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Is There A Bad Faith Exception To Mediation Confidentiality?

by Phyllis Pollack
May 2014

PGP Mediation Blog by Phyllis G. Pollack

Phyllis  Pollack

Recently, I received an e mail alerting me to an order (Order_Mot for Remit_MSJ re New Trial.pdf ) of a federal court providing that mediation confidentiality would not apply to prevent an insurance company from using statements made during mediation to defend itself against claims of insurance bad faith.

In Craig Milhouse and Pamela Milhouse v Travelers Commercial Insurance Company, Case no. SACV 10-01730-CJC (ANx), plaintiffs suffered the total loss of their home in Yorba Linda, California in November 2008, when the Yorba Linda Freeway Complex fire swept through their neighborhood. After filing a claim with their insurer, Travelers Commercial Insurance Company ("Travelers") but reaching no resolution, they agreed to mediate the dispute and attended mediation on October 5, 2010. No settlement was reached. (Order at 1-3, and 23-30; Plaintiffs' Motion for New Trial at 8 ( Mot New Trial_Breach.pdf ); and Orange County Superior Court Docket Sheet for Case no. 30-2010-00415058-CU-BC-CJC)

Two days later-on October 7, 2010- Dr. and Mrs. Milhouse filed suit in Orange County Superior Court which the defendant Travelers removed to federal court based on diversity jurisdiction. (See Orange County Superior Court Docket Sheet.) In August 2013, the case was tried before a jury. The issues were whether Travelers had breached its contract with the plaintiffs and breached the implied covenant of good faith and fair dealing (or, in essence, acted in bad faith) in not settling their claim.

During trial, the court allowed in as evidence, statements of what had occurred during the mediation on the basis that the parties had waived mediation confidentiality. More importantly, the court ruled that even if the parties had not waived it, the statements would be admitted to provide due process to Travelers to defend itself against claims that it had acted in bad faith by refusing to settle. (See, Order at 19-21 and 23-31.)

The jury found that Travelers had breached its contract with plaintiffs and awarded damages to plaintiffs but also found that Travelers had not acted in bad faith such that plaintiffs were not entitled to punitive damages. (See, Order at 2.)

Not surprisingly, both sides filed post trial motions. In its Order, the district court essentially affirmed the jury verdict though ordering the award be reduced to a lesser amount, giving plaintiffs the option of either accepting this lesser amount or going forward with a new trial on the issue of breach of contract only. (Order at 1-3, 31-32.)

In their post trial motion, plaintiffs moved for a new trial on the issue of bad faith arguing that the admission of statements concerning the demands and offers made during the mediation was extremely prejudicial requiring a retrial on this issue. (See, Motion.)

The district court rejected the notion that mediation confidentiality was even an issue. First, it believed that the parties had waived it by not timely objecting (which plaintiffs disputed in their motion), and more importantly, even IF the plaintiffs had timely objected, the court would have overruled the objections based on due process:

Due process demanded that the Court allow the jury to hear the testimony regarding the parties' mediation statements.

The Milhouses argued extensively at trial that Travelers, "unreasonably or without proper cause, failed to pay or delayed payment of policy benefits." (Citation omitted) More specifically, the Milhouses contended that Travelers acted in bad faith by refusing to settle their claims. ...

For the Milhouses, the case was one about a despicable insurance company that had a policy of not fairly and reasonably cooperating with its insureds to settle their claims after a tragic loss. They now argue the Court erred by allowing the jury to hear the parties' mediation statements. The Milhouses are wrong. Travelers needed to present the parties' mediation statements to provide a complete defense of its actions and to avoid paying millions of dollars in bad faith and punitive damages for wrongfully refusing to settle the Milhouses' claim. (Order at 27-29.)

