it.”
Exhibits
The proof of the pudding is in the eating. That is what exhibits are all about. They not only establish facts buy verify the statements in a mediation statement. We include exhibits, which are organized as they are referenced in the mediation statement. Again, we highlight key portions which verify our story about the case. While we do not want to overwhelm the mediator with more than can be absorbed in a reasonable amount of preparation for his/her role as mediator, we also don’t hold back if we need to verify the facts or expert opinions that support our client’s case.
Videos
Seldom do we attend a mediation without a mediation video. I have written a column on these (August/September 2008, Volume II, Issue 8).
These videos can include family photos (in a death or serious injury case), videos of locations where an accident takes place, a series of photos of damaged vehicles or products that are the subject of the case, reenactments and computer simulations, news segments from television reports, interviews of witnesses (such as family members about the value of the lost relationships in death or serious injury cases), key documents with important portions highlighted or enhanced, and event interviews of expert witnesses.
Material that is specially prepared for the mediation and that is not otherwise available to the parties may be labeled as confidential. We always put an admonition at the beginning and ending of our video that it has been specially prepared for the mediation and is deemed a confidential mediation submission. We cannot protect inclusions which are otherwise discoverable or admissible, but we can protect our work product from being used at trial. (
Private Letters
The confidential, private letter to the mediator is an effective tool in preparing the mediator before the mediation. We use this letter as a means of:
· Advising the mediator who will attend the mediation on our client’s behalf, giving a brief description of their role (client’s family, consultants/experts and our attorneys);
· Providing the mediator with additional information about our experts and consultants (e.g.. medical reports from consultants who have evaluated a part of the case and advised that their opinions would not support a particular damage claim);
· Demonstrating structured proposals;
· Submitting written statements from witnesses that the other side has not obtained in discovery;
· Providing information on insurance and our comments regarding the carrier’s position and approach;
· Providing comments on apportionment of liability among several defendants;
· Providing comments on prior dealings with defense counsel and/or the parties or carriers involved;
· Relaying thoughts on how the negotiations might progress.
Pre-Mediation Conference
I am also a fan of a pre-mediation conference with the mediator. This serves several purposes. First of all, the mediator can outline what is important to him/her (i.e. what information is deemed important for the neutral). Second, the mediator can advise the parties of the date for a timely submission of the written submissions. Third, the parties can exchange ideas on how the mediation should be approached. And, if the parties need additional information before the mediation, they can request such.
Timing of the Mediation Submission
I also believe that any mediation submissions should be provided at least week before the mediation. In fact, weeks before is not too early. It is not effective to submit a several page statement a day or two beforehand. If counsel cannot do better, then the mediation should be continued to a date that will allow the parties to have a full and timely exchange of information, and the mediator will have what he/she needs to give them the best chance for resolution.
Tuesday, October 7, 2008
What Type of Negotiation Personality Are You
Before representing your client in negotiations, particularly in the more formalized environment of a mediation, it is important to assess what type of negotiator you are. You, your client, and any mediator who is used, must work together to seek a voluntary resolution. That takes a different persona than the advocate at trial. You are indeed still an advocate, but one with a different presence.
Recently I attended a mediation in which we represented a local auto retailer that made available rental cars for its customers and also to employees. An employee rented a car and was involved in an accident in which he was killed and his passenger was seriously injured. Both sued. Our client was named in the lawsuit even though there was a separate subsidiary handling the rental operation. There was a CGL policy which sought to exclude rental cars. The client’s broker had not obtained proper coverage for our client. Faced with a limits demand, the CGL carrier settled and sought reimbursement from our client. We sued the broker as well.
The broker’s attorney was difficult. At a mediation of the cases, he exhibited an antagonist and hostile attitude that interfered with the process. He just did not “get it.” It made the process difficult because my client and the carrier wanted to settle the case. I just did not understand why the broker’s lawyer had to be so difficult. Fortunately, there was a more responsive claims representative from the broker’s carrier present, and based on some excellent skills by our mediator, the whole case was resolved.
