Give and Take.

Mediation can help insurers reach a speedy--and less costly--resolution to claims disputes.

In this litigious society, where lawsuits can take years to inch their way through clogged court dockets, more plaintiffs and insurers are exploring another avenue--namely, mediation--in hopes of reaching a speedy resolution to claims disputes.

This process, a form of alternative dispute resolution, can save time, expense and angst for all concerned, its advocates say. But industry representatives point out that mediation is only one tool for settling disputes and, if it is to succeed, requires a skilled referee and a willingness on the part of both sides to give and take at the bargaining table.

"The biggest benefit of mediation for us is it helps us get to a point of conclusion short of trial," said Lee Bennett, senior vice president and claim general counsel for St. Paul Cos., an insurer that provides commercial and medical-malpractice coverages. "Assuming the other party is rational, we end up with an indemnity payment that is fair and reasonable vs. having people stay on a trial track, which is a lot more expensive and unpredictable."

From the insurers' standpoint, mediation has played a significant role in helping to reduce court time and the hours generated by insurers' attorneys for settling claims, said Loretta L. Worters, spokeswoman for the Insurance Information Institute, New York.

Chubb Group of Insurance Cos., Warren, NJ., has tried to assess the savings that successful mediations can mean to its bottom line, but it has yet to come up with a firm figure, said Michael Marchio, director of claims. "Obviously, it's cheaper because you do not incur the costs of attorneys for years and years," he said. "But it's awfully difficult to calculate."

The Insurance Information Institute breaks down tort costs this way: for the average dollar spent, 24 cents go to litigants for economic losses; 22 cents go to cover their pain and suffering; 16 cents go to the claimant's lawyer; 14 cents go to defense costs; and 24 cents go to administrative costs.

The High Price of Trials

While only 2% of liability claims are settled by court verdicts, these verdicts have a disproportionate influence on liability costs, Worters said. "The number of lawsuits that go to trial have such a large impact because the size of the settlement is so large," she said.

One of the crucial steps in paving the way to a successful mediation is choosing the right mediator from a roster of attorneys or judges, said Diane Kalan, assistant vice president, claims, for SCPIE Indemnity Co., Century City,

Calif., which specializes in medical-malpractice coverage. "The wrong mediator can actually lead parties away from resolution," said Kalan, who has participated in several mediations in recent years.

"The mediator takes the case apart and shows its weaknesses," Marchio said. "It's more in-your-face--and done in a more direct, open fashion than in a court of law." As a result, each side can gain a better understanding of the other's position, thus helping to smooth the way toward possible settlement, he said.

A chief goal of any good mediator is to gain the confidence and trust of all the players, said John B. Bates Jr., chairman of practice development for Jams, a San Francisco-based provider of alternative dispute-resolution services.

Bates, an attorney who began specializing in mediation more than 10 years ago, has handles everything from mass medical-malpractice claims in Illinois and New York with a $2 million settlement, to class-action business disputes in Missouri, yielding a $100 million settlement. He claims a 90% success rate in his mediation.

A Case Study

One successful outcome involved several hundred plaintiffs who were suing a physician in Southern California. The doctor specialized in phalloplasty, or penile enhancement, which included the severing of a pelvic ligament and liposuction to add fat. "He was running this operation where he was doing 10 to 15 of these procedures a day, and a number of plaintiffs said they were severely injured and deformed," Bates said.

Besides the large number of plaintiffs and the battery of lawyers representing them, the parties also included multiple insurance carriers, because various companies had been writing the doctor's medical-malpractice policies over the course of several years, Bates said.

"So you've get lawyers, competing carriers, a doctor who wants all this to go away and a court that would love to get rid of these cases," Bates said. "If you tried each case, imagine how expensive this would be for the carriers."

Bates devised a strategy. First, he meet with the plaintiffs' lawyers and got them comfortable with him as mediator and the process he planned to follow. Then he hit the first major hurdle. Plaintiff lawyers wanted to know the insurance policy limits, which were envisioned to be in the multimillions of dollars.

"I had to find out what the carriers would be willing to do should the exposure significantly exceed their policy limits--something they'd been unwilling to convey to the plaintiff lawyers," Bates said.

There were issues about how much insurance money was available, agreed Joseph Manning, an attorney with Marshall, Dennehey, Warner, Coleman and Coggin in Livingston, N.J., which was representing one of the plaintiffs in the case. "We weren't looking at a bottomless pit here," he here," he said. "We had to put on some controls."

Bates won an agreement from the carriers on that front and the process advanced. The next step was to find a way to give the carriers and idea of what their exposure was. Bates had each plaintiff submit his medical records along with financial information if he had a wage-loss claim. Then each plaintiff had to fill out a short questionnaire.

