Mediating the first-party insurance case to avoid a bad-faith action

In mediation a claimant can assert elements of bad faith – perhaps receiving consideration for them – without explaining it all to a jury

2014 September

The first question often asked when a discussion about mediation and first-party claims comes up is: “Why would I mediate when the contract calls for binding arbitration?” The answer, of course, involves either the dramatic benefits or the “black holes” connected with first-party insurance practice. The issues in play are ones often asserted by claimants and routinely denied by insurance carriers that can be the issues of bad faith.

An insurance carrier can often make it so easy for a bad-faith claim to arise, in even the simplest first-party claims, by failing to meet the standard of care that its insured has not only paid for, but deserves. This goes all the way back to when Percy Sloan hit Anthony Comunale in a crosswalk (Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654).

There is likely some element of identifiable bad faith in almost any claims-handling scenario; the problem is whether or not the claims handling, or mishandling, rises to the level of actionable bad faith causing separate damages for which the carrier must compensate the claimant. It has long been held that sloppy or careless claims handling is not in itself an act of bad faith, but what actually is bad faith conduct may not always be so simple to identify. This is why mediation can become the solution for both claimants and carriers. Claimants (and their counsel) need someone not only sophisticated in the subtleties of identifying bad faith but also adept at putting an appropriate value on the damages arising from that bad faith. Carriers need to resolve a bad-faith exposure at the same time that they resolve an underlying claim. They also want confidentiality and will sometimes even pay a premium for it. Another argument for mediating the first-party claim that works for both sides is the fact that, if the underlying claim is resolved, no second effort is required by way of a post-arbitration trial of the bad-faith issue(s).

The “black hole” that the claimant may fall into if they are overly aggressive in asserting bad faith, is that the carrier won’t buy into those assertions at all, continues to deny that it did anything wrong, and then forces the claim into the contractually mandated arbitration. If the arbitration result is then reasonably within the carrier’s value range, or even just within policy limits, the carrier pays up and the claimant has to overcome the carrier asserting the genuine-dispute doctrine and press on for whatever is left of their bad-faith allegations.

Remember that carriers have the right to argue on behalf of the uninsured or underinsured motorist and that is not yet deemed to be bad faith if that is done with reasonableness. Cases where there is a potential for bad faith can benefit from mediation in many ways, but the potential in those cases tends to disappear only when a carrier begins to put realistic values on a claim which values would hold up if attacked in a second lawsuit.

Mediation is also a venue wherein the claimant can assert elements of bad faith, and receive some premium for it, without actually having to explain it to a jury – a jury who has no idea what the concept is. Just as a jury may have difficulty placing value on subjective injuries when it can clearly be guided on a broken leg, a jury can struggle with bad-faith damages, especially when they have the insurance contract and its available coverages right in front of them. Juries just may not always understand why an insurance company should pay more, absent any extremely egregious behavior.

So, mediating clearly has benefits for the claimant, but what about the carrier? Insurance companies are like any other business, whether or not they are for-profit, reciprocal, member owned, or publicly held. They take in a lot of money, and they also have very large departments that do nothing but pay out money in the form of claims. The big black hole for the carrier is that they hold themselves out as the experts on value of a claim. They see thousands of cases a year. They are often correct on those values but, when they are wrong, they are very wrong! Those errors often come from the garden-variety disbelief in the reasonableness or necessity of medical treatments, the severity of injuries, or the length and scope of recovery time leading to disability and lost earnings. Whatever it may be, it creates the opportunity for an incorrect valuation which, if asserted improperly in a first-party case, may be perceived as bad faith.

Just as all plaintiff’s attorneys are not in business to instruct their clients how to build up damages, and not all chiropractors and doctors are overtreating accident victims to beef up their cases, not all insurance companies and their lawyers are motivated to cheat a claimant out of a recovery on the claimant’s own policy. But, in fact, the carrier does have a duty to its shareholders and/or policy holders to identify and challenge issues of excessive treatment, incorrect coding by the providers, and overbilled or repetitious diagnostics. As good as the available panels of arbitrators might be for these types of cases, Arbitrators are not likely to put full value on a case with an obvious buildup. They have seen it all. If a carrier simply challenging the special damages in a first-party case is deemed bad faith, then every insurance company in the country commits bad faith on a daily basis.

As a plaintiff’s attorney it can be particularly challenging when a claimant has treated conservatively, returned to work, and not incurred a huge amount of special damages – even where they may have been warranted. However these cases may still find the carrier being overly aggressive or in disbelief of damages that have been presented to them. The black hole for the claimant’s attorney is to be reaching for policy limits in every case, and the corresponding black hole for the defense is to try to save money off of every policy even when a policy limits case is clearly presented.

“Winning” a first-party case at mediation

The beauty of mediating these cases is that all the protections of mediation hold true and yet, if the mediation is not successful, both parties still have the opportunity to prevail in the contractual arbitration proceeding. But the claimants should be prepared for most skilled mediators being intent on actually settling their cases. This may leave a final offer from the carrier which is high enough to rescue them from bad-faith exposure but perhaps not strong enough to meet claimant(s)’ expectations, if they have been set too high. Rule #1 is to come with realistic expectations.

