Sue or settle? Mediate or litigate?
Attorneys and risk managers on Tuesday tapped into years of experience to suggest strategies that will lead to the right approach for resolution of claim disputes during the Risk and Insurance Management Society’s annual conference at the Boston Convention and Exhibition Center.
Washington D.C. attorney David Klein said it’s important to keep in mind, through his “warped way of thinking,” that a claim is an asset. The value is determined by the court or through an agreement between the insurer and the insured.
Klein, partner with the Pillsbury Winthrop Shaw Pittman law firm, teamed up with Ashraf Kilada, senior director of treasury risk management for PepsiCo, for a presentation on how to evaluate the economic and legal circumstances of a claim to decide on a litigation or negotiation strategy.
Klein said a policyholder may know the amount of a loss down to the penny, but there are other considerations. Negotiation will certainly result in a payment of something less than full value, but that has to be balanced against the cost of attorney fees and the time that staff, often key executives, will spend preparing for litigation.
And yet, negotiation has its own perils. “Insurers will commit to institutional decisions,” Klein said.
Over time, it may become clear that no matter how much effort is spent properly documenting a claim, the carrier isn’t going to budge. He said he worked on one coverage dispute from 2001 to 2012 and generated $1 million in legal fees. Nevertheless, his client was happy with the result.
“At some time in year three you realize that you are spending money to satisfy the insurer’s insatiable desire for information and you’re not going to get a recovery,” Klein said.
On the other hand, litigation is a gamble. A victory may bring a 100% recovery, but a loss will yield nothing.
Sometimes complications may also tilt the decision toward negotiation. Klein said in complicated environmental litigation, for example, there may be several sites involved and claims from each of those may not be ripe for resolution at the same time. In such a situation, a negotiated settlement might make the most sense.
Kilada said its important for managers to take a hands-on approach toward claim resolution: don’t leave everything to the lawyers.
“If you depend on coverage counsel to negotiate with coverage counsel, you’re going to be in litigation a long time,” he said.
When parties are still on the fence about going to court, the process of preparing for litigation may bring a better settlement in the long run. Klein said discovery may turn up documents that strengthen a case and might even reveal details that will “up the ante” in a case against an insurer.
An audience member asked if threatening a bad faith claim is a good approach.
Both Kilada and Klein agreed that a bad faith claim is an option, but it’s difficult to win, especially in New York. Klein called it “the nuclear option.”
“That’s a slap in the face to the insurer,” he said. “It makes it more difficult to settle later, but there may be times that it is appropriate.”
Sometimes parties in a coverage dispute may want to sit down face to face and come to an agreement. Toward that end, the RIMS conference offered a panel presentation by three attorneys and a risk manager who extolled the virtue of mediation.
Giulio Zanolla, an attorney who owns Zanolla Mediation in New York, said the beauty of mediation is the parties involved get to decide exactly what it will involve. They can decide with whom they want to mediate, what issues need to be mediated and how the mediation process should work.Once a mediation agreement is made and the parties sit down together, it’s important not to focus on numbers right away, said Erin Gleason Alvarez, a mediator with Gleason Alvarez ADR in New York. Initially, a mediation should be about the defining the problem, she said. If an offer is made, the mediator should understand how the offering party how he came up with that number. The mediator’s role is not that of a carrier pigeon who carries offers and counter offers, she said.
When numbers are discussed, a common technique is to use brackets; that is defining a possible settlement by marking the lowest possible amount reasonable to the highest possible reasonable value. But it’s crucial for parties not to decide that the bracket means the other party is willing to settle for the midpoint, both Alvarez and Zanolla said. That can lead to a breakdown in negotiations.
Mediation must be brought to a close. Sometimes the parties may decide to let the mediator settle on a number and agree to accept that decision as binding.
Baseball arbitration is another common tactic, the lawyers said. Each party is asked to provide his best number to settle the case and the mediator decides which number is the most reasonable. Each party has an incentive to give up something to increase the chances that the mediator will decide that his or her number is the most reasonable.
Mediations don’t always produce agreements. Peter Halprin, an insurance coverage attorney with Anderson Kill in New York, said if negotiations break down there’s no reason to close the door forever. He said incentives to settle or to litigate may change over time. He said he worked on one case recently that could not settle through mediation before a suit was filed, but the parties were able to reach an agreement afterward.
Zanolla offered this advice to any who decide to go down the mediation path.
“Make sure your team is aligned before you walk into the mediation room,” he said. “Get involved. Don’t just let the lawyer run the show.”
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