"Because the defense wanted to know the worst-case exposure, I suggested to them that I would visit with each plaintiff and coach him, along with his lawyer, so he could make the absolutely best presentation to them," Bates said. These coaching sessions often lasted a couple hours or longer, depending on the "psychological and emotional aspects of that case," he said. In addition to his role as mediator. Bates found that he was becoming the men's confidante, "and that helped the process," he said.

The mediator, each plaintiff and his attorney then appeared before the defense attorneys and made their presentations. Bates went through 300 of those sessions. Each plaintiff's presentation was evaluated and an allocation figured out. "Ultimately, all the insurance was used." Bates said, nothing that each plaintiff received something and even the lowest settlement was enough to pay for corrective surgery. "And the carriers were way ahead of the game, because they avoided the cost of 300 problematic trials and the risk of getting into litigation with their own insured," he said.

This mediation--conducted in person and over the telephone--took about nine months, a long time in a business that often can wrap up medical-malpractice or commercial insurance cases in an intensive day or two. But it's nowhere near the estimated five years that it would have taken these hundreds of cases to come to trial. Furthermore, Bates noted, "we got closure--there were no appeals. And the plaintiffs could keep everything private and confidential. The alternative was a public trial."

Manning found that the plaintiffs "needed to vent, and the mediation process allowed them to tell their story."

Mediation Gaining Ground

Over the past couple years, Manning has frequently represented plaintiffs in mediations over claims disputes, and he thinks the approach is gaining ground. More plaintiff attorneys are open to mediation because it removes some of the unnecessary fighting that goes on in litigation, he said. Also, the insurers he has dealt with "are willing to engage in mediation if it has a chance of being productive," Manning said. "They analyze it on a case-by-case basis. You have to have the will to participate on both sides. Insurance companies are receptive to mediation if they recognize they have exposure."

But when they don't, they see no need to participate. Insurers enter into mediation with the perception that they will wind up paying something, unless they believe they can obtain "some absolutely definite verdict" in court, said Bennett of St. Paul Cos.

In the reinsurance realm, the popularity of mediation as a dispute-resolution tool seems to be growing as well. In February the New York-based insurance law firm of Mound, Cotton & Wollan recognized the increasing demand for mediation services by forming its Reinsurance Mediation Group. The firm's principals thought the time was ripe to make the move because reinsurance is becoming more of a legal battleground, they said.

"The reinsurance industry has, to an unfortunate extent, gotten away from those good old days where there were few disputes, and if there was a dispute, it would be resolved over cocktails," said Lawrence Greengrass, a partner in the firm's insurance/reinsurance practice. "Issues have gotten very complex, dollars have gotten enormous, and there are issues like asbestos claims being made under reinsurance contracts put together in the 1950s and 1960s, before anyone knew what an asbestos claim was."

Fueling the situation is the dramatic increase in insurance insolvencies, which effectively put an end to business relationships; heightened activity by state insurance departments in trying to make reinsurance collections; the expansion of reinsurance into new areas like financial risk; and potentially huge liabilities in the insurance and reinsurance business.

Even the arbitration process, which is directed by clauses in most reinsurance contracts, has become more contentious in the reinsurance realm, evolving into a take-no-prisoners approach on the part of counsel and the parties on both sides, said Eugene Wollan of Mound, Cotton & Wollan. Wollan is a certified arbitrator with ARIAS--Aida Reinsurance & Insurance Arbitration Society--based in Mount Vernon, N.Y

Mediation vs. Arbitration

Mediation is a voluntary, nonbinding process using a neutral third party to guide the disputing parties toward a mutually satisfactory resolution, Bates said. While an arbitrator can impose a decision, a mediator helps the parties decide for themselves whether to settle and on what terms, he added.

"One advantage of mediation is its high flexibility," said Bennett of St. Paul Cos. "Unlike arbitration, mediation is infinitely flexible, and you can structure it any way you want to."

Ron Gass, vice president and associate general counsel, Nac Reinsurance Group, Greenwich, Conn., recently has been involved in two mediations, one of which produced a settlement while the other parties progressed to arbitration.

Nac Re goes to mediation only if all other remedies--like contacts between company officials, acting on advice from their lawyers--fail. "At the point where an arbitration demand is filed, the lawyers move to the forefront," he said. Once this stage is reached, Nac Re likes to have a mediator step in to see if arbitration can be avoided, Gass said.

