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Mediation Strategies: “Early Bad Faith” Mediations Require The Proper Participants

April 19, 2011

It is increasingly common for claimants to seek a mediation resolution in personal injury claims where a defendant’s full policy limits have already been offered prior to trial, the plaintiff has already rejected that tender as allegedly totally and clearly insufficient and too-late tendered, but the trial of  this initial claim has not yet occurred.

I refer to these as “early bad faith” mediations. And, to have any reasonable chance of success at the mediation of these matters before a trial of the matter, it is imperative that all of the correct participants be present.

The claimant-plaintiff in these instances is overtly seeking “extra-contractual” damages from the defendant’s insurer. That is, additional monies from the insurance company beyond those monies presumptively available to be paid by the defendant’s insurer based solely upon the defendant’s existing policy of insurance, the stated limits of that policy’s coverage, and the outcome of a trial still to he held.

These unique mediations also seek a resolution of the primary matter in litigation by the voluntary payment of the full policy limits.  But, this “early bad faith” mediation also requires for their resolution, the obtaining  of the voluntary payment of these extra-contractual dollars by the defendant’s insurer, over and above the stated policy limits, but without first going through the trial of the underlying cause.

This type of dispute, usually over the alleged actions or inactions of an insured’s insurance company, is the basis of seeking such extra-contractual dollars and is commonly referred to  as “Bad Faith” .  Those issues and remedies are both well-known and still-evolving.  As this is written, the Florida legislature is entertaining new sweeping legislation on the present common and statutory law regarding these issues.

Seeking extra-contractual monies originally arose after the trial of the underlying claim where the ultimate outcome of the judgement was in excess, usually far, of a defendant’s insurance coverage limits. Such “excessive” judgments were then commonly the subject of following litigation between the plaintiff and the defendant’s insurer or even the defendant and their own insurer for indemnification of the excess. And thus, mediation regarding  excess or “extra-contractual” dollars sought  normally took place during the second litigation process.

However, earlier claims of bad faith and earlier attempted mediation of those claims gradually evolved to this present early posture because both parties understood the savings of time and money by examining and mediating these claims without first requiring the underlying trial and then the second subsequent litigation and trial.

Early bad faith mediations can be successful. But, as usual, it first requires an express interest in resolution by the insurer accused to have this unique exposure to have any chance of success at such an early stage. And, equally important, the proper participants present when it is contemplated.

One of the first problems, if there is no mutual interest in voluntary resolution, is legal. Legally, the proper participants to even consider a voluntary resolution for any possible excess verdict are not even required to attend any mediation of the underlying litigation. Normally the underlying defendant’s “insurance” attorney and insurance representative has no connection to or authority for any payment beyond the policy limits or the defendant’s personal funds.

But even where policy limits have already been tendered and rejected some courts are still requiring mediation of the underlying cause.  As you might expect, such mediations are highly likely to fail at the best and be a total waste of time and money at the worst.

However, increasingly, these early bad-faith mediations are being found fruitful by many insurers for any number of reasons, inclusive of the continuing duty of the carrier to defend their insured and the high likelihood of significant cost savings in avoidance of unnecessary litigation if there is any basis for both bad faith and an excess judgment.

But many mediating parties, and many mediators, still fail to recognize the revised roles of the named parties and their counsel and, more importantly, the  new “other participants” that really must be present (not merely on the phone) for any chance of early mediation success.

What changes for the participants in the underlying matter when the limits of coverage are believed to be insufficient to protect the insured and actions or inactions of the insurer may have exposed the insured to personal risk and the insurer as a fund for indemnification?

First, the defendant-insured, previously believing themselves totally protected by their insurance coverage, now finds themselves vulnerable to a personal judgment in excess of his insurance.  The loyalties previously first extended to the carrier now return to self-interest and personal judgment avoidance.

The defendant-insured’s attorney provided by the insurer, with their duty solely to the insured while being paid  only by the client’s insurer, finds themself in the position of  having to move from solely protecting the client from the plaintiff to now having to represent their defendant-client by encouraging the people paying his/her bills to pay something beyond their contractual limits for the protection of his client.  Oddly, once the insurer effectively admits any clear extra-contractual exposure of the insured, at the least, the clients’ insurer-supplied attorney may have the duty to refrain from too-strongly advocating trial of the matter rather than pushing for resolution without payment by his insured-client.

And, if the defendant is or becomes uncomfortable with the assistance of the insurer-provided counsel being  as forceful as possible, a personal attorney for the defendant becomes a likely good idea, if not a requirement. (The proper role and strategies of this important personal counsel is, however, another subject for another day.)

The defendant’s insurer’s representative, responsible for evaluation and the initial tendering of the defendant’s policy limits in the original claim, in many companies, now becomes totally unnecessary to attend this early mediation.  They have no authority to pay more than their limits.  They may in fact be one of the alleged causes of the alleged bad faith.  And many will suggest their presence at mediation is in direct conflict with finding resolution as they may, intentionally or unintentionally, be undermining their insured’s obtaining additional protection of extra-contractual monies.

The first of the two most critical new participants required,  but technically not yet legal participants, is the insurer’s representative of any insurer that will pay, if found responsible, any extra-contractual damages.  Most insurers will not permit this new representative to have any contact with their primary adjuster of the underlying claim, much less their insured’s attorney.  However, it is this new representative, with the new lines of evaluation and extra-contractual authority granted him/her on all  of the extra-contractual issues, that ultimately determines whether the matter can be resolved or not.  Their presence and active involvement, including with their own insured and all of the insured’s counsel, is critical.

Finally, since the defendant-insured’s insurance attorney will likely be a required witness in any bad faith litigation totally separate counsel must be obtained to represent the new insurer(s) representative and to both advise and receive direction from that new representative. Should extra-contractual dollars not be offered or insufficiently for resolution, this same attorney will then likely be defending the insurer in the litigation.  There is thus much to consider and advise and negotiate on these collateral issues, at mediation, also.  Thus, this new counsel’s presence is simply mandatory.

In short, assuming mediation has no chance of resolving within the policy limits already tendered and previously rejected, realistically the only  required participants to any early “Bad Faith” mediation, are the “new” attorney and the “new” claims representative of any insurer being asked to consider extra-contractual monies for resolution.  The former legal participants are necessary, but merely to add to the weight of the total discussions that must take place to have any chance of resolution.

Legally, only the normal underlying claim participants must attend any court-ordered mediation. However, in the absence of the “real” proper participants, any chance of resolution of an early bad faith mediation, court-ordered or not, is highly unlikely.

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