The mediator spends hours with the policyholder-defendant and its insurer, but to no avail. The mediation ends, and the plaintiff is frustrated. Why was she forced to waste a day? Embittered, she and her counsel return to the litigation trenches less willing to collaborate on settlement initiatives, discovery, scheduling, or anything else. Clearly, this is a bad result.
Outcomes such as this are common, unfortunate, and preventable. The purpose of this article is to explore the sources of this frustration, and to urge policyholders and insurers to work together in new ways "behind the table" in order to do a better job of negotiating with the third-party plaintiff "across the table."
When Policyholders Can't Pay
In many cases where a plaintiff's reasonable demand is not being paid, the reason is simple: The policyholder can't afford to pay, and the insurer doesn't think it has to pay. For the policyholder, it may not have the money; that's why it bought insurance. For the insurer, coverage defenses may relieve it of whatever indemnity obligations the policyholder contends that it has.
For many third-party plaintiffs, the policyholder's situation is easy to understand, but the insurer's is not. Many plaintiffs, and even their lawyers, are relatively unsophisticated on insurance coverage issues, regardless of how knowledgeable they may be about their own businesses or other business subjects. An insurance insurer's reasons for reserving rights on coverage—to say nothing of what a "reservation of rights" really means—are far from obvious to many plaintiffs. But if the insurer's positions are sincere and firm, and insurance money is really not available for settlement, the plaintiff needs to understand that and evaluate its settlement options realistically.
Thus the challenge: What is the best way to make sure that a third-party plaintiff understands why an insurance insurer is taking the positions it is taking in settlement negotiations, when defending a claim under a reservation of rights?
A common approach for insurers is to ask defense counsel, or sometimes the mediator, to do the heavy lifting of communicating across the table with the plaintiff's side. Many coverage lawyers for insurers are reluctant to have those conversations themselves. To explain this reluctance, insurer's counsel always cite White v. Western Title Ins. Co., 40 Cal. 3d 870 (1985), for the propositions that a insurer's conduct during litigation may form the basis of bad faith liability, and that direct communication with plaintiffs regarding settlements, coupled with requests that policyholders contribute to those settlements, could subject them to just such claims.
The problem is that all too often, this approach is ineffective. Both defense counsel and mediators suffer critical deficits when they try to have conversations with plaintiffs that avoid, or even deal with, the extent of insurer participation in settlements.
For defense counsel, the problems relate to comfort, hostility, and conviction. First, many defense counsel (especially appointed counsel rather than Cumis counsel) are plain uncomfortable talking about coverage. They don't see it as their job, which is to defend the claim on its merits. For those defense counsel willing to take the plunge, there are other problems. Litigation can breed polarization, and defense counsel sometimes develop hostility with the plaintiff's side during the litigation.
Defense counsel has been asking all the tough questions at depositions, putting the plaintiff's conduct under the microscope and otherwise making war, not love. This antagonism may make the plaintiff's side less open to a conversation with defense counsel about the insurance issues that have to be discussed. Finally, defense counsel's discussion of coverage defenses will often lack a certain oomph of sincerity. The coverage defenses are generally not their arguments, after all. It will be hard for defense counsel to answer the inevitable questions from the plaintiff's side, because of lack of conviction, lack of detailed knowledge, or both.
For mediators, many of the problems are the same. While mediators and plaintiffs have not become polarized during the litigation, mediators are often not sufficiently informed to answer all of the questions plaintiffs may have, and are rarely able to muster the same sincerity as the insurers when explaining these positions. Finally, mediators lose effectiveness when put in the position of having to debate or argue with anyone. When the defense side sends a mediator to tell a plaintiff about their internecine conflicts, and answer all of the questions about coverage as best she can, debate and argument are too likely to result. The plaintiff is less likely to view the mediator as neutral, and more likely to view her as just one more person telling him to do something he really doesn't want to do—accept a disappointing settlement. This potential loss of the mediator's effectiveness serves the interests of no one interested in the mediation's success.
An Effective Approach
The more effective approach? For the insurer's counsel to communicate directly with the plaintiff's side. Why? First, the insurer's counsel is generally "the new kid on the block" in the mediation, and has no history of antagonism with the plaintiff. Second, when there are questions, nobody knows the answers better than the insurer's own counsel. Finally, the plaintiff is able to judge the insurer's sincerity and resolve directly. If anybody can deliver the message with oomph, it's the person whose client's own money is on the line.
But, what about White? Does an insurer risk bad faith liability by telling plaintiffs and policyholders that it may require a policyholder to contribute to the settlement of potentially covered claims? Fortunately for conscientious insurers, there are ways to meet these concerns.
First and obviously, insurers should act only in good faith. Their coverage positions should be supported by the facts and the law. Insurers and policyholders should discuss and, ideally, agree on what the insurer will say to the plaintiff, and how the insurer will say it. Conscientious policyholders will acknowledge that, in some cases, their own coverage positions are thin, and it may not be unreasonable for an insurer to ask a policyholder to share in the expense of settlement. This is particularly true when a policyholder is concerned that a insurer may have a claim against it under Buss v. Superior Court, 16 Cal. 4th 35 (1997) for reimbursement of attorney fees advanced for the defense of potentially noncovered claims, and the insurer acknowledges a willingness to waive those claims if the policyholder contributes to the settlement.
Moreover, White does not apply to statements made in a mediation. White involved the admissibility in evidence of two settlement offers, which the policyholder claimed to prove bad faith. The insurer objected, under California Evidence Code section 1152, to the admissibility of the evidence. Section 1152 relates to the admissibility of settlement offers generally. The court held only that Section 1152 did not preclude the introduction of the settlement offers as evidence that the insurer did not process the claim fairly and in good faith. 40 Cal. 3d at 887.
The admissibility of statements made at a mediation is governed by a completely different statute, California Evidence Code Section 1115 et seq., enacted in 1997. White was decided in 1985. Section 1119(a) makes clear that "(n)o evidence of anything said ... for the purpose of, in the course of, or pursuant to, a mediation ... is admissible or subject to discovery, and disclosure of the evidence shall not be compelled, in any ... civil action, ...."
The California Supreme Court has made clear that this plain language governs, and that courts may not depart from it even if adherence would lead to an absurd result. Foxgate Homeowners' Assn. v. Bramalea California Inc., 26 Cal. 4th 1 (2001). Since mediation confidentiality is governed by a later-enacted and differently construed statute, it is difficult to argue that the holding of White itself could result in the admissibility of statements made at a mediation.
Might White might be extended to create an implied exception to the "absolute confidentiality" rule of Section 1119? Well, anything is possible, but it is hardly plausible. The California Supreme Court has already decreed that "plain meaning" governs the construction of section 1119, and implied exceptions are not allowed. Foxgate, supra. Moreover, White is a relic of a different jurisprudential age in California and not a good candidate for extension in the year 2007. Ask any California lawyer to tell you the last time that a "Rose Bird Era" decision received a broad application or extension, and you are likely to get a blank stare.
Mediation confidentiality should never become a beard for insurer conduct which is, in fact, bad faith. But mediation confidentiality does create new opportunities for third-party plaintiffs, policyholders, and insurers to work collaboratively and candidly toward settlements which serve the interests of them all. It's time to use these opportunities.