This article examines some of the significant issues that differentiate the mediation of insurance bad faith cases from other types of complex litigation. As such, its orientation is practical rather than theoretical, though it assumes a basic familiarity with relevant statutory and caselaw developments since Royal Globe Ins. Co. v. Sup. Ct. (1979) 23 Cal.3d 880, Moradi-Shalal v. Fireman's Fund Ins. Cos. (1988) 46 Cal.3d 287, and Proposition 103. Among the specific issues examined are; 1) the process, or negotiational, ramifications of the peculiar relationships among the insurer, its insured, defense counsel, coverage counsel and Cumis counsel; 2) the effect that the hierarchical organizational structure of insurers has on the duration of negotiations as well as on the process of ratifying settlements; 3) unique cost and risk considerations; and 4) pragmatics of unlinking underlying claims from bad faith claims in order to advance settlement.

Roles and Relationships in Bad Faith Litigation

The relationships of parties and counsel in insurance bad faith cases are fairly complex and legally mature, having been the focus of considerable appellate discourse. Accordingly, nowadays when questions arise over the existence or extent of insurance coverage --the typical prelude to a first-party bad faith claim-- familiar protocols are triggered: defense counsel will typically be assigned to defend the insured, normally under a reservation of rights, insurance coverage counsel will be engaged to protect the rights of the insurer, and, when there is a conflict of interest between the insurer and its insured, independent Cumis counsel will be retained for the benefit of the insured. (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.)

In bringing his or her bad faith claim, the insured will have alleged, normally through Cumis or other counsel, that the insurer has acted in a manner which wrongfully prefers its own interests over those of its insured, thereby breaching the familiar duty of good faith and fair dealing owed by the insurer toward its insured. This claim will be overlaid upon whatever underlying third-party claim for damages exists, or formerly existed, against the insured.

Thus, defense counsel enters the negotiation wearing the customary two hats; representing the interests of both the insured and the insurer insofar as the two coincide. This arrangement, though potentially problematic for counsel, is balanced, at least in theory, through the participation of Cumis counsel. As would be expected, private caucus sessions with insurance defense counsel and alternately with Cumis counsel will typically be necessary in order to fully develop a workable settlement approach. Consensus between defense counsel and Cumis counsel is vital at this level in order to balance the control held by the insurer over settlement of the underlying litigation.

Thus, the conflicting interests and relationships of insurer, insured, third-party claimant, and counsel are the raw material which the mediator must unify, or organize, into a productive negotiation. This task is formidable for several reasons. First, because of the highly lawyered environment described above with its customary aggressive negotiating styles and accompanying pressures to stake-out extreme maximum positions, frequently there is tremendous rigidity and very little room for movement or progress at the outset of negotiations. Deadlock is the starting point, and potentially the endpoint, of negotiations. Hence, one of the mediator's first tasks is to evoke in each negotiator at the table the will, despite circumstances, to persevere in a serious but difficult settlement initiative. To accomplish this, important trust-building between the mediator, counsel and the parties must occur during this early phase of the mediation.

A second difficulty is implied in the very name given to these cases. Bad faith cases involve real, or at least perceived, breaches of faith on the part of one, and therefore inevitably both, sides. Thus, oftentimes doubt will have nearly entirely supplanted whatever trust once existed between the contractually interlinked insurer and its insured. In extreme cases, the burdens of aggressive advocacy will have exacted a similar toll on the relationships of counsel to one another. As a consequence, face-to-face negotiations, even between counsel, are sometimes not possible. When this circumstance exists, negotiation can only be carried forward in private caucus session. Although more time consuming, this approach can be very successful. Thus, even if the mediator cannot restore the parties' confidence in one another, nevertheless if each side can trust the mediator, then negotiations can still achieve pace and advance toward resolution.

