COMMENTARY: Mediating insured claims requires different approach

By Edmund J. Sikorski Jr.

Mediation of insured claims requires a different negotiating style and mediation approach from other negotiating and mediation styles because the dynamics of the participants are completely different from those involved in other areas of dispute resolution (such as commercial, probate, real property and family).

Mediators of insured claims quickly learn that creative problem-solving opportunities that appear in other types of controversies are rare in the mediation of insured claims.

The subject matter of the dispute does not lend itself to settlement in terms other than money. The parties rarely knew each other and will have no contact with each other after the matter is concluded. The negotiation is simply how much money one side will pay the other. It is position-based bargaining pure and simple — although it is anything but simple.

As a consequence of the nature of the beast, it is hard to get the process started.

This fact is reflected in the often-heard complaint that the carrier has never made a pre-mediation offer or has failed to respond to a pre-mediation demand. I have even heard the complaint that the plaintiff never made a pre-mediation demand. It is equally difficult to keep making concessions and adjustments. It is easy to get angry or disgusted, which impedes the process of resolution

Otherwise, normal discussion of an issue is abandoned early in the process and replaced with communication by numbers. Reasoned discussion of the strength and weakness of a case disappears after the second round of caucuses and instead turns to reacting to each others monetary proposals. Communication dynamics are thus monetized.

We hear one side say “I want to send them a message” but do they say “here is the problem with your position?” No. They send a number.

An auction process then begins and the attorneys on both sides and their respective clients and carriers start the often-agonizing march of negatively reacting to the auction process. The auction process, however, not the problem. That process is an integral part of all negotiations about money because the only resolution that an injured party can get is a monetary one.

Negative reactions are the problem. Negative reactions are characterized by annoyance and anger to proposals from the other side that are considered “out of the ball park” of settlement, and soon spiral into an emotional crash that deprives the parties of the opportunity to reach resolution before their best numbers are reached. This dynamic, more than anything else, is the cause of unnecessary impasse. The first party to lose emotional control, unless they can keep it in check early in the process, will lose the negotiating contest.

The parties may become angry with the mediator for not convincing the other side of the justification of the last proposal, and view the mediator a just a messenger. However, this view disregards that mediators are guardians of the process of resolution not the guarantors of resolution.

At this point, mediators are watching for and listening for kinks in the process, missteps that can occur, or problems that may develop. The mediator’s job here is (1) to help the parties overcome their reactivity; (2) encourage confidence in the process; (3) refrain from stopping prematurely in reaction to the parties’ frustrations and pessimism about the prospects of settlement; and (4) encouraging the parties to move through their range (employing the tool of bracketing) until the parties reach their best numbers or are sure that their best numbers will not settle the case.

So, What Do You Do to Make Mediation More Likely to Succeed?

1. Adequate Information Exchange

Information is power. Withholding information may also be power. Withheld information is one side’s guard against the possibility that the case may not settle and they can spring the information on the other side at trial. However, given the discovery and disclosure rules, one has to assess the probability or risk that such surprise information may not be allowed into evidence. The tactical question is: how are you going to get it in over the almost certain objection of the other side?

If one withholds information, one must answer the question whether the withheld information adds to or detracts from the legitimacy of the claim or defense during the mediation process. The mediation process is, after all, an opportunity to convince the other side of the legitimacy of the claim and value of the case.

It is a well-known fact that insurance carriers have vast networks of shared proprietary data on almost every conceivable insured claim. That is how they set premiums. In addition, they have a staff of claims managers and adjusters to utilize the statistical data and information that they obtain by a variety of means (including discovery) to come up with a committee case evaluation and set a “case reserve,” or better said: “case value.”

This case value does not mean that the carriers have a crystal ball—far from it. The carriers are hampered by their own internal requirements to set case reserves, and hence case value, very early in the claims process - often times prematurely acting on only preliminary information. An insurance company must determine and set a reserve on each claim when it occurs. This is a cash item and an immediate hit on working capital. The longer it stays on the books, two other things simultaneously happen: (1) the insurance company has fewer investible assets; and (2) the reserve has built-in resistance to expand at a later date. These reserves are set well before the defense attorney ever sees and evaluates the witnesses that may be called to support the claim. Once the reserve process happens the only way the reserve value is going to get changed is the receipt and evaluation of new information that legitimizes or discredits the claim. A late breaking change in the valuation calculus is usually not well received by claims managers and their supervisors – unless it is favorable.

The point of the foregoing discussion is that if the insurance carrier does not get the needed organized claim information well in advance of the mediation, they will not be in a position to make an informed decision and negotiate a settlement. Organized case presentation designed to persuade the carrier of the legitimacy of the claim is critical.
In addition to the inherent problems produced by the claims reserve practices and procedures of the insurance industry, withholding of information by the defense is a very high-risk game. Not only do they face the same evidentiary problems as plaintiffs, but they have the cloud of a bad faith claim hanging over them.

The mediation resolution process is heavily dependent on (1) a frank exchange of information; (2) justification of valuation; and (3) a genuine interest in resolving the claim and avoiding the risks of trial (including attorney client conflict over disappointing or unanticipated results).