After tersely noting the factual history of Travelers' efforts to settle this case, commenting that the matter did not settle due to the actions of the plaintiffs, rather thanTravelers, the court concluded:

It was entirely proper for Travelers to present the parties' mediation statements to the jury. The evidence presented at trial clearly demonstrated that Travelers did not settle the Milhouses' claim because of the positions that were taken during and after the mediation by the Milhouses and their attorney. The jury therefore needed to hear all about what happened during and after the mediation so it could determine whether Travelers did in fact act unreasonably, maliciously, fraudulently, or oppressively by refusing to settle the Milhouses' claim. To exclude this crucial evidence would have been to deny Travelers' of its due process right to present a defense. See Cassel v Superior Court, 51 Cal. 4th. 113,119 (2011) ("We must apply the plain terms of the mediation confidentiality statutes to the facts of this case unless such a result would violate due process, or would lead to absurd results that clearly undermine the statutory purpose.") (Emphasis added.)...." (Order at 31.)

This ruling flies in the face of both statutory and case law on mediation confidentiality. As this matter was based on the diversity jurisdiction of the court, under Federal Rules of Evidence 501, California law would apply. (See, Motion at 5.) California Evidence Code section 1119(a) clearly states that "No evidence of anything said or any admission made for the purpose of, in the course of, or pursuant to, mediation or a mediation consultation is admissible...in any... civil action." (Id.) The California Supreme Court beginning with Foxgate Homeowners' Association, Inc. v Bramalea California, Inc. (2001) 26 Cal. 4th 1 and ending with Cassel v. Superior Court (2011) 51 Cal 4th 113 has made it abundantly clear that there are no exceptions! "No ifs, ands, or buts about it!"

While the District Court does cite a one sentence caution or obiter dicta in Cassel v. Superior Court, supra, as its justification for "due process", the District Court leaves out the California Supreme Court's very next two sentences: " No situation that extreme arises here. Hence, the statutes' terms must govern, even though they may compromise petitioner's ability to prove his claim of legal malpractice (citations omitted.)" (Id. at 119.) (Emphasis added.) Without doubt, the California Supreme Court has been adamant that the mediation confidentiality statutes be very strictly construed and simply stated the one sentence caution to provide an exception or loophole, if ever needed. ... And the district court seized upon it, contravening the entire intent of the legislature and the Supreme Court on this subject.

Yet, the California Supreme Court in White v Western Title Insurance Co (1985) 40 Cal. 3d. 870 has also held that in a first party action against the insurer by its insured for breach of the covenant of good faith and fair dealing, evidence of settlement offers made by the insurer are admissible under California Evidence Code section 1152 and Code of Civil Procedure section 998 as long as the statements are offered to prove issues other than liability, such as the bad faith of the insurer to investigate and resolve the claim! That is, the Supreme Court held that even after the insurer has been sued by its insured for not honoring a claim, the insurer still has the continuing duty to act in good faith in evaluating and resolving the claim. Shortly after this case was decided, the California legislature amended Evidence Code section 1152(b) to allow any opposing or rebuttal evidence regarding such settlement offers to also be admitted. As a result, many insurers will now request a White waiver before discussing settlement so that anything it offers can NOT be later used against it at trial.

... An interesting juxtaposition. Does mediation confidentiality usurp Evidence Code section 1152(b) and Code of Civil Procedure section 998? Or vice versa? Did the district court judge unwittingly and correctly apply White v Western Title Insurance Co., supra?

Both parties have appealed this ruling to the Ninth Circuit Court of Appeals (Case No. 13-56959); will that appellate court take the easy way out and rule on the issue of waiver or will it tackle the hard issue and discuss mediation confidentiality, offers to compromise in general and the exception made in Evidence Code section 1152(b) and Code of Civil Procedure section 998?.... We shall see... stay tuned.

Just something to think about.

Biography


Phyllis Pollack with PGP Mediation uses a facilitative, interest-based approach. Her preferred mediation style is facilitative in the belief that the best and most durable resolutions are those achieved by the parties themselves. The parties generally know the business issues and priorities, personalities and obstacles to a successful resolution as well as their own needs better than any mediator or arbitrator. She does not impose her views or make decisions for the parties. Rather, Phyllis assists the parties in creating options that meet the needs and desires of both sides.  When appropriate, visual aids are used in preparing discussions and illustrating possible solutions. On the other hand, she is not averse to being proactive and offering a generous dose of reality, particularly when the process may have stalled due to unrealistic expectations of attorney or client, a failure to focus on needs rather than demands, or when one or more parties need to be reminded of the potential consequences of their failure to reach an agreement.



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