Articles

Mediation in Reinsurance

by Katherine Billingham

Most reinsurance disputes settle. That’s a fact.  Only a small percentage of disputes actually go to final hearing.  In other words, most parties are amenable to settlement but can’t quite figure out how to get there without first spending a lot of time, money and aggravation.  

Most mediations result in settlement. Also a fact. Mediation statistics are available from numerous resources with some quoting success rates as high as 85- 90% for resolving the dispute, and none that I could find below 50%.

While the reinsurance industry has its foundation in the merchant and marine business of the 18th century (and marine policies date as far back as the early 1300’s), it has only take us two decades to chart a different course for dispute resolution in reinsurance. Some say the system is broken.  Others say that arbitration is still the best alternative to litigation. No matter the view, is there another viable alternative?

I suggest that the answer is yes.

Part One:  The Value

The reinsurance industry faces a dilemma. Arbitration costs have skyrocketed and arbitration outcomes awards rest on fault lines.  In fact, several recent court decisions have vacated even seemingly secure “final” awards, presenting parties in arbitration with the chilling prospect of never-ending wasteful and expensive litigation.  Below is a chart[i] that demonstrates the allocation of costs spent during the course of typical litigation.

Most parties want to settle (and usually do settle) their disputes, whether early in the process or later.  The number of legal disputes resolved by trial (and by extrapolation, arbitration hearing) has declined steadily over the past 30 years. In 2002, despite increased new case filings, only approximately 2% of lawsuits were resolved by trial.[i] Meanwhile, the use of mediation has grown exponentially.  Nearly 90% of Fortune 500 companies now use mediation, which typically enjoys a settlement rate as high as 75-90%.

Nevertheless, historically mediation has been woefully ignored in the reinsurance arena, largely because, unlike lawsuits, there is no judge standing ready to mandate mediation.  Additionally, since reinsurance is an arcane area, parties usually want their disputes reviewed by peers familiar with its nuances, customs and practices.  Until recently[ii], there were few mediators in the U.S. who specialized in this area.

With recent frequency, parties to reinsurance disputes are turning to mediation.  Possible reasons for this change include the state of the economy and, more likely, parties’ successful exposure to mediations in other types of legal disputes.

Mediation offers cedants and reinsurers a streamlined alternative that shifts to them the power and opportunity to control the process of negotiating their dispute and to decide the terms of their settlement.  Mediation is specifically designed to help parties reach commercially reasonable solutions that best serve their interests. And who knows their interests better than the parties themselves?

At its core, mediation is facilitated negotiation.  The mediator’s principal mission is to enhance communication, clarify issues and identify interests to assist the parties in developing options to achieve their goals.  This sort of flexibility, and the opportunity for parties to share their more candid and perhaps “higher” self, is not necessarily available in arbitration and litigation. Mediation is often better suited to provide commercial results for commercial problems as is reflected in the chart below.

Part Two:  Mediation vs. Party Negotiation

Why is mediation more effective than negotiating one’s own dispute? There are facets of mediation – negotiating tools used by experienced mediators – that are simply not available in direct negotiations.

Assist in exploring options without bidding against self: One of the most common frustrations experienced in heated, contentious negotiations is the perceived inability to suggest or have your opponent seriously consider reasonable settlement options.  The mediator will explore various options without disclosing them to the other side and will assess the likelihood of success of each proposal before any is shared with the other side.  In this way, parties can explore options without feeling as though they are bidding against themselves.  A mediator can hold an offer as a condition to the other side also improving its offer, a useful tool that is unavailable to direct negotiators.

Assist in developing a more realistic analysis: Having an independent and objective person hear a party’s version of the issues is always helpful.  More often than not, a party focuses only on the strengths of his case and discounts the weaknesses.  A mediator helps parties to develop a more realistic analysis and to assess the likelihood of success.

Identify interests and discreet impediments: Parties often hold hidden interests in their positions that they cannot share with the other side. Examples include as yet undisclosed weaknesses in the case, budgetary or staffing limitations, unstated other business relationships, impending liquidation, distaste for their management or lawyers, etc.  Mediators are trained to listen carefully and to gain an understanding of the party’s underlying issues, motivations and impediments to a settlement, especially during individual caucuses.  Sometimes these interests were not even disclosed previously to their attorney.  Mediators can and will assist in exploring ways to overcome impediments by folding these interests into a workable agreement.

Decision-makers focus on the case: Business people managing active or discontinued operations are busy with business. Given the time and cost-constraints of their business, managers want to ensure that the time and money devoted to prepare for and attend a negotiation with the other side is well-spent.  Mediation requires the participation of decision-makers with authority to settle who are fully prepared and focused on the current dispute.

