Most complex cases go to mediation for resolution, and it is expected this trend will continue. Mediations, however, can be wasteful and sometimes counterproductive when opposing parties arrive at mediation with entrenched views of liability and damages and without first determining a reasonable settlement range. Rather than finding a middle ground and negotiating from there, the parties typically approach negotiations from adverse positions. While the mediators may play a role in providing neutral evaluations and settlement recommendations, they often hold back to avoid spoiling the negotiations and losing the trust of one or more of the parties. All of this contributes to delays that frustrate the mediation process and threaten to further polarize the parties.
What if, especially on complex cases, we turned the tables on the process? Instead of adverse parties approaching mediation as a battle in which they sit in separate rooms attacking each other, what if the adverse parties sat in the same room and focused their energies and resources on finding neutral ground and establishing a structure for an unbiased and informed evaluation of the case?
What Is a Neutral Evaluation?
In its simplistic sense, a neutral evaluation is nothing more than an opinion of an unbiased party as to the “value” of a case at a point in time. It is intended to provide an objective and informed answer to the fundamental question, “What is the case worth?” While simple in theory, a true assessment of a case’s value in complex cases with multiple parties and multiple disputed issues requires an investigation and analysis of the disputes and their relevancy to the bottom line. This includes identifying and organizing the important issues and risk factors, making informed assumptions, and putting them into an analytical context that addresses the mutual concerns of the parties.
Neutral evaluations are not new. They have been recognized by the federal courts, state courts, administrative agencies, and a variety of corporate entities as a viable alternative dispute resolution (ADR) approach. However, because neutral evaluations for complex cases require a significant investment of time and expertise, they are not often used. ADR providers tend to focus on mediations and arbitrations, and have been slow to develop the techniques and protocols needed for neutral evaluations to be performed by private providers. As a result, neutral evaluation techniques, strategies, and protocols are not as developed as other ADR strategies.
Neutral evaluations are different from arbitrations because arbitrators rely on the parties to conduct their own investigations and analyses, and to present it in an adversarial manner. This tends to result in the parties committing themselves to strategies, positions, and analyses that are more directed to win, which may conflict with a goal of achieving settlement. Not only does this fail to facilitate early resolution, it can frustrate the intended cost and time-savings goal of using arbitration as an ADR approach in the first place.
A mediator’s primary job is to negotiate monetary settlements, and they use a number of traditional and not-so-traditional techniques to accomplish it. Generally, mediators are not hired to conduct an independent investigation into the underlying disputes. Instead, they rely on the information provided by the parties, which often is presented in an adversarial context. Many mediators, even after they come to a conclusion on a valuation, do not disclose their assessments out of concern that it might kill the mediation by polarizing the parties. Some even worry about how disclosures can affect their reputations.
Mediators need to cut through the inherent biases and extreme positions of both parties to get them on the same page with respect to the important risk factors so reasonable compromises can be made. This is the foundation needed for settlement negotiations. The faster it is achieved, the earlier a case can settle, which results in less money being spent on litigation.
How Can a Neutral Evaluation Help?
In addition to providing a structure for earlier and more cost-effective resolutions, there are many other uses for valuation opinions worth considering. For example, it can be used as a framework to assess the viability of other ADR strategies and techniques, or as a method of achieving a “second opinion” on a problematic case or even aspects of a case. Neutral evaluations also can help the parties with litigation strategies—such as sorting out allocated defense and indemnity issues—and to assist in more efficiently preparing an unresolved case for arbitration or trial.
From a claims perspective, claims professionals perform an integral role in an insurer’s overall financial management. Once litigation of a complex case gains momentum, claims professionals tend to rely on information and analyses obtained from defense counsel, who has the potential of being biased. Further, counsel’s assessment may come in a variety of formats that may need to be interpreted and re-stated for reporting purposes. One of the most important ways a neutral evaluation may help is in setting reserves, the accuracy of which is the holy grail of insurance company financial planning. In addition, having a neutral evaluation in a complex case with policy-limit demands may mitigate a potential bad-faith claim.
Neutral Evaluation Techniques
Old war-horse trial attorneys and judges can spend 10 minutes talking about a case and will give you their gut opinion based on experience, which may be perfectly accurate in many cases. However, this approach in dealing with complex cases with multiple parties and multiple issues has its inherent limitations.
