In nearly every litigation, there are three parties: The plaintiff, the defendant, and the insurer. Once the duty to defend is triggered, an insurer must typically provide a “complete” defense to the litigation until settlement is reached, even if uncovered claims are included.
Challenges can occur when the time arrives to resolve a claim, and indemnification and allocation disputes arise. The disagreements can occur both between insureds and insurers, and strictly between insurers. Inviting insureds and their coverage counsel to mediation often can resolve their indemnification contribution for uncovered claims. Allocation between carriers can be more difficult to achieve, however, given debates regarding time-on-risk, priority of coverage, sole negligence application arguments, and proper reservation of rights.
These issues are compounded if policy limits are eroding as defense continues; additional claims impair limits making exposure containment critical; there is a policy-limits settlement demand; or there is concern that litigating outstanding coverage issues might result in adverse precedent.
Evolving Co-Carrier Coverage Issues
While several coverage questions have been resolved with case law and updated policy language, mixed claims continue to evolve, creating issues. Examples include: time-on-risk for habitability claims; lawsuits involving property damage and/or bodily injury resulting from exposure to substances often being pleaded as “toxic cocktail” claims, with insurers having various exclusions that may or may not apply to the combination alleged; and cases involving liability claims in which plaintiffs may be entitled to an award of attorney’s fees and some, but not all, of the defending insurers have policies that exclude attorney’s fees in the supplementary payments provision of the policy.
Mediations that proceed without having coverage issues resolved often fail. Plaintiffs and plaintiffs’ counsel can become more entrenched in their positions if they assess that their time and efforts were not spent constructively because insurers worked through coverage issues rather than presenting joint offers.
Mediation, as an intersection where all claims are resolved, requires preparedness on all issues for momentum to take hold. To maintain effective momentum, mediation of litigation involving coverage issues requires a mediator who understands complex coverage issues as well as the underlying liability issues (i.e. which liability claims result in uncovered damages), and cooperation from all parties/professionals involved. Raising insurer-coverage debates throughout the plaintiff-negotiation process is typically ineffective, and, ultimately, insurers have a duty to get their insureds out of harm’s way despite coverage issues that may require insurers to “pay and chase.”
Creative Insurer Resolution Methods
However, there are ways to think outside the box and resolve coverage issues for potential global settlements without the uncertainty of declaratory judgment and reimbursement actions—and without potential for missed optimal resolution opportunities. Where there is a high uncertainty regarding a coverage adjudication outcome—such as a case of first impression—and a large plaintiff exposure, a creative approach can optimize resolution, reduce exposure for the case, reduce the risk of a failure-to-settle argument by an insured, and avoid ultimately setting an adverse coverage precedent (either informally through future case expectations or legally via an appellate decision).
Methods to resolve coverage issues creatively and allow for global resolutions include:
Coverage mediation prior to plaintiff mediation. Selecting a mediator with a keen understanding of the specific coverage issues is a key to success. Another key is assessing the odds of success and attendant probable outcomes via a decision-tree analysis or other tool, including a “second look” by a colleague.
Consensus for a compromise allocation among insurers for purposes of the mediation only, either as a final compromise or reserving rights to reallocate afterwards. Reallocation can occur via litigation or arbitration. The case mediator may serve as the coverage arbitrator if the insurers agree that the arbitrator’s decision is confidential and inadmissible, with no right of appeal.
Settlement with plaintiff, subject to insurers funding within a certain time period (allowing them to work out allocation in a post-resolution mediation). Flexibility and appreciation of a realized optimal resolution can allow for final resolution of disputed indemnification obligations.
Mediator as subsequent coverage arbitrator if the insurers agree that the arbitrator’s decision is confidential and inadmissible, with no right of appeal. As the mediator is familiar with the case and positions, this method can allow for a prompt and reasonable resolution to differing viewpoints, while containing ultimate risk for the insurers.
Before mediation, insurers that provide policies for different policy periods—or have differing applicable policy language—should make every effort to agree on an allocation that will allow funding of settlement offers at mediation. Disagreements may still arise at the mediation regarding coverage issues related to attorney’s fees and other uncovered damages, whether the insured will contribute to the settlement, and whether the insurers will pay for uncovered claims when the insured refuses to contribute to a settlement for uncovered claims and damages, to name a few.
To respond to these issues, parties at mediations are developing creative strategies for obtaining global resolution of liability and coverage issues at mediation. For example, following resolution of a habitability action involving multiple tenants and multiple insurers, the insurance carriers responsible for defending and indemnifying the building owner all agreed that the mediator could serve as arbitrator to resolve the question of how the attorney’s fees should be allocated among the insurers. In this particular case, two of the insurers had an attorney’s fees exclusion in their policies, and one did not.
Having the mediator act as arbitrator can only resolve the claims if the insurers agree that the arbitrator’s decision is confidential and inadmissible, with no right of appeal, which they did in this particular case. The arbitrator ultimately determined the final allocation of the entire settlement among the insurers, including allocation of the plaintiffs’ attorney’s fees, such that all liability and coverage issues related to the underlying dispute were resolved as part of the mediation process.
Plaintiffs and defendants in a liability action may be able to negotiate an agreeable settlement amount, but, ultimately, the settlement has to be funded by insurers or by a combination of insurance proceeds and, potentially, contribution from the insured. Where there are multiple insurers defending the action, there may be coverage disputes between the insured defendants and the insurers regarding uncovered claims, and among the insurers related to allocation of insurance proceeds and/or coverage, leading to future protracted reimbursement actions that could be avoided at mediation. In other words, a mediation that results in a complete resolution of liability and coverage issues saves time and money for all parties involved.