Parties educating parties: Knowledge is power, an axiom never as important as in mediation, where both lawyers and most importantly the parties, take an active role in explaining their positions directly to each other.  These candid exchanges often lead to enlightened perceptions of the issues and also provide each side with a better understanding of the true bases for the problems, which can enhance a vetting of meaningful solutions.

Persistence is not a sign of weakness: As we have all experienced in arbitration or litigation, especially just before hearing or trial, if a party attempts to negotiate, is unsuccessful and later tries again, the other side might view this approach as a sign of weakness.  In mediation, however, the parties expect several rounds of negotiations as the mediator respectfully and persistently encourage them to develop areas of agreement.  One common, counterintuitive axiom of mediation is that, when you hit impasse, you are actually making real progress.  Being relentless and optimistic, even at an impasse, is the gift of a skilled mediator, and the parties’ continued participation in the process is certainly not a sign of weakness.

Outlet for moral indignation: Bitter arbitrations and lawsuits are often brought, not because of substantive issues, but because powerful people, who might not have even spoken to each other, have gotten mad.  As differences escalate, the dispute becomes personalized, preventing parties from separating their subjective selves from the objective problem.  In this environment, some prefer their “day in court” before they can be open to settlement.  Allowing parties to air their grievances before a mediator with an empathetic ear, in the presence of the opposing party, provides an outlet for such emotions and once accomplished, opens the door to productive negotiations.

Assist in reassessment without losing client confidence in the attorney: One of the most subtle, but potentially most delicate elements of the process is the mediator’s relationship with counsel.  The reasons are simple to understand but often difficult to manage: clients often retain the attorney whom they perceive will fight most vigorously, leaving the attorney reluctant to express doubt about the merits of the case.  A mediator who challenges counsel’s opinion in front of his/her client risks losing the trust of both the lawyer and the client.  The mediator must carefully work with the parties and their lawyers to conduct a more realistic assessment of their chances of success without undermining the client’s confidence in the attorney or the attorney’s respect for the mediator.

Client control over negotiations: Many negotiators use posturing as a default strategy.  During negotiations, lawyers, ethically charged to be zealous advocates, tend to exhort the strengths of the client’s case, usually for the client’s benefit.  This leaves little room for a frank discussion about the true merits of one’s case.  An experienced mediator can bypass posturing and help the parties make more meaningful progress in negotiations.  A mediator ensures that all parties’ voices are heard in the negotiations.

Selecting a mediator with exceptional skills and in-depth substantive knowledge is key to a successful outcome.

Part Three: Mediation Law

Some exploration of the current state of the law on mediation could be useful.  The courts have had numerous occasions to review a variety of issues raised in connection with mediations. At the Hamline University School of Law, two professors undertook an extensive study of the federal and state court decisions involving mediation that they identified in the Westlaw database from 1999 through 2007. In two of their premier articles, [i] they analyzed the accumulated data from over 2,200 opinions and summarized their conclusions:

  • The number of cases involving mediation issues tripled between 1999 and 2005
  • Most of the litigation took place in California, Texas and Florida.
  • In the majority of the cases, the issue was enforceability of the settlement agreement, followed by the duty to mediate, fees, confidentiality, condition precedent, sanctions, ethics and hybrid mediation.  (See chart below.)[ii]
  • Courts had frequently allowed evidence of what occurred in the mediation with only limited objections
  • Traditional contract defenses were rarely successful in enforcement cases.
  • Very few cases asserted mediator misconduct.
  • Several decisions confirmed taxation of costs despite lack of clear authority.
  • Opinions about sanctions increased dramatically over the years reviewed and sanctions were often awarded.

They also found that there has been a recent increase in cases involving hybrid mediation-arbitrations[iii] which cases included issues such as conflict of interest, waiver and the use of confidential information. Additionally, they observed a recent increase in cases addressing ethics and malpractice[iv] where the issues were primarily focused on the lawyers, not the mediators.

Uniform Mediation Act

The Uniform Mediation Act was drafted through the joint efforts of the American Bar Association’s Section of Dispute Resolution and the National Conference of Commissioners on Uniform State Laws, as well as other legal contributors.  Its primary purpose is to provide a sound privilege that will ensure confidentiality in the process of a mediation, which will in turn promote full disclosure of facts to the mediator by all parties.  More disclosure often results in greater success of the process as well as party satisfaction.  The more parties find success in mediation, the more they will tend to use it.