One approach that is used is a “decision-tree” approach, where a flow chart model is developed to address the issues and risks and to evaluate what direction a case should take based on assumed facts. Constructing a decision tree model can be a practical challenge absent having specialized software, can be difficult to approach, and may seem to be potentially never-ending in highly complex cases.
The development of a valuation model greatly assists the preparation of a credible opinion. A valuation model is the linking of a conceptual framework of the disputed issues and creating an analytic process focused on identifying the key risk factors in a transparent and honest manner. It is easy to see how having a valuation opinion based on an objective investigation and generally accepted principles would facilitate establishing a reasonable settlement range, thus setting the stage for more productive settlement negotiations. Channeling of attacks toward the risk factors and adjusting them openly where appropriate only increases the credibility of the model.
Generally, whether in contract or in tort, valuation modeling starts by investigating and focusing on the same primary risk factors: probability of proving liability; probability of proving damages; post-judgment rights and obligations; risk shifting through indemnity and insurance; and litigation expense. Once the above is determined, then another set of factors should be assessed. That is, the discount or premium for early resolution. Once these probability ratios are established and the risk factors identified, the neutral evaluator should show his work to the parties. This can be done with reasonable clarity through spreadsheet modeling, which boils down the issues into succinct data points that are logically formulated to produce bottom line monetary valuations.
While lawyers typically are adverse to complex math and many older lawyers don’t want—or know how—to use spreadsheets, incorporating a highly detailed and multi-factor, actuarial-type assessment in a spreadsheet form is an effective tool in enabling a top-down evaluation from the macro to the micro. A spreadsheet provides a tangible and generally accepted structure that, along with the analytics involved, identifies the important disputed issues and key risk factors and converts them into a quantifiable context for use in determining probabilities of outcome. They also provide a seamless and easily understood communication tool to all those involved in risk assessments and financial planning. Further, the effect on the bottom line valuation due to changes in the case or a parties’ perspective can quickly be obtained by making simple adjustments in it.
While difficult to construct and document, a spreadsheet-based valuation of a case is a very effective tool for supporting a valuation opinion and helping the parties understand the financial risks involved in any given case.
A neutral evaluation of a complex case first requires identifying an unbiased and experienced litigator or judge with both liability and insurance coverage experience who has the critical thinking ability to analyze a case all the way from the macro to the micro. Depending on the nature of the case, it also will require incorporating the services of an expert consultant on specific issues. This evaluation team needs to perform its work according to an established and tested protocol and needs appropriate staffing and other resources to perform the investigative, analytical, and mathematical functions.
The costs for performing an evaluation should be viewed in the same manner as other professional fees. However, fixed or capped fee cost structures are generally the best approach to ensure that there is an understanding of the cost/benefit of such an endeavor and the deliverables.
Should You Go Neutral?
Using a neutral evaluation as a tool to facilitate resolution of complex cases requires a desire and commitment of the parties to try something different and make it succeed. It is a particularly effective tool for ugly cases that no one seems to be able to get their arms around and are prone to getting out of control. It is also an effective tool for cases in early development, where the parties are sincerely desirous of achieving an early, reasonable resolution at less cost. Examples of cases that would be appropriate for this approach include complex tort cases involving multiple parties and injuries; construction defect cases; intellectual property cases; environmental cases; insurance litigation; wage and hour cases; and class actions.
A case can be made that spending money on neutral evaluations is another layer of avoidable litigation expense and that it is difficult to justify how spending more money will save money. On the other hand, given the current budget crises many courts are dealing with and cutbacks in court-sponsored ADR, private ADR and its expense is becoming a bigger factor in resolving complex disputes.
Perhaps it’s time for ADR providers to take a closer look at further developing this option. What is needed for increased acceptance of a neutral evaluation approach for complex cases is education and the development of protocols and models that can be used. This will allow stakeholders to have a comfort level in what they are investing, and help them understand what they can expect out of it. This is not a one-size-fits-all ADR approach, but rather an approach that needs to be tailored to address specific cases that would economically benefit from having another set of eyes look at it.