In these days of sophisticated risk management, more employers are availing themselves of a variety of insurance options to cover employment practices liability, making it more likely that insurance will be operating behind the scenes in employment litigation, and will be present at the mediation table.
1. A Variety of Insurance Policies Cover Employment-Related Claims.
In addition to the standard Comprehensive General Liability (CGL) policy, many employers are expanding their risk management to include Employment Practices Liability (EPL), Directors and Officers Liability, and Errors and Omissions insurance, among other types of insurance. EPL policies, for example, provide protection for an employer against claims made by employees, former employees, or potential employees for claims of discrimination (age, sex, race, disability, etc.), wrongful termination of employment, sexual harassment, and other employment-related allegations. Directors and Officers liability insurance covers members of the company’s Board of Directors from allegations of negligence in the performance of managerial duties.
2. If a Claim is Potentially Covered, Insurance has an Unlimited Duty to Defend the Employer.
If there is a potential for coverage for at least one cause of action, the employer’s insurer has an unlimited “duty to defend” the employer on all claims in the lawsuit, whether they are covered or not. Indeed, if a frivolous or fraudulent claim has a potential for coverage, the insurer still has a duty to defend and indemnify the employer through to resolution. In addition to the broad duty to defend any potentially covered claim, insurers also have a duty to indemnify the insured employer for any monetary loss or damages associated with the covered claim, either at trial or, more likely, in a pre-trial mediation.
Most insurance companies provide a defense subject to a reservation of rights. This means that if the litigation unearths facts so that the claim no longer has the potential for coverage, the insurance company has a right to withdraw from the litigation or to recover costs, under some circumstances.
If there is a potential conflict of interest in the defense (employer and alleged harasser, for example), the insurance company has an obligation to provide Cumis counsel to the alleged harasser, separate from the defense of the employer. In such cases the insurance company is paying for the defense of the employer as well as the individual, and may have increased incentive to settle because of the double defense costs.
Some insurers refer potentially covered claims to “panel counsel”, while some insured’s reserve the right to select their counsel of choice. More often than not, the insurance company assigns a panel law firm to provide the employer’s defense, and also to keep the insurance company apprised of case developments, strategy and potential settlement value. In many ways, this arrangement takes control of the litigation away from the employer, and allows the insurance company to direct litigation strategy, and to determine the value of the case. After the employer has paid its deductible, the employer’s control of the litigation often is reduced to the right to consent, or not, to a settlement negotiated by the insurance company’s defense counsel.
3. Money Matters that Come Into Play at Mediation Where Insurance is Present.
Nearly all insurance policies have a deductible, or Self-Insured Retention (SIR). The deductible is money that the insured employer needs to pay before the insurance policy comes into play. The deductible or SIR is important in mediation because other than providing the defense, the employer has control and can settle the claim at or under its deductible. Once the insured employer has paid its deductible in full (either by paying for defense costs or by contributing the value of the deductible in settlement negotiations), the insurance company effectively controls the litigation, as well as the settlement strategy at mediation, subject to the insured employer’s consent.
Another important money matter is the reserve, or the amount of money the insurance company sets aside to settle the matter at the outset of the claim, based on current information. The amount of the reserve often is revised as new information comes to light. The reserve is important because it reflects the insurance company’s value of the case, and the amount of money it has set aside to pay on the claim. In mediation, the insurer usually cannot, or will not, offer to settle a case beyond their reserve absent compelling new evidence or information.
The policy’s limits of liability also can come into play at mediation, as these limits are the maximum amount the insurance company is obligated to pay on the claim, and usually the maximum settlement possible. Some policies have “burning limits”, where the limit of liability is reduced by defense costs. Offers at or within policy limits are important because such an offer opens the insurance company to exposure beyond policy limits if the insurance company had an opportunity to settle within policy limits, but did not pay on the policy limits demand.
4. Insurance Issues in Mediation.
a. The Pre-Mediation Conference.
Insurance clearly comes into play long before the parties agree to mediation. However, often times the other party is not aware that the employer has insurance, and how this will affect settlement strategy. An excellent time to raise the issue of insurance, and to determine if a representative from the insurance company will attend the mediation, is during the pre-mediation conference or private discussion with the mediator. Many claims adjusters/claims examiners (the representative from the insurance company who communicates directly with defense counsel) often prefer to attend mediations remotely, with periodic telephonic check-ins. In order to navigate the shifting sands of insurance, the parties stand a better chance of settling a dispute above the employer’s deductible and within policy limits if the claims adjuster is physically present at the mediation. Even more important, however, is that the claims examiner, who probably has limited authority, to has swift access to additional authority, if necessary.
