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Mediation Case Law Updates

Can an Insurer Commit Bad Faith in a Mediation?

November 14, 2016

Most jurisdictions permit a bad faith claim against an insurance carrier that unreasonably fails to settle a claim.  In Agape Senior Primary Care, Inc. v. Evanston Insurance Company, No. 3:16-cv-1610 (D.S.C. 2016), the plaintiff alleged that its insurer committed bad faith by failing to send a representative with full settlement authority to a mediation.  The local rules specifically required that a representative with full authority attend the mediation, and plaintiff alleged that this caused undue delay and expense in resolving the litigation.
The defendant moved to dismiss, arguing that those allegations failed to state a claim, but the district court denied the motion, ruling that by failing to comply with the mandatory attendance requirement, the carrier “violated its implied duty of good faith and fair dealing to properly adjust and settle the prior claims.”
The ruling in this case hinged on the presence of a local rule requiring the attendance of someone with authority.  In a private mediation where there is no similar local rule in effect, an insured may be able to place itself in the same position by demanding, prior to the mediation, in writing, that the insurer send someone with full settlement authority.  If the carrier fails to do so, a similar bad faith claim might be possible even without a local rule compelling such attendance.

What is Binding Mediation?

June 6, 2016

Binding mediation may sound like an oxymoron because the decision to settle in a mediation is supposed to be voluntary. Yet something called binding mediation is a growing alternative dispute resolution mechanism. The general concept is that the parties attempt to resolve their dispute with the assistance of a mediator, but if they are unable to do so, the mediator issues a final – and binding – award. The award can be similar to an arbitration decision in which someone wins and someone loses, or it can be a determination by the mediator of what a fair settlement is. As long as the parties have agreed to this procedure, the courts have uniformly upheld the results. E.g., Nike, Inc. v. Enter Play Sports, No. 3:14-cv-1104 (D.Or. 2016).

The key is that the parties must clearly agree to such a procedure. In Kern Health Systems v. Allied Management Group, 2016 WL 1650523 (Cal.Ct.App. 2nd Dist. 2016), the parties had a contract providing that, if a lawsuit arose out of the contract, the winning party was entitled to an award of fees by the court, but also that the parties must engage in “legally binding mediation” before filing litigation. The court ruled that, in these circumstances, legally binding mediation could not mean the mediator would issue a final determination, even though that is what it usually means, because to do so would negate the meaning of the rest of that clause, which provided that a court would award attorney’s fees.  If the parties had actually agreed to legally binding mediation, by definition there would never be a court award of fees.

Should you consider binding mediation? In smaller cases, where the fees and expenses of litigation can quickly approach the amount at issue, this may be a fair and inexpensive way to resolve a dispute. Try to settle, but if you can’t, have a neutral third party determine a fair amount and be done with the matter.

Seventh Circuit Addresses The Binding Nature of Mediation Agreements

April 21, 2016

In Beverly v. Abbott Laboratories, 15-1098 (7th Cir. 2016), the parties ended a mediation by each stating a final cash offer that would remain open for a few more days. Before the deadline, the defendant accepted the plaintiff’s final offer, but when the defendant later tendered a complete settlement agreement, the plaintiff refused to sign. The Seventh Circuit ruled that the agreement was binding because it had all the necessary material terms. Along the way, however:

The expected: The court ruled that there can be a binding contract even if the parties contemplate later executing a formal written agreement. Because the plaintiff failed to show that any material terms were missing, the offer and acceptance created a binding contract. This is standard contract law that virtually all courts have held applicable to mediation agreements.

The interesting: One term not in the contract was the division of plaintiff’s money between lost wages and other damages, a division that has important tax consequences for both sides. The Court hinted that this might have been material, but the plaintiff failed to raise it in the trial court.

The strange: In rejecting plaintiff’s argument that some missing provisions were material, the court stated:

It bears mentioning that a transcript (or some other recording) of the private mediation session here may have provided important clarity regarding the parties’ beliefs and intentions relating to the handwritten agreement and the draft proposal. We encourage future litigants to record any communications that directly relate to the final settlement agreements.

This is a strange and unprecedented suggestion. Why not put in writing anything that would be recorded in a conversation during the mediation, and eliminate the need for transcripts or recording devices which, for many good reasons, have never been a part of the mediation process? As this author has suggested before, most of these disputes can be avoided by having the agreement reached during the mediation, however, brief, contain the following conclusion: “Although the parties intend to draft a formal settlement document, this agreement contains all the material terms and is a binding contract.”

Another Look At What Constitutes Bad Faith In Mediation

March 25, 2016

Because a party can never be forced to settle, courts struggle with what constitutes “bad faith” in mediation.  In Lea v. PNC Bank, No. 15-776 (W.D. Pa. 2016), after the court ordered mediation, Defendant’s counsel told Plaintiff’s counsel that the mediation would be more productive if Plaintiff made a demand before the session. Plaintiff complied, but Defendant did not respond with a counter-offer before the mediation. Even at the mediation, no counter-offer was conveyed to Plaintiff. While defendant apparently proposed a counter-offer in a private caucus with the mediator, the mediator determined that relaying that offer to Plaintiff would not be productive, presumably because it was so far from Plaintiff’s demand.

Having attended a mediation at which it did not even receive an offer, Plaintiff moved for sanctions. The court agreed that Defendant had violated a local rule requiring the parties attending a mediation to act in good faith, which meant avoiding a waste of time and resources. The court ruled that “after counsel for Defendant recognized the Plaintiff’s demand was well beyond an amount to which his client might be agreeable, he had a duty to reach out to the Plaintiff’s counsel to discuss the issue.” The court did not, however, award attorneys’ fees, but rather only the half of the mediator’s fee that Plaintiff had paid.

While one can understand the frustration of the Court and Plaintiff, there is a problem with the court’s decision because it assumes that the parties or the mediator can determine, based on pre-mediation offers, that a settlement is not possible. Most mediations start with a large gap between the parties, but it is only during the mediation session that one finds out if these positions are firm or not. For this reason, other courts have taken a purely procedural approach to determining bad faith, under which if a party shows up to a mediation, and has full authority to settle, there is never bad faith, regardless of the settlement position taken by that party.

Do You Need an Excess Insurer at a Mediation?

February 9, 2016

In Doe Run Resources Corp. v. Fidelity & Casualty Co., Cal.App. 2016, a policyholder notified both its primary and excess insurers of a substantial environmental class action. The primary insurer defended, and the excess insurer was kept apprised of the status. When mediation was scheduled, the policyholder notified the excess insurer that there was going to be a mediation, noted that it was unclear if the policy would be exhausted by a settlement, but that if a settlement exhausted the primary layer the policyholder would look to the excess carrier for coverage. The letter did not, however, invite the excess carrier to the mediation, and the excess carrier did not attend. The case settled at the mediation for an amount in excess of the primary layer, but the excess carrier denied coverage because the policy required consent of the excess carrier before a settlement was reached as a condition of coverage.

The policyholder argued that it was the excess carrier’s fault that it was not at the mediation because it had been notified that the parties were going to mediate and that excess coverage would be involved if the primary layer was exhausted. The court rejected this argument, noting that: (1) the letter did not assess the likely outcome of the litigation, (2) it did not assess the probability that a settlement would exhaust the primary layer, and most critically, (3) it did not state where the mediation would take place and precisely when it would commence. The excess carrier, therefore, owed no coverage.

While the law relating to consent clauses varies from state to state, this case is a good warning to make sure all necessary carriers are invited to attend a mediation.

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