Virtually every company suffers a substantial insurance loss at some point in its life cycle. If the loss is large, there is a good chance there will be an insurance dispute. If efforts by the risk management department, outside brokers and in-house law department do not resolve the dispute, an outside lawyer who represents policyholders will get a call. What happens next varies from firm to firm and from lawyer to lawyer. An important first consideration should be alternative dispute resolution, or ADR.
ADR is not always available. It is only available if both sides agree to it.
Insurers are generally willing to participate in ADR. There are a number of reasons why ADR makes sense for them. Insurers are in the litigation business and understand better than anyone how expensive and unpredictable the process can be, and insurers are typically not jury favorites. Moreover, many states' insurance codes encourage or obligate insurers to meet with their policyholders to try to resolve claims outside of litigation or run the risk of acting in bad faith. Finally, insurers sometimes have an economic interest in their relationship with their policyholder; for example, they make take into consideration how much business the policyholder places with them. Litigation is not the best way to retain friends.
Unlike insurers, policyholders are not in the insurance-litigation business, so the discovery and the trial processes are more disruptive. Litigation is also more expensive for policyholders, who do not have a stable of insurance lawyers on retainer who offer volume pricing discounts. Litigation is just as unpredictable for policyholders, even when a claim is strong. Large companies that purchase insurance are not treated like widows and orphans. For them as well, a successful resolution of a claim outside of litigation is quicker, more predictable and guarantees money in the bank.
Not all lawyers believe ADR is useful or have much experience resolving complex insurance claims outside of litigation. Like litigation, ADR is a skill born of practice. It is important to match the ADR tool to the dispute at hand. For ADR to have the best chance to succeed, a lawyer has to pay attention to a lot of different issues: the particular insurer's approach to handling claims of the type at hand, the reason why the insurer has denied or refused to fully pay the claim, the strength of policyholder's legal basis for the claim, and the personalities involved on both sides of the table, both principals and counsel.
As a first step, we recommend that ADR probably should take the form of a private structured negotiation. The structure matters. We recommend starting with a one-on-one negotiation with each insurer. The meeting should include principals from each side with sufficient authority to settle the claim. The policyholder client-principal needs to understand the claim. How the meeting is structured should be the product of a negotiation with the insurer. Both sides need to be invested in the process. Both sides need to come away understanding the actual risks and rewards of settlement versus litigation. In addition, the insurer needs to come away believing that the policyholder's position is transparent, credible, and legally justified. Credibility matters. Finally, the deal has to make sense to both sides. A meeting of this kind is a chance to make the policyholder's strongest case directly to the other side without opposing counsel filtering the message. That is an opportunity that should never be missed.
When private negotiation does not work, the involvement of one or more neutrals is a potential next step, in the form of mediation or arbitration. Once again, the devil is in the details. We have written extensively on this topic. We refer anyone who wants a fuller explanation of our chapter on meditation and arbitration to review the chapter on this subject in the New Appleman Insurance Law Practice Guide, Volume 2, last published in 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