The lesson learned for the foregoing discussion is that providing information to support the legitimacy of the claim is the touchstone to bringing a case to a mediated resolution.

2. Objective Case Valuation and Risk Analysis

Valuing a case is not an exact science, but the job of lawyers prior to mediation is to learn as much as possible about the case (rarely, if ever, can we know everything and miss nothing), compare it with similar cases that have produced settlements and verdicts, and reach a conclusion about the claim’s value (more accurately, the range of value into which the case will fall – like a mediation bracket).

The noted mediation authority Laura Kaster begins her latest essay, “Addressing Impasse,” with the “much overlooked but obvious point: Settling or mediating a case is, among other things a process for agreeing to the value of the claim. Impasse often occurs precisely because the parties do not agree on the value of the case.” Kaster then goes on to cite Randall Kiser’s much touted article, “Let’s Not Make a Deal,” for one of its many startling findings: that 61% of plaintiffs made errors in rejecting settlement offers with a mean loss of $42,000 and 24% of defendants made decisions errors in rejecting offers, with a mean loss of more than $1,000,000.

On the basis of that information, we may assume that there is a high likelihood that parties to mediation are misinformed about the objective value of the claim/defense.
No one wants to make an error in value assessment. We know that accuracy is hampered by (1) the phenomenon of “group think;” (2) cognitive dissonance (where we filter out what we do not want to hear); and (3)“sunk-costs” which prompts litigants and advisors to throw more money and effort into an endeavor in which they have already invested regardless of how unsuccessful that endeavor is.

How to Deal with Valuation

1. Work out a risk assessment protocol. Create an explicit list of the assumptions and calculations that underlie the value decision. Include the negative as well as the positive.

2. Compare your case to similar cases.

3. Apply a decision tree risk analysis. Here is an example of how it works:

• What is the likelihood of success at trial?
  - Slam Dunk.

• But what is the percentage of likelihood?
  - 80%.

• And will the other side appeal?
  - Certainly.

• What is the likelihood of success on appeal?
  - Slam Dunk. 80%

The probability percentages are then multiplied to determine the cumulative effect of the assessment on the predicted outcome. In the above example it means that there is only a 64% chance of winning, subject to further reduction of costs by experts, court reporters, trial exhibits attorney fees, etc.

Approaching the same subject another way, the basis of case analysis can be addressed by asking four questions:

1) What do you get if you go to court? What is the result in monetary terms?

2) What are your chances of obtaining that outcome?

3) What does it cost you to get that outcome?

4) What are the chances of collection of that judgment?

Here is an example of how this works:

Best Day in Court Jury Damage Award = $600,000—$700,000

Plaintiff thinks there is an 80% chance win, which = $480,000—$540,000 (less costs of $60,000)

To get to the best-case settlement, demand of $420,000—$500,000.

Defendant thinks there is a 20% chance of loss, which = $120,000—$140,000 (plus costs of $60,000) to get to the best-case settlement offer of $180,000—$200,000.

The settlement bracket is thus $180,000—$420,000

Note that the foregoing process starts with a damage analysis and discounts backwards for liability, costs, present value, and trial uncertainties such as how the judge applies
the law, how the facts come in, how well the experts will testify, how well the other side’s lawyer tries the case, how the jury will react, etc.

The point here is that case evaluation starts with damages and discounts and with case and trial liabilities to establish the range of settlement value. This approach is a little counter-intuitive because lawyers are trained to think in the progressive elements of tort: duty, breach of duty, proximate cause, and (then) damages.

The foregoing exercises are designed and intended to help generate meaningful proposals from both sides that more clearly resemble the case analysis. Thus, the parties are less likely to make an outrageous demand that generates an equally outrageous counterproposal that hurls the case in the direction of impasse.

3. Create a Plan of Movement through Your Negotiating Range

The mediation literature is replete with admonitions to disputing parties not to start negotiations with a number that is more than their best day in court given their own case analysis. Negotiation communications that start with a number higher (Plaintiff) or lower (Defendant) than their own case evaluations are inviting emotional reactive responses that shut down the process and leads to impasse for no good reason.

How many times have we heard the following volley? “Their demand is outrageous! We will make the equally ridiculous offer of $250. Send them that message.”

What has been accomplished? All we now have is two sides who have traded an organized cognitive process for an emotional war of attrition.

The solution is to begin with “your best day in court” valuation and systematically movie through your negotiating range to your “walk away” number.

I have seen plans that divide the negotiating range by one-half on each move. A few moves and it is apparent to all where the range will end and identify the walk away number. The drawback of this approach is that it telegraphs the ending number and eliminates the possibility of settling at a number higher/lower than the party’s best number. Another approach is to divide up the negotiating range into equal increments. At any point the range can be redivided into smaller equal increments to signal that the party is approaching its best number. Movement usually begets movement.

Lesson learned: Make a plan and stick to it. Stay in control of an otherwise reactive process calculated to be self-defeating. As in any military or sporting contest, victory is often achieved because of the self-inflicted wounds by the other side on itself.
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Edmund J. Sikorski Jr. is an attorney and civil mediator in Ann Arbor. He can be reached at edsikorski3@gmail.com.