It is holiday season, and as families gather around the table to talk politics, everyone is a mediator. And while mediating disputes between relatives is challenging, this article looks at when parties seek another form of “relative” justice: constantly comparing their positions with other parties.
Most cases settle. Insurance coverage cases are complex and there are always risks, at least that is what your mediator usually tells you. And then there are costs, something not lost on your clients. The costs of our legal system virtually guarantee that parties share a common interest—avoiding the expense and hassle of litigation. Mediators ask parties to focus on their common interests even when their legal positions clash. Another reason cases settle is that the parties do not have to agree on their case evaluation and estimates for the myriad of sub-issues involved in the case. In the end, the only thing they need to agree on is that it is in their best interest to settle for the figure offered by the other side. The parties may still disagree on the likelihood of success and damages at issue, and often do, but those disagreements do not usually preclude reaching a deal. Thinking about it that way, settling cases is so easy you can do it blindfolded!
Coverage cases, however, present unique circumstances that often complicate settlement. Insurers are litigation professionals and often have other concerns than just the merits of the particular case at issue. Perhaps they are looking for a test case to change or establish precedent. Maybe they feel they need to draw a line in the sand and go to trial to prove to the plaintiff’s bar that they will not roll over. And finally, in some cases, involving multiple carriers, the insurers not only want to reach a good deal, they want to get a better deal than the other insurers in the case. Dealing with varying degrees of relative justice can often scuttle a settlement. Consider the following situation:
A chemical company faces over $25 million in CERCLA liability for alleged PCB contamination at its site and nearby river. It sues numerous insurers over a twenty-year period for defense and indemnity. There are many issues that impact the various insurers differently. The insurers collectively hope to settle and, realizing the significant damages at issue, believe that a $10 million deal on behalf of all of them would be a reasonable result. Meanwhile, the policyholder also believes that $10 million is reasonable. Awesome, this case will settle. I won’t even need to order lunch. Not so fast. As seen below, each carrier has reasons to believe that its own share of the liability should be less than the other insurers. (Blind mediation is effective in multi-party cases. In reality, there are likely to be more than four parties, but I use four parties to best illustrate the concept). Consider the following hypothetical:
Primary Insurer 1: Willing to pay up to $4 million, but strongly believes that the property damage took place after its policy period so it will not put more money on the table than Primary Insurer 2.
Primary Insurer 2: Willing to pay up to $2.5 million, but believes that a significant amount of the damages were associated with RI/FS costs that it considers to be indemnity costs. As such, Primary Carrier 2 fully expects both excess carriers to pay more and will not offer more than either of them.
Excess Insurer 1: Willing to pay up to $1.5 million, but issued policies to a parent company in a different state and believes that the law in that state is more favorable than the other excess policies. It therefore, will not offer more than Excess Insurer 2.
Excess Insurer 2: Willing to pay up to $2 million, but Primary and Excess Insurer 1 issued more policies and were on the risk longer, so it will not offer more than them.
In a vacuum, collectively each insurer is willing to contribute to a $10 million settlement. Unfortunately, most of the insurers have reasons not to contribute because each carrier also firmly believes it should pay less than other carriers. A potentially advantageous opportunity might slip away.
This situation is common in multi-party cases. In Texas, many complex, multi-party construction cases are settled using a blind mediation technique. For purposes of this article, I use “blind mediation,” but some mediators use the term “double-blind” mediation. Compare Heley, Mark J. (2007) Mediation of Construction Cases Using ‘Blind Negotiations’: Can Providing Less Information Generate Better Results?, William Mitchell Law Review: Vol. 34: Iss. 1, Article 4 (using “blind” mediation) with “Taming the Multi-Party Construction Dispute in Mediation,” Nelson, Steve and Shidlofsky, Lee, Presentation at the Associated General Contractors of America 2022 Surety Bonding and Construction Risk Management Conference, at p. 13 (using “double blind” mediation). Whatever the label, the idea is to make all parties - general contractors, architects, sub-contractors, product manufacturers, focus on their interests and not get sidetracked by pointing the finger of blame at other parties. So, how does it work?