Hierarchy and its Effect on the Duration of Negotiations and Ratification of Settlement Terms

The hierarchical organizational structure of insurers plays a significant role in the duration of negotiations and on how settlement terms are ratified. Notwithstanding that considerable efforts are expended to assure that all the right parties come to the negotiating table armed with "full authority" to resolve the case, it will often be the case that robust negotiations exhaust the authority of the initial claims representative sent by the insurer. For negotiations to move forward, he or she will have to serve as a bridge to their superior who will have to be looped-into the negotiation, directly or by proxy, in order to achieve further progress. Thus, as negotiations progress, increasingly senior negotiators for the insurance carrier will become involved. When this occurs, it will be important for all to understand it as a normal part of the process and not as reflecting subterfuge or a lack of commitment to the negotiation process. As is implied, some insureds in these circumstances will be disposed to the view that the carrier intended to undermine the negotiation by sending the "wrong person" as its negotiator. The mediator can positively affect the progress of negotiations by anticipating such a reaction and by explaining events to the insured in a manner that can be understood, accepted and that clears the way for productive dialog.

Nor should the mediator and counsel regard the insurer's primary negotiator as merely a stepping-stone to the next more senior person up the organizational chain of command. Rather, this relationship with the insurer’s primary negotiator is of special importance because it sets the tone and establishes the foundation for a future set of mediator/insurer relationships that may extend upward to the senior executive vice-president level of the company.

In terms of effecting the duration of the negotiations, this hierarchical decision-making structure, of course, necessitates the expenditure of time; more time than if the "final" decision-maker was present when the mediation began. Therefore, it will often be the case that multi-session mediations will be required in order to reach resolution.

Likewise, ratification of settlement terms will frequently have to flow up the decision-making chain for final approval. Changes to hitherto agreed upon terms may be required at any level before final approvals are forthcoming. Thus, the finality of settlement agreements reached in mediation will frequently be subject to later ratification by insurer constituencies not in attendance at the mediation.

Special Cost and Risk Considerations in Bad Faith Cases

In addition to the costs and risks normally associated with the litigation and trial process, bad faith cases present further downside to parties and claims professionals.

From the insurer and claims professional's standpoint, a lifetime career of employment may be at-risk from unprecedented scrutiny of claims decisions which, quite apart from their legal merit, have ripened into serious claims against the company itself, for which it is exposed to litigation costs, potential compensatory and punitive damages, possibly increased regulatory oversight, negative publicity and related fallout. Moreover, these risks are not only associated with an unfavorable trial outcome, but exist, more or less, for so long as the litigation continues. More or less, bad faith cases represent high-cost, lose/lose litigation that threaten everyone near them.

From the insured's standpoint, there is corresponding downside. The insured's very economic survival may be threatened by a potentially non-covered third-party claim, potential liability to reimburse defense costs to the insurer, etc. Loss, or threat of loss, of the policyholder's personal wealth and livelihood may stand as the real world backdrop to the bad faith lawsuit. The financial requirements of funding serious bad faith litigation combined with the losses associated with deploying key employee resources to litigation support functions will often have overwhelmed the policyholder. Further health and psychological costs are not uncommon for litigants ill-suited and unaccustomed to the uncertainty and aggressivity of bad faith litigation. These negatives obtain, as with the insurer, throughout the course of the litigation, and quite apart from the legal merits of the claims.

Finally, given the high-stakes for all sides, costs associated with prosecuting and defending this type of litigation can be extreme. No party or seasoned counsel is unmindful of these influences.

Unlinking Underlying Claims from Bad Faith Claims

One final point should be mentioned. Where there is an active underlying third-party dispute, often one of the mediator's first tasks is to unlink, or isolate, the resolution of the insured's bad faith claims from those of the underlying third-party claim(s). Doing this opens the way to achieving at least a partial settlement of the underlying claims against the insured even if the overlying bad faith claims cannot be immediately resolved. As with any piecemeal settlement, incomplete but real benefits accrue to insurer and insured alike from such settlements, including reduced claims exposure and litigation defense cost savings, among others. Equally important, settlement of underlying third-party claims creates momentum for settlement of remaining bad faith claims through further mediation or direct negotiations. Often when this occurs it is finally possible to approach and resolve ancillary claims relating to reimbursement and, in the case of multiple and excess insurers and reinsurers, unresolved issues of apportionment, contribution and subrogation.

Conclusion