Whether the claims adjuster is present or not, s/he periodically will update his or her supervisor as to the progress of the mediation, and whether the negotiations are likely to exceed the claims examiner’s limited authority. Requests for additional authority are most likely to be approved if supported by new evidence or information that may affect the value of the case.
Many insurance companies have “authority plateaus”, meaning that a claims examiner may have $5,000 in authority, but that additional authority requires approval by another person/team or committee with 50K/100K/250K/1 million in authority. These “authority plateaus”, if known or suspected, are useful in negotiations in that a demand can open the door to the next level of authority, and thus pave the way for a larger settlement. Adjustors have to defend their decision up the chain to their supervisor or committee, and often try to “look good” by settling a claim at or his or her limit of authority.
b. Pre-Mediation Internal Valuation and Access to Authority.
The pre-mediation conference also a good time to determine who on the defense has authority to settle the case, and whether that person will be present at the mediation. In many instances, if the insurance company is being asked to pay a significant sum, the claims adjuster will need pre-authorization by her or his supervisor to settle above a certain number (the reserve). In high dollar cases, the insurance company may require the claim to go “to committee” for evaluation prior to the mediation. By asking about the existence of insurance, in-person attendance, authority and status of any necessary internal evaluation prior the mediation, the parties will be in a better position to reach resolution.
c. Strategies for Working With Insurance at Mediation
The employer’s insurance is responsible to indemnify the employer’s liability for covered claims, as well as the defense costs attributed to covered claims. However, the insurance company has an unlimited duty to defend all claims, covered and uncovered, subject to future reimbursement of allocable costs. Of course all insurance companies are interested in paying as little as possible to achieve a quick settlement that avoids costly future attorney fees.
Strategies for working with insurance companies at mediation involve assessments of the SIR/deductible, covered vs. uncovered claims, the limits of liability and the cost of defense. One strategy to resolve any case involving insurance to estimate the cost of unlimited, future defense costs to encourage the insurance company to save those future payments to counsel by settling now. If there is a reservation of rights, another strategy is to determine what unknown facts could affect coverage, to encourage the parties to settle now, rather than risk a future dispute between the employer and its insurance company. To the insurance company, the most important evidence goes to the elements of a covered claim. Of course, as in all mediations, the parties will assess the risk of liability, as well as the cost of proving or defending against the risk of liability. If the insurance company receives an offer within policy limits, and refuses to settle, they runs the risk of having to pay above policy limits at trial. Thus an offer at or below policy limits will receive special consideration because of this potential downside.
d. How Insurance Companies Make Decisions at Mediation.
At every mediation, insurance companies have particular, sequential concerns. First, is the claim covered by the employer’s insurance policy, and do any exclusions apply? Second, is the employer liable for the covered claim? What facts support or undermine liability? Third, what are the cost of defense to date, and projected to trial. Fourth, what is the claims adjuster’s assessment of the credibility of witnesses, the Plaintiff and his or her counsel, as well as the evidence known or suspected? It is the job of the claims adjuster who attends the mediation to report back on these issues, and parties who readily provide this information have a better chance at securing a settlement with the employer’s insurance company.
e. Techniques Used by Insurance Companies in Mediation.
Insurance companies use several techniques to pressure a settlement in mediation. The first technique is the “out of authority” technique, often quite honestly relayed by the low-level claims examiner. A second technique is for the supervisor to speak with the mediator separately, often asking the mediator for her or his evaluation of the case. If the mediator is comfortable being evaluative, he or she must be careful to remain neutral, and not pressure the parties to meet the “mediator’s number.” A third technique is to ask the mediator to offer a “mediator’s proposal”, and let both parties separately consider this suggestion (and to only reveal each parties’ response if both parties agree).
The mediator can cut to the chase by asking the supervisor what information he/she needs in order to request additional authority, and working with Plaintiff’s counsel to provide that information, or the plan or likelihood of proving those facts. The mediator also can ask, in private session, about the deductible/SIR, the limits of liability, authority plateaus and whether the policy has “burning limits” in order to understand the framework of the case from the insurance company’s point of view.
Insurance carriers are interested with cost-effective resolution, and generally are not concerned with Plaintiff’s interests or creative, “outside the box” resolutions. Insurance carriers do not view mediation as a potential pie to be enlarged to a win-win, but rather as an early-out from protracted litigation. Indeed, many insurance companies get nervous if the employer is required to do something affirmative – an apology, a reference, as these elements could open the door to liability.
5. Conclusion
In order to maximize the potential outcome at mediation where the employer has insurance, the parties, and the mediator, are well-advised to understand the process by which the insurance carrier evaluates and values the claim. If the needs of the insurance company are met with regard to a reasonable prediction of future litigation expenses, credibility of a key witness (including the Plaintiff), a skillful mediator can move the employer and its insurer through the deductible and the various authority plateaus to achieve the best settlement possible.