As an initial matter, all of the parties must agree at the beginning of the process that the mediator will keep them in the dark during the blind mediation process. Once the parties understand and consent, the procedure works as follows:
The mediator solicits a demand from the plaintiff. In our case, let’s say the plaintiff’s initial demand is $25 million. Each defendant is separately informed of the demand and is asked to focus on what it would be willing to contribute to a joint response. The carriers independently tell the mediator that they are willing to contribute the following:
Primary Insurer 1: $2 million
Primary Insurer 2: $1 million
Excess Insurer 1: $500K
Excess Insurer 2: $1 million
Steve Nelson and Lee Shidlofsky frequently use blind mediation in construction cases in Texas. While the initial response above is an expedited summary of a blind mediation to illustrate the concept, Nelson and Shidlofsky also recommend that the mediator urge the parties to consider that multi-party cases are best resolved when parties use their “3:30PM’ish” offer well before late afternoon. Nelson and Shidlofsky, supra, at p. 13 (discussing soliciting opening, 3:30 pm’ish, and absolute highest numbers from the parties). Thankfully, our insurers took their advice.
Back to our hypothetical: the mediator goes back to the plaintiff and without disclosing what each individual carrier offered tells the plaintiff that the insurers are collectively offering $4.5 million. The plaintiff’s new demand is $14 million. Here is where it gets interesting. When the mediator goes back to the defendants, instead of saying that the plaintiff is demanding $14 million, the mediator simply says, “we are making progress, the gap is now $9.5 million.” The mediator conveys this information without informing anyone what the other defendants are contributing. Each defendant is then asked to consider increasing their individual participation in an effort to bridge the gap. After listening, highlighting risks and focusing on the settlement opportunity each carrier agrees to increase their participation as follows:
Primary Insurer 1: $3 million
Primary Insurer 2: $2 million
Excess Insurer 1: $2 million
Excess Insurer 2: $1.5 million
The mediator goes back to inform the plaintiff that the gap has narrowed to only $5.5 million. For purposes of an expedited example, let’s say the plaintiff now makes a $10 million demand. Remember, the defendants don’t know that it is a $10 million demand. All the defendants will be told is that the gap is now only $1.5 million dollars (plaintiff is at $10 million while the defendants are at $8.5 million). After protesting that they have already put too much on the table, the insurers finally agree to fund a $10 million settlement as follows:
Primary Insurer 1: $3.5 million
Primary Insurer 2: $2.5 million
Excess Insurer 1: $2.25 million
Excess Insurer 2: $1.75 million
So, in the end, both primary carriers and Excess Insurer 1 paid more than the other carriers they specifically believed should pay more than them. In a traditional, non-blind mediation this probably would not have happened and likely would have scuttled the deal. Excess Insurer 1 paid more than it initially wanted, but it ultimately was happy to resolve the case. Other parties actually paid less than they would have otherwise been willing to pay so they should feel great–even if they, like Primary Insurer 2, paid more than other insurers it believed owed more.
Terrific, so now it is time for the great reveal, right? No. While all of the insurers are happy, revealing the relative contributions now will only ruffle feathers and lead to buyer’s remorse. So blind mediations require a few unique logistical steps to ensure that the process remains confidential.
Confidential Exhibits: The settlement agreement is memorialized, but unlike the normal settlement, the total settlement amount only appears in an exhibit that is given only to the Plaintiff. That is the number to which the Plaintiff agrees. Then each defendant receives their own exhibit sheet with only their final contribution.
Escrow Account: Once everyone signs the agreement and agrees to their confidential exhibits the defendants write checks payable to the mediator. The mediator deposits them into an IOLTA account and then writes a final check to the plaintiff from that account. See, supra., Nelson and Shidlofsky at p. 17 (“If you mediate double blind, keep it double blind through the end by closing the mediation in escrow”). All interest from attorney IOLTA accounts in Texas helps fund access to justice programs. So, if you are intrigued about blind mediations, but still on the fence, they might help fund a good cause. See Texas Access to Justice Foundation.
Blind mediation is not for every case and everyone. For a more thorough analysis of the pros and cons of blind mediation see Heley, Mark, supra. Most attorneys’ initial reaction is “hell no” and it requires the parties to understand that knowing what other parties are offering is often counter-productive in multi-party disputes. Sometimes less information is better, even when that can make some people uncomfortable.
Putting on a blindfold forces each party to focus on their own risks without being distracted by other parties. If you find yourself constantly comparing your client’s situation to other parties in a multi-party case, and it comes time to mediate, you should consider whether a blind mediation is best suited to meet your client’s needs. Whether blindfolds will help Uncle Joe and Aunt Sara get along this Thanksgiving is a different type of relative justice.
