Proven, Professional Assistance in Mediation Matters

Negotiation News: Volume 1, Issue 6

  • Sean Judge Joins Resolute Systems

For those of you who may not have heard: I am extremely pleased to announce I have joined the panel of Resolute Systems, LLC. Resolute Systems provides dispute resolution services throughout the United States. As I have in the past, I will be offering mediation and arbitration services throughout Southern California through Resolute Systems, Inland Valleys Justice Center and through Judge Mediation.

  • About this Month’s Article

Below is a brief article on mediating with potentially inadequate insurance proceeds. There are some obvious steps that one takes when the case is having difficulty resolving within policy limits, but I also tried to address some of the more subtle considerations that you may wish to think about as well.

Mediating With Potentially Inadequate Insurance Proceeds

The following scenario comes up from time to time:

Plaintiff is involved in an auto accident with liability adverse to the defendant, and plaintiff is seriously injured. You send the letter to the defendant’s carrier requesting they provide all available insurance proceeds, and the carrier, in turn, is authorized to provide that information. After commencing litigation against the defendant, defense counsel provides the answer to insurance information under oath (in California, this is generally provided in form interrogatory 4.1 and production of the insurance policy or policies in discovery). By then, however, there is a related or consolidated lawsuit involving occupants of defendant’s vehicle. The defendant is not judgment-proof and has few assets.  The total available insurance proceeds are inadequate to cover the reasonable value of all the claims.

The parties agree to mediation. What can they expect?
In this situation, it is highly advisable that some degree of pre-mediation discussions take place so that the parties and the mediator do not encounter the opening positions when walking into the mediation room for the first time. Typically, the claims representative and counsel for Plaintiffs have discussed this issue at length and are already aware of the issues. The mediator should also learn from the defense whether the policy has been tendered or whether, for example, the tender is conditioned upon a global settlement.

The parties and counsel, however, should expect that if all of the claims cannot be resolved together within policy limits (especially after the policy has been tendered), absent a contribution from the insured, the insurer will interplead the policy proceeds into court, and have the parties litigate in court for their share.

It should be noted though that simply interpleading the funds into court will not automatically discharge an insurer from a subsequent claim of bad faith Schwartz v. State Farm Fire & Cas. Co., (2001) 88 Cal. App. 4th 1329, although this is not the view in all jurisdictions. Further, the insurer’s duty to defend may not terminate upon interpleader, either. Again, these considerations should be addressed, if appropriate, before simply adjourning the mediation and proceeding with an interpleader action.

In the rare case that all of the claims are not resolved together and if a piecemeal approach is decided upon, the issue of which claims get resolved first becomes important. Assuming the insurer has exercised “reasonable conduct” in evaluating the claims against its insured (i.e., attempting to evaluate and settle as many claims as possible within policy limits), the insurer maintains primary control over the settlement proceeds. However, both the defense and the mediator should at least be mindful that an indiscriminate settling of claims without regard for the policy limits that unreasonably depletes available policy funds may lead to a later action for bad faith. Peckham v. Continental Casualty Co. 895 F. 2d 830, 835 (1st Cir 1990). Other opinions have permitted much more latitude to the insurer to settle cases reasonably and in good faith on a “first come, first served basis,” regardless of whether they leave the insured with inadequate policy assets for later claims. In Re Rare Coin Galleries of America, Inc. 862 F. 2d 895, 903 (1st   Cir 1988).

Again, this “piecemeal” approach is rare. Most insurers will want everything resolved at once, and within policy limits. Though it is decidedly not the role of the mediator to get involved with insurer’s decisions regarding the order in which the claims get resolved if they are to be resolved piecemeal, keeping the principles of good faith in mind if these claims are to be resolved will undoubtedly produce a more satisfactory and lasting agreement, and minimize the chances of later litigation.

Those who will not settle within policy limits, in addition to risking an interpleader action, may expose the insured to an excess judgment. It is then up to the defendant’s personal and/or Cumis counsel to carefully consider options with the defendant should Plaintiff chose to go forward with their claim that exceeds defendant’s policy limits.

Some other options to be considered are as follows:

A. Continue negotiating and request a Mediator’s Proposal: With a mediator’s proposal, the parties retain control over the parameters of how it is utilized. These parameters may address such as issues of whether the policy proceeds constitute all the available assets, how many sides must accept for there to be an agreement, etc. Of course, the parties are free to accept or reject the proposal, proceed with the case or return to the table.

B. Mediator’s binding distribution decision: This option is similar to the mediator’s proposal except the parties agree that they will be bound by the decision of the mediator, and that the sums arrived at will be incorporated into a settlement agreement. Before proceeding with this option however, it is paramount that all of the participants execute a waiver of confidentiality, since the mediator will be considering confidential communications when arriving at a decision. If this option is selected, the parties should construct an agreement that is enforceable under CCP section 664.6 and that addresses the confidentiality provisions of Evidence Code sections 1115-1129 and 1152.

C. Sending the parties to binding arbitration: This too is similar to the mediator’s binding distribution decision option, except another neutral hears the arguments in an adversarial, non-confidential setting.

In summary, though the mediator must not get involved in the relationship between counsel and either Plaintiffs or Defendant, it is decidedly in everyone’s interest, including that of the mediator, that the settlement is final despite the limitations of inadequate policy limits. As with any mediation, by continuing to structure the outcome through negotiation or other procedures over which the parties maintain control, the dispute stands the greatest chance of being resolved once and for all.

Sean E. Judge is a mediator with offices in Woodland Hills, CA. In his 21 years as a litigator, he has represented corporate and institutional clients, and individual litigants and small businesses, both as Plaintiffs and Defendants. He can be reached via telephone at 818-616-8500, at or via email at .