You Two Can Work It Out (Legal Times)
March 3, 2008Monday, March 3, 2008
By: Harold J. Moskowitz and James T.H. Deaver
Outsiders might assume that most insurance disputes are bloodless disagreements over contract interpretation. In fact, these insurance disputes can become very personal, and that’s something that both sides have to recognize.
Almost everything can be personal, because each of us experiences all aspects of life “personally,” and such personal experience almost always brings with it emotional experience. We feel happy when recognized for good work. We share disappointment when a friend is passed over for promotion. And any one of us can get angry in a business dispute with another entity.
This is particularly true when there are allegations of dishonesty, even if cloaked in some of the more polite phrases available, such as “negligent misrepresentation.” Once negative emotions are triggered, and are perhaps reinforced because of still more disagreements during litigation, they can become one of the foremost obstacles to a voluntary resolution of any dispute.
Consequently, the corporate entities in significant insurance conflicts often need a forum to manage their emotions without damaging the possibility of settlement. And this is true even, and perhaps especially, for big-dollar disputes.
This need for such a forum is one of the main reasons that mediation organizations are often useful. A number of such groups exist, but we have considerable experience with the International Institute for Conflict Prevention and Resolution, better known as the CPR Institute or just CPR.
One of us (Moskowitz) serves on its executive committee and the other (Deaver) is also actively involved with CPR. We’ve seen firsthand how its services can help insurers and insureds resolve disagreements.
The CPR Institute is a nonprofit association of general counsel and their attorneys who examine and develop dispute resolution alternatives to the high cost of litigation. For insurers and policyholders, this can involve several services in insurance disputes:
• CPR provides a forum that is neutral, both on the merits and the emotions involved.
• It has created a set of “Mediation Principles for Insurer-Insured Disputes” that can assist insurers and companies.
• It has compiled a data bank of experienced neutrals who have been recognized by the CPR joint committee of both insurer and policyholder representatives as having expertise in mediation of complex coverage matters.
A transparent process that emphasizes early disclosures and good faith efforts to resolve insurance disputes may prevent or reduce the amount of negative emotion that can otherwise cloud each party’s assessment of its real business interests in either continuing or ending an insurance dispute.
Because insurers often have long-standing ties to their policyholders, the relationships between the companies can have a deeply personal overtone for the risk managers, claims managers, and other policyholder or insurer personnel involved.
Insurance for large companies also creates a certain level of intimacy, as policyholders disclose aspects of their businesses and operations to their insurers that few outsiders see.
Insurers and policyholders also usually have a history of fighting side by side against claims by third parties against the policyholders. So, a significant dispute with one’s former or even current foxhole buddy can be particularly emotional, with one or both sides feeling betrayed or unjustly accused.
The potential for negative emotions can be enhanced when the parties focus most on goals that can now divide them, rather than on the overall business interests that united them in the first place. That potential is always there in a dispute, because insurers and insureds can have opposite economic goals. After all, money paid to the policyholder is money lost to the insurer.
After coverage litigation begins, the situation can get significantly worse. Unfortunately, common litigation tactics often involve a full array of early and aggressive allegations designed to enhance the opposite party’s perception of potential economic or reputational damage if it does not prevail in an inherently uncertain jury trial.
Insureds may accuse an insurer of “bad faith” or seek punitive damages to increase the scope of the dispute and amount of potential loss to the insurer. Insurers may focus on the “expected and intended” exclusion found in almost all liability policies to call into question the propriety of the insured’s past business practices and motives.
Too often, the emotions generated by aggressive litigation positions and strained factual allegations overshadow the parties’ extensive mutual interests that may weigh in favor of a negotiated resolution.
In our experience, success in moving past the negative emotional pictures of one’s “opponent” often requires the assistance of a good mediator. For example, a well-known mediator was able to salvage a mediation that threatened to implode when an insured product manufacturer deemed the insurer’s proposed opening presentation to be “insulting” because it included an assessment of the insurer’s “expected and intended” exclusion defense. The mediator convinced both sides to look past the heat of the moment and then negotiated a new agenda for opening discussions that saved face for everyone involved, starting the dialogue for what ultimately proved to be a successful mediation resolving a dispute over hundreds of millions of dollars.
CPR’s new policyholder/insurer procedures are designed to help the parties make the mental transition needed to see one another as reliable partners capable of resolving a dispute rather than as opponents causing a dispute.
This program is a nonbinding protocol for conducting negotiations and mediations between the participating parties. No legal or contractual rights need be lost or waived to participate.
Insurers or policyholders join this program by becoming a signatory to the relevant protocols. This creates a formal policy, signed at the parties’ highest levels, in favor of the use of negotiation and mediation to resolve insurance disputes.
Such a commitment encourages claims departments or risk management departments to use these options without fear of waiving rights or of moving in a direction not sanctioned by their companies. Fear of later being second-guessed by superiors when deciding whether to attempt to resolve a dispute through mediation can be a powerful emotion all its own.
If a coverage dispute arises between an insurer and insured that are both signatories, the companies follow the protocols for dispute resolution. Commitment to these protocols is not enforceable in court. CPR, however, is essentially an active community of companies and other interested parties who have endorsed mediation as a dispute resolution mechanism, so there is a certain amount of peer pressure among signatories to “walk the walk” and use mediation when the opportunity arises.
These mediation principles are beautiful in their simplicity (and, of course, in general can be used even without this particular organization).
• The parties agree, upon written request of any party, to engage in good faith confidential mediation. Either party can apply for a 30-day stay from mediation for direct negotiations, which companies might want if they think a matter could be resolved quickly through better communications between the right people on both sides.
• Ideally, parties will agree on a neutral mediator, but, if not, CPR will assist with finding someone suitable.
• The mediator may encourage the exchange of information as necessary, but does not have the authority to order the production of any information.
The bedrock of these principles is really the expressed willingness and commitment of participants to use mediation rather than to immediately commence litigation or even arbitration.
Being “the winner” may be an emotional need for some, but it’s a need that can lead to a waste of significant resources. A desire to simply “win” diverts much needed assets away from other activities better calculated to advance an organization’s interests. Insurance companies and others for whom litigation expenses are a major cost of doing business have learned from long experience that “winning” cases is not the most costeffective way of resolving disputes.
Mediation—whether through CPR’s insurance dispute protocol or otherwise—offers an opportunity to efficiently allocate resources among dispute resolution and core business goals.
Early intervention by a neutral mediator in a coverage dispute can provide the political or emotional space to let the parties make interim compromises and to accept coverage interpretations that they may not be able to do on their own.
Mediation should, therefore, be seen as the functional equivalent of outside intervention by a court rather than as a cheaper alternative suitable only for claims of little financial importance.
Harold J. Moskowitz is a partner in the New York office of Wilson Elser Moskowitz Edelman & Dicker, where he represents insurers. James T.H. Deaver is also a partner in the firm’s New York office. They may be contacted at firstname.lastname@example.org and . CPR’s Web site is www.cpradr.org.
Download a PDF of this article here