Negotiating a case is an active and dynamic process which inserts your personality into the case as an advocate for your client, just as it does at trial. The advocacy, however, is different. Instead of simple persuasion, you are using your skills to cause your adversary and his or her client to recognize the vulnerability of their case, and to voluntarily enter into the process of trying to find a point of resolution before trial. Your adversary must be motivated to seek that resolution, and your approach and personality are parts of the process of that motivation.
Each of us presents a personality in negotiations. There are some lawyers I know who are excellent in most all respects but have a hard time switching hats from pure advocacy to negotiation advocacy, which is a much different process. They are tough, hard-hitting lawyers who can push a case, work it up for trial, handle the motion practice, and try the case. However, when it comes to changing gears to a “negotiator,” they just don’t seem to understand the process well enough to be very effective. As a result, they end up with cases that do not produce good economic results: verdicts between offers and demands, or simply cases where the necessary expense of trial is not warranted, i.e., cases where liability may be strong but the damages or collection of the judgment does not justify a full-blown trial.
My sense of the personality types – generalizing of course – is as follows. Bear in mind that some present a combination of these, or in rare cases, all of these:
· The Aggressive Type – no mater what the discussion, this type tries to take over and control everyone by being very aggressive.
· The Angry Type – everything seems to evoke an angry response, sometimes raising the temperature of the negotiations. Not good, obviously.
· The Hostile/Confrontational Type – wants to give an opening statement in the first caucus to show his or her clients what a great advocate he or she is and how he or she can get in the face of the other side.
· The “I Cannot Work in this Process” Type – just does not understand the process and how one must engage in the “give-and-take” of negotiations. It is a compromise, but this type does not understand that.
· The “Close to the Vest” Type – wants to keep everything confidential; will not exchange mediation statements. For some reason, believes that exploring the issues is harmful.
· The “Unprepared” Type – just is not ready, and may simply be looking for a way to resolve the case and earn a fee, rather than work the case up.
· The “Unrealistic” Type – for many reasons, including lack of preparation or ability to evaluate a case, does not understand the issues or damages; or simply has an highly inflated view of the value or a very low deflated view of the exposure of the client.
· The “Doesn’t Understand the Case” Type – here there is a lack of legal analytical skills and an understanding of what the case is about – legally and not emotionally, usually is the problem.
· The “I Get Frustrated with the Process” Type – has a hard time with the process of “give-and-take” because of impatience, and also lacks a sense of how to move through the process and engage the other side in the negotiation process.
· The “I am Trying to Get the Case Cheap” Type – this applies to the insurance company that believes if it goes to mediation, it will get a “good deal,” and that its representatives are attending a “fire sale,” not a real supervised negotiation. Carriers often approach early mediation this way, rather than taking a serious look at the carriers “down the line” costs plus exposure. Often an insurer will not spend the money to allow its counsel, panel counsel, or coverage counsel to evaluate the case in the real light of day.
You probably can describe others, but each of these represents an impediment to
The more positive personality types include:
· The “I Understand the Process and Can Work in It” Type – they know how it all works. Their clients are ready to make decisions and they have provided both the mediator and other side with a solid, well organized statement of the case.
· The “Diplomatic” Type – can present the case forcefully in the calm environment of negotiation process.
· The “I Will be Up Front” Type – “Candor are a lovely virtue.”
· The “Well Prepared” Type – refreshingly well versed in all phases of the case. Could start trial shortly because he or she knows the case.
· The “I Understand the Value of My Client’s Case” Type – realistic about the cost of going to trial vs. settlement; knows the verdict ranges; understands the “present value” of money; has let the client know what the financial benefits are of settlement at this time.
The successful negotiators present a combination of these positive traits. There may be occasional lapses where each of us exhibits one or more of the negative traits during the negotiation process. However, the successful negotiators are aware when these lapses occur, recognize them, and return to exhibiting the positive ones that improve the chances for resolution.
A major problem is presented when we have an adversary who truly falls into the negative personality types and is stuck there. My experience is that usually this type is reluctant to go to mediation; but if it happens, then you need to have a very candid discussion with the mediator beforehand to discuss how to approach the mediation. It may be that the mediator has to exercise some strong influence on your adversary and his or her client to assess how to approach the mediation process.
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