United States: A Policyholder Perspective On The Unique Challenges Of A Three-Way Mediation

Last Updated: January 12 2018
Article by Mary E. McCutcheon

I recently participated in a negotiation with an insurer who had denied coverage for an underlying errors and omissions claim in the mid-seven figures. The insurer's counsel and I exchanged stern letters, each explaining why our respective client's position was absolutely correct, and the other's absolutely wrong. The client's broker arranged a meeting with principals and counsel on both sides. At the meeting, the insurer's counsel and I debated our respective positions once more. Neither of us conceded any possibility that the other could be right. After 25 minutes, my client put a stop to the debate competition and, aided by the broker, moved into negotiations with the insurer's principal.

The opening offer and demand were miles apart. But within an hour, the case settled, to the clear satisfaction of both sides. With no mediator. No wrangling about which mediator to select. No waiting three months to get a date on the mediator's calendar. No mediation briefs or reply briefs. No waste of non-refundable mediator's fees. No shuttle diplomacy, bracketing or mediator's proposals. No mediator reserving jurisdiction to hammer out disputed settlement terms. It felt almost too easy.

Are lawyers too dependent on mediators to settle their cases? Whether you answer that question yes or no, there are many situations where a neutral can resolve a case where party negotiations would fail. This is particularly true in a "three-way" mediation, where the defendant's insurer is participating but is reserving rights, denying coverage, or rejecting defense counsel's settlement recommendations. These mediations present unique challenges that require a skilled mediator and savvy defense and coverage counsel. Among such challenges are:

  • The policyholder needs to convince the plaintiff that it will win its case, while convincing the insurer that the case requires significant settlement authority. To make matters worse, it has to accomplish this feat through the efforts of a single person who cannot bifurcate his or her brain. Can you really tell the mediator the plaintiff's case is worthless, but also tell him or her about the "smoking gun" needed to convince the insurer(s) to put serious money on the table?
  • The insurers insist that the defense counsel make a "strong" presentation to convince the plaintiff why the case has a low settlement value. But they are so enamored of the defense presentation, they refuse to consider the defense evaluation explaining why the case must be settled, and for a significant sum.
  • The "smoking gun" that plaintiffs do not yet know about eviscerates not only your defense, but also your coverage position.
  • The plaintiff refuses to move off a demand in excess of limits, but the insurer refuses to authorize the next offer to entice the plaintiff to move further.
  • The insurer insists on attending the mediation (as is its right) even though the sight of an insurance claims representative may trigger dollar signs in plaintiff's eyes.

As daunting as these issues may be, a little advance planning, strategically minded defense counsel, alert coverage counsel and a skilled mediator can overcome these hurdles.

Talking out of Both Sides of Your Mouth

Most defense counsel are skilled at sitting down with plaintiff's counsel and explaining how plaintiff's case is worthless, and that the defense will grind them through discovery and recover costs after wiping the floor with them at trial. Defense counsel then compose their rabid faces, walk into the insurer's room and tell them that liability is so clear that they will be lucky to save even a few pennies off their policy limits. But insurers often expect defense counsel to act solely as the warrior who will do battle, rather than the wise counsel who tell them when it is time to sue for peace. Defense counsel has to consider how to arm the mediator with enough "bad news" to prepare the insurers to contribute to the settlement, without signaling to the mediator that they are panicked about their prospects at trial. A skilled mediator can deliver the bad news so that the insurer or their monitoring counsel does not shoot- or second-guess-the messenger.

Don't Let the Carrier Fall in Love With Your Case

Many mediators discourage joint sessions, because all they do is harden each side's position. Everybody listens to their own counsel, not the other's. But an insurer can be insistent that the defense put on a presentation to point out to the plaintiff the weaknesses in his/her case. Unfortunately, the insurer may become so enamored with the defense position, it discounts plaintiff's position. Arrange a pre-mediation meeting or webinar with the insurer to run through the presentation, but then present your own rebuttal, pointing out all of the weaknesses that are not addressed in the presentation to the plaintiff. And do it again right after the plaintiff's and defendant's presentations at the mediation, while the mediator is talking to the plaintiffs about their opening number. Remind the insurers that while their defense counsel is ready to defend the claim until the death, there is a reason to settle before that comes to pass.

Watch out for Coverage Traps

The "smoking gun" that demonstrates to the insurers that the insured faces serious liability may also reveal that the insurers have a solid coverage defense. Before this item is revealed to the insurers, look at the reservation of rights. Also look at the policy to see if there are other coverage defenses that could be raised even if not mentioned in the reservation of rights. Insurers are not embarrassed to raise new coverage defenses, even on the eve of mediation, and many states hold that failure to raise the defenses at an earlier date is not a waiver. Coverage counsel must work with the mediator and defense counsel to present the smoking gun as one that presents risks that are nevertheless potentially covered.

Getting a Demand Within Policy Limits

Suppose the policy limits are $100 million. Plaintiff demands $200 million. Defendant's insurer counters at $199 million. The insurer is outraged at this supposedly "bad faith" counter, and refuses to respond, or authorizes such a minimal increase in the offer that plaintiff breaks off the negotiations in a huff. Or the insurer refuses to make any offer because it does not believe the claim is covered. In many states, this conduct may not necessarily "open" the limits because there has been no demand within policy limits. A skilled mediator can dialogue with the parties to get a sense of what the "right" number should be, without going through rounds of proposals and counterproposals, and make a mediator's proposal within policy limits. If the insurer refuses to fund that proposal, the mediator can encourage the plaintiff to make the demand outside of the mediation, so that the insurer's failure to accept a reasonable settlement is not shielded by the mediation privilege.

Manage the Plaintiff's Expectations

Many defense counsel are concerned about bringing insurers to a mediation, thinking it will excite a plaintiff into demanding more money. But I have seen too many situations where insurers are discouraged from attending a mediation, only to later find that the case was settled without their consent, giving them a strong coverage defense. DO NOT DO THIS. There are many other things you can do to make sure the plaintiff does not see the insurer as a source of limitless funds. Have the insurers sign in on a separate sheet and sit in a separate room, talking only to the mediator. Tell the plaintiffs the insurer is about to file a declaratory relief actions. Or let the insurers tell the plaintiff why there is no liability and no coverage. Better a plaintiff with unrealistic expectations than an insurer with an ironclad coverage defense.

So sometimes you do need a mediator to settle a case. Anticipate the challenges raised by the insurer as a party to a "three-way" mediation, and make sure the mediator is equipped to resolve the issues between the defendant/insured and its insurer, as well as those between plaintiff and defendant.

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.

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