Where there is a rule #1 there must be a rule #2; that is that claimants must not sandbag the defense, or hide meaningful evidence with a desire to surprise the carrier at arbitration. Some of these tactics certainly work at trial, and periodically work at arbitration. Mediation, however, requires that the carrier come with authority and a wallet big enough to settle the case. Insurance companies grant that authority based on what they actually know about the claim. Carriers also love a paper trail, so don’t hide evidence, or assert positions you cannot support. Give the defense attorney or the claims staff all the documents you have supporting the value of the claim. This includes medical reports, status, and recommendations for future treatment or surgeries as well as letters from employers documenting time lost from work. The carrier still may act as if they have not come with enough authority, but if all that paperwork has been presented prior to your mediation, there is likely more authority available than they may let on.

Rule #3 for succeeding at mediation is to demonstrate that you actually came to get the case settled. The first side to genuinely send the message that they want to get the case resolved will often get control of the case which can be difficult to wrestle away from them. There are many different styles of negotiating on display in mediation, for example:

• Wild demands: Somewhat unorthodox, but which may still be effective, is the wild demand by the claimant. This approach, sometimes also called “shock and awe” can be effective because the claimant then moves significantly from the wild demand, in the hopes that they will then demonstrate the true desire to settle by moving into the reasonable range of the case value. The black hole in this approach is that the carrier side is so disgusted by the demand that they disengage themselves from the process or respond and lock down at unreasonably low numbers. In this scenario a skilled mediator will keep the parties involved and reset the numbers so meaningful negotiations can commence.

• The voice of reason: Some demands are reasonable. So reasonable that the claimant’s case falls into the black hole of possibly being undervalued in the eyes of the carrier. “That opening is pretty realistic…they must not think much of their case” says the carrier. The mediator will coach the claimant not to budge on the demand for a while so he can stress to the carrier that the demand was genuine and not just a starting point for show (see above).

• The middle grounders: So many mediations get hung up by the offers being made having some sort of a midpoint in mind. Not only do the parties fall into this black hole, but mediators themselves often do it by attempting to set “brackets” or ranges that the parties might agree to in the hopes of narrowing a wide gap that exists between the parties. In this situation, the winning side, if there is such a thing, will go with a well suggested bracket range, or counter with another one that they like, and will avoid getting scared off by what the midpoint of those numbers is. When the case gets closer to settlement as the gap becomes narrower, one side or the other will budge off of their midpoint resistance and grab at an opportunity to settle at a number close to their goal.

• Chipping away: Similar to the middle grounders, the “chippers” like to start perhaps realistically but at a large distance from where they believe a case will settle. They don’t believe in brackets, and they like lots of small moves to achieve their goal. A good mediator will often break this style open by suggesting that one party make a large move and then stay put. The black hole not to fall into for either side is failing to recognize when the chipper has started to lose interest and isn’t throwing in enough chips anymore.

• The final number proponents and variants: Final number people agree to mediation and then virtually refuse to participate by saying that their last offer on a case (or last demand) is the “final number” and the mediator should get the other side to accept it. This approach seldom works unless there is a real problem for one side or the other that makes settlement mandatory and the opposition knows it. The mediator usually can break down the final number practitioner by challenging them to be involved in the process which they chose to be a party to.

The troubling variations on final number practitioners is either a carrier who may take money off the table that they have previously offered, or the claimants’ counsel who has negotiated in good faith prior to the mediation and then jacks the demand up at the mediation (see wild demands above). A lot of time is wasted on both of these players to get them back to the range the mediation was originally based on.

So many other styles and scenarios play out in front of a neutral mediator that it would take volumes to cover them all but the key theme here is to avoid the black holes of mediation in a first-party case while at the same time maximizing the benefits of mediation. Every insurance carrier has one goal and that is to settle the case and get it off of their desk. The benefits to mediating include the opportunity for early resolution, even pre-litigation, and the savings from avoiding costly discovery and legal expenses. This creates one of the bonuses for the claimant: those savings can be put in the claimant’s pocket and good mediators know that.

Good mediators are not fooled by lots of good-faith claims handling that was preceded by some gross act of bad faith, like a breach of a duty to pay medical benefits or property damage, or a serious bad-faith negotiation tactic like lowballing or unsupported creeping offers. The best reason to mediate this type of case is that the mediation process will allow the time line of the case to be presented clearly – and to someone who understands it.

With all of the above in mind, practitioners should never fear going forward with a decent bad-faith case. A lot of factors will weigh in on whether an insurance company really wants to risk a trial result, and the negative publicity that can result, as well as the possibility of a jury really, at the end of the case, understanding bad faith and wanting the carrier to have to pay handsomely for committing it.

If both sides can look past their own case, and intelligently evaluate the case the opposition has, there could be some eye-opening realizations that the certainty of a mediated result may indeed be the best solution. That kind of unilateral examination of every case will also pay off when a trial is the only alternative.