Whose Money Is It Anyway?

Whose Money Is It Anyway

Where an insurance company will be paying the settlement for a claim, there are other issues to consider in mediation beyond whether the parties to the dispute can resolve their differences. The relationship of the insured to the insurance company is a major factor determining whether the case will resolve. Often, this relationship is out of sight in the negotiations taking place in the mediation caucus but looms over the mediation like an 800 lb. gorilla.

Some of the items that affect the dynamic between the insurer and the insured, and thus, the mediation outcome, include:

  • Is there a large deductible or self-insured retention (SIR) that applies to the claim?
  • Does the cost of defense erode the policy limits?
  • Has the insurance company reserved its rights or identified issues that will affect the availability of coverage for the asserted claims?

One of the key questions that should be considered before mediating a claim is who is paying the claim. Carriers utilize different devices for transferring some of the risk for certain identified claims back to their policyholders. The reasons for doing so range from the idea that when an insured has some risk, risk avoidance helps prevent claims, to the more basic aspect of making a particular policy affordable for an insured. Among these risk-transferring devices is one most people are very familiar with: the deductible. Simply stated, when a deductible applies to a claim, the insurance company will resolve the claim and collect back an agreed amount from the insured for each claim paid. The amount can be stated as a sum certain, or agreed to as a percentage of the amount paid by the carrier. A self-insured retention is another common device. With the SIR, the insurance company and its insured agree that when a claim is presented, the insured is responsible for an agreed to amount on the claim and that the insurance policy’s indemnity limits do not apply until the SIR has been exhausted.

Placing defense costs inside the policy limits is another device that controls the risk presented to the carrier and which can help or hinder settlement. When defense costs are included within the policy limit, every dollar spent on defense reduces the amount of insurance money available to settle a claim. By the same token, when defense costs are inside the policy limits, once the policy limit is reached in defense costs, the insurer’s obligation to provide for a defense typically ends, and the entire obligation for continuing the litigation and/or paying to resolve it becomes the insured’s.

Where the cost of defense is not a part of the policy limits, the obligation to fund the defense is that of the insurer throughout the litigation. The litigation pockets of insurers are governed by the duty of good faith via insureds, and aided by the “repeat business” aspect of certain claims. What this means in mediation is that the insurance professional will have a very clear idea of how much it will cost to continue with a claim and what savings will accrue if a claim is resolved at mediation instead of at some future litigation point down the road.

Coverage issues that arise in connection with a claim are among the most fundamental elements affecting the insurer/insured relationship for purposes of mediation. Does the claim assert punitive damages? Are those damages covered under the policy in your jurisdiction? Does the claim present other excluded injuries, such as intentional torts? Does the claim present an extended period of activity (such as in discrimination claim) that triggers the carrier’s policy for only part of the alleged duration?

While simplistic, these explanations may shed light on why parties, on their own, just cannot close what appears to be a very slight gap between the plaintiff’s lowest demand and the defendant’s highest offer. And knowing these issues will inform who should be at the mediation for it to succeed. If a large deductible or SIR is in play, it may be impossible to get to a settlement without the policyholder’s consent.

Consider the eroding policy limits issue in the context of a products liability claim. A retailer sells a product and gets sued along with the manufacturer for injuries arising in connection with the product’s use. The retailer’s tender of the case and defense to the manufacturer is rejected because of the independent negligence claims asserted against the retailer. Faced with absorbing the full costs of defense as well as a percentage of liability in an injury case, that retailer may have a completely different settlement motivation at mediation than does the manufacturer.

Another scenario: a typical employment law claim. Under most state and federal laws, claimants who can establish a violation are entitled to recover their attorneys’ fees. Most plaintiffs also allege violations of various common law torts, in addition to their statutory violations, so that the claims in the suit will include items like a negligent infliction of emotional distress claim, an intentional infliction of emotional distress claim, an assault and battery claim, among others. And usually, plaintiffs assert a right to punitive damages as part of their claim. Presenting a large demand to the insurance professional attending mediation that is premised primarily on the uncovered punitive damages claim is less likely to result in creating momentum towards settlement than is a demand based on what the policy clearly does cover. Meanwhile, in the defense caucus room, it becomes known that the insurance company intends to collect the policy deductible and seek a contribution from the insured to address the uncovered exposures (because that large punitive damages demand appears to be based on some evidence or testimony in the case).

Knowing this information in advance — and how to address and control the 800 lb. gorilla in the room – allows the mediator to keep settlement on track and help the parties move to their settlement goal.

I will have more to say about the issues presented when mediating with an insured defendant in future blogs (hence the Part I in the title!). Leave me a comment if you want and let me know what you think or share your insights.

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Christina Magee

Christina Magee, Esq., Florida Supreme Court Certified Circuit Civil, County and Appellate Mediator has more than twenty-five years of experience representing injured parties, corporate and individual defendants, and insurance companies.

About Me

Christina Magee, Esq., Florida Supreme Court Certified Circuit Civil, County and Appellate Mediator has more than twenty-five years of experience representing injured parties, corporate and individual defendants, and insurance companies.

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