The UMA protects all communications of the parties, the mediator and non-party participants and prevents the use of mediation communications in legal proceedings that take place after the mediation.  Mediators and non-party participants may refuse to disclose their own statements made during mediation and can prevent others from disclosing them as well. Waiver of these privileges must be in a record or made orally during a proceeding to be effective. There is no waiver by conduct.

The UMA may be viewed on the www.nccusl.org web site. The Act has been enacted in eleven jurisdictions:

  1. District of Columbia (D.C.Code §§ 16-4201 to 16-4213)
  2. Idaho (Title 9, Chapter 8)
  3. Illinois (710 ILCS 35/11 to 35/99)
  4. Iowa (I.C.A. §§ 679C.101 to 679C.115)
  5. Nebraska (Neb. Rev. Stat. §§ 25-2930 to 25-2942)
  6. New Jersey (N.J.S.A. 2A:23C-1 to 2A:23C-13)
  7. Ohio (Ohio R.C. §§ 2710.01 to 2710.10)
  8. South Dakota (Chapter 19-13A)
  9. Utah (Utah Code Ann. 78-31c-101 to 78-31c-114)
  10. Vermont (Vt. Stat. Ann. tit. 12, §§ 5711 to 5723)
  11. Washington (West’s RCWA 7.07.010 to 7.07.904)

The UMA has also been introduced in Hawaii, Rhode Island, Maine Massachusetts, Minnesota and New York.  Although they did not adopt the Act, Delaware, Florida, Montana, Nevada, Oregon, New Mexico and Wyoming have adopted similar bills.  Virginia adopted a similar bill before the UMA was finalized.  Two states rejected the UMA: Connecticut and Indiana.

Conclusion

What’s the message? It’s time to re-evaluate how we handle these disputes. In mediation, the parties retain control and tailor their own solution while saving precious resources. Simply put, mediation saves time and money. Rather than a win/lose as in arbitration, mediation can often be a win/win.

Katherine Billingham, JD, CPCU

(317) 796-4700

kathy@kbillingham.com

Katherine Billingham is an ARIAS certified reinsurance arbitrator and mediator, an attorney and consultant.  She is a former executive officer of a reinsurance company, and subsequently in 1990 went into private practice in the reinsurance and insurance industry. She also served as reinsurance consultant to the Ohio Insurance Department and in 2004 began focusing on providing ADR services to the industry. She is the Chair and CEO of ReMedi, the non-profit Re/Insurance Mediation Institute.  She is also a certified neutral with the American Arbitration Association and an Adjunct Professor at the Charlotte School of Law.


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– Extracts based upon The Insurance Institute of London publication ( RSG 263 ) in January 2011 “Alternative Dispute Resolution in Practice” ( Figs. 6.1 and 6.2 ) –The Costs Profile of Litigation.
– ABA Journal, The Vanishing Trial, October 2002.
– The Re/Insurance Mediation Institute (“ReMedi”) as well as ARIAS now certify qualified reinsurance mediators.
– See James R. Coben & Peter N. Thompson, Disputing Irony: A Systematic Look at Litigation About Mediation, 11 Harv. Negot. L. Rev. 43 (2006) and Mediation Litigation Trends: 1999-2007, 1 WORLD ARBITRATION & MEDIATION REVIEW 395 (2007)
– Chart created by extrapolation from similar chart found in Coben & Thompson articles referenced in fn 3 supra.
– See Scaffidi v. Fiserv, Inc., No. 05-C-1046, 2006 WL 2038348 (E.D.Wis. July 20, 2006) affirmed, 2007 WL 648178 (7th Cir. Feb 28, 2007); U.S. Steel Mining Co., L.L.C. v. Wilson Downhole Services, No.02:00CV1758, 2006 WL 2869535 (W.D. Pa. Oct. 5, 2006)
– Attorney Grievance Com’n of Maryland v. Steinberg, 910 A.2d 429 (Md. 2006); Sealed Party v. Sealed Party, No. CIV. A. H-04-2229, 2006 WL 1207732 (S.D. Tex. May 4, 2006); Morgan Phillips, Inc. v. JAMS/Endispute, L.L.C., 44 – Cal.Rptr.3d 782 (Cal. Ct. App. June 20, 2006); Simpson v. JAMS/Endispute, LLC, No. A110634, 2006 WL 2076028 (Cal. Ct. App. July 26, 2006).
– See also Cassel v. Wasserman, Comden, Casselman & Pearson, LLP, et al., Cal. Ct. App. Nov 12, 2009, 2nd Dist. Div 7 (B215215)