Why Early “Conventional” Mediation Rarely Works In Serious Disputes Where Insurance Funding Is Essential To Success

“Settlement Facilitation” is a better (and less costly) process. Here’s how it works.

Mediation has become standard fare in many liability disputes, including large claims in which it is clear from the outset that most or all of any ultimate settlement will be funded by available insurance of the defendant. And as more companies try to economize litigation, mediation if now often attempted early in the dispute, shortly after suit is filed—or even before. This “conventional” mediation has a standardized format embraced my outside counsel for all sides. It goes like this:

Counsel wrangles for a while on the selection of an agreed neutral, often a lawyer or former judge known to all of them. Once selected, the process that follows is normally the same: written position statements are prepared by all sides and submitted to the mediator, and probably shared with the other parties in some form.

If the defendant has applicable insurance, the defense position is almost always prepared by the insurers’ appointed defense counsel, usually at modest cost to the insurers who efficiently manage their appointees. The claiming party’s mediation efforts will normally be more expensive because its outside counsel is not laboring under the below-market billing rates imposed by insurers on their own appointed counsel.

On a given date, usually farther down the road than would be preferred by the claimant (on account of the inevitable scheduling difficulties), the disputants and their representatives meet in a formalized setting. The lawyers usually make opening statements, not unlike what happens in a trial. Then there is a lot of waiting while the mediator meets alone with each side, back and forth.

Attempted mediation of insured liability disputes will nearly always bear two trademark characteristics:

  1. The process is driven by lawyers for whom the coin of the realm is advocacy and combat; and
  2. The individuals most relevant to the decisions on insurance funding, the insurer’s coverage counsel (as opposed to the appointed defense counsel) and senior claims leadership, are either mere observers to the process or are disengaged altogether.
  3. Many parties do not appreciate that the insurance company sitting in the background of an insured liability claim is making two largely independent assessments, each of which is vital to its willingness to fund a settlement, and to what amount. The first is “what is our contractual obligation to our policyholder under the policy of insurance?”, for which it will, in large matters, have consulting outside coverage counsel with real influence. If its internal answer to this question is “not much”, the outlook for a successful mediation is slim to none. The second assessment is “How liable is our policyholder, what is its realistic exposure with or without our insurance?” Conventional mediations tend to be preoccupied with this second question, the answer to which is irrelevant if there is no insurance funding available to meet it. A big problem with early mediation of insured liability cases is that the players pertinent to the first question—how much insurance funding is available—are left out of the picture and seldom even in the room. The chair with the wallet is empty. And in large dollar disputes, that wallet—and its size—are fundamentally important.

    Standardized mediation can work in the right circumstances. For example, in small dollar disputes where liability is clear, no underlying coverage issue is present, and the only real question is measurement of damages. Or after years of litigation when “dispute fatigue” has set in, or an unhappy judge has scheduled a trial and the parties perceive it to be a true and firm date.

    But early in a dispute, and especially where insurance funding is involved and the underlying coverage is an open or disputed question, the mediation event involves much more lawyer arguing than dispassionate discussion. And the arguing is between individuals (appointed defense counsel versus claimant’s counsel) who will not be making the important financial and insurance coverage decisions anyway! Business executives who attend are disappointed and frustrated. A settlement is not reached. Time has been wasted, sometimes many months of it. And now, the real litigation expense will begin to mount, diminishing the net value of any future deal when it eventually comes.

    THERE IS A MORE SENSIBLE WAY TO EARLY SETTLEMENT, BUT IT DOESN’T LOOK LIKE REGULAR MEDIATION

    A principal focus of our work is insurance-related dispute resolution. As opposed to conventional mediation, we use a process we call settlement facilitation. It has three very different characteristics from ordinary mediation.

    1. The process is driven by “settlement facilitators” instead of counsel for the parties. The settlement facilitators have deep experience in the settlement of major claims and disputes, and understand the decision-making channels within policyholder companies and insurance companies because they had long careers in each. The settlement facilitators are not acting as counsel and are “non-combatants”. They may be retained jointly by the parties or independently. But in any case they are advocates for settlement, not for the correctness of any side’s particular positions.
    2. Instead of a formal meeting on a scheduled date, the process is highly iterative and incremental. The settlement facilitators work more or less daily, by phone, email, and in-person brief meetings with people on all sides of the dispute who can be helpful to settlement. Importantly, this includes frequent discussion with the senior level decision-makers within the insurance company (or companies) who will be looked to for ultimate funding of any agreement.
    3. Because the settlement facilitator is not serving as legal counsel to anyone, he is are able to reach directly in to management of all sides, and into the insurance company claims and business management at the senior level. (Legal counsel is prevented from doing this by lawyers’ rules which prohibit a lawyer from speaking with another party who is represented by counsel—so lawyers talk to each other, but not directly to the actual business decision-makers.) And, critically, the settlement facilitator or envoy can and will dialogue directly with the insurer’s coverage counsel to understand and discuss the insurer’s positions on the amount of available insurance.

    SPEED AND COST EFFECTIVENESS

    A credible settlement envoy can begin work immediately. Introductions and substantive, but friendly, discussions begin at once. There are no delays as large groups with competing schedules are not sought to be brought together. In fact, there may never be a formal meeting of the parties for the purpose of discussing settlement. Often, the first time the business players come together in person is to celebrate a settlement in a cordial setting.

    Even in complex matters with difficult insurance coverage issues to be ironed out, it is not unrealistic to expect a conclusion—usually a successful one—in 60 to 90 days.

    Bauer Advising acts as a settlement facilitator to all parties (or as an envoy for one of them) for a flat fee that is much less than would predictably be spent in legal fees to pursue and conduct mediation, not to mention the major costs to be incurred when that mediation is unsuccessful.

    There is a solution to every problem. Even the most complex insurance-related disputes are capable of settlement. The key is a realistic process that allows for progress “one step at a time”, and provides for communications between commercial decision-makers and experienced and credible envoys.

    Future posts will detail specific process steps and how you can implement them to obtain results—and obtain them efficiently and without rancor.

    Joe Bauer is the Principal of Bauer Advising LLC. Bauer Advising is an independent advisor and receives no commissions from any insurance company or broker, but assists policyholders, carriers, and brokers as settlement facilitators of disputed commercial insurance claims and related issues. Read more about Bauer Advising’s approach.

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