"Ideally, the mediator should be someone esteemed in the profession, so both sides respect the person," Gass said. It's also helpful if this neutral party makes it clear which points in the company's argument make sense and which don't, Gass said. "You want to be able to sound out someone in a low-risk situation" to test the strength of the case should the company later have to go before a three-person arbitration panel, Gass said,

Typically, the arbitration clause in a reinsurance contract will state that the arbitrators should be active or retired executive officers of insurance or reinsurance companies or of syndicates of Lloyd's, Wollan said. "There's been a tendency to broaden that a bit, adding experienced insurance or reinsurance attorneys. But the bottom line is, the industry wants arbitrators who are familiar with the industry and have experience in dispute resolution but, more importantly, understand the unique customs and practices in the reinsurance field."

Nevertheless, there's a movement in reinsurance to avoid arbitration, because it's costly and unpleasant, Wollan said. Also, the parties often are disagreeing on one isolated subject, claim or position, "but continue to do business with each other, of choice and of necessity, and prefer not to poison the relationship permanently," he said.

Many times, the amount of money contested is not sizable and would be outstripped by the costs of a formal arbitration process, Greengrass said. "So, mediation represents an opportunity to resolve smaller kinds of disputes as well, in an efficient and inexpensive manner," he said.

Greengrass estimates that a typical arbitration is likely to cost at least 10 times more than a typical mediation.

The time element also is an important factor favoring the use of mediation over arbitration in reinsurance conflicts, Wollan said. "It used to be the typical reinsurance arbitration took from six to nine months. Now, it's probably a fair estimate that the typical arbitration takes more than a year and possibly as long as two years," he said. "Mediation, on the other hand, can be done very quickly. From the time the process begins until it is either completed with a settlement or with an understanding that it can't be settled, you can probably do it in a few months."

Kalan of SCPIE Indemnity said the usual short duration of a mediation process--as opposed to the length of the discovery process leading to trial--has side benefits. "When you have less time, there's less of a tendency for parties to dig in their heels and become entrenched in their positions," she said. "Also, there are fewer aggravations, like fighting over motions in court."

Scott Crockett, vice president of the health-care claims department at GE's Employers Reinsurance Corp., Overland Park, Kan., said mediation is frequently practiced in some areas of the United States, but it is less common in others.

In Chicago, for example, the courts have not required it, so mediation only now is catching on as an option, he said. Instead, adversaries there have been encouraged to settle disputes through a court conference or party-to-party negotiations.

In Texas, however, mediation "is practically an institution, because virtually all personal-injury cases that are filed there are filed in state-level courts, and the rule is they must be mediated," he said.

ERC conducts a great deal of business in Texas, so mediation "just seems the natural way to do business, and it's our preferred alternative dispute-resolution tool," Crockett said. He expects that this practice will grow in popularity "as attorneys in parts of the country who haven't done a lot of mediation become more comfortable with it and see the advantages."

Usually, once the parties have agreed on a mediation process and a mediator has been designated, each side submits a brief position paper. The mediator goes over the papers in advance of the first meeting, then explores the adversaries' positions by meeting with all the parties, then with each side separately to discuss settlement figures. "It's almost always possible within a matter of hours to get a feel for whether the case can be settled or whether it's just not one of those things that can be resolved," Wollan said.

Even then, some ground may be gained.

Bennett said insurance companies can enjoy a fairly high degree of success depending on how well they have selected the cases they take into mediation. "If you're careful and pretty serious going in, there's a reasonably good success rate' he said. "But even if the case doesn't settle, you haven't necessarily wasted your time and assets, because you may end up learning where the opponent is and where the weaknesses are in your case" before taking the matter to trial.

In reinsurance, parties often have multiple disputes and resolving even some of them can ease subsequent negotiations. "Whether the future process is another attempt at mediation three months later or an arbitration, an initial mediation may present an opportunity--if the entire series of disputes can't be resolved--to still streamline the issues and narrow the further proceedings," Greengrass said.

Mediation on the web

In recent years, mediation services have been going high-tech and gaining the support of insurers and industry organization along the way.

In October, Travelers Insurance Co., Hartford, Conn., committed to a regional arrangement with the National Arbitration and Mediation Corp., a provider of dispute-resolution services online and in person NAM is the parent of ClickNsettle.com, which was launched in June 1999 as a dispute resolution Web site. It features unlimited blind-bid technology and a real time negotiating format allowing two parties to settle any dispute with a menetary payment. In May, Insurance Services Office Inc. said it had bought 16% of NAM for $4 million.

Rival Cybersettle.com. launched in August 1998, is another online service that seeks to aid in the settlement of insurance, personal injury, property damage and other disputes. Unlike mediation and arbitration, with their unpredictable outcomes, Cybersettle.com tells users that "the amount of the settlement is always under your control."

Lee Bennett, senior vice president and claim general counsel of St. Paul Cos., said his department was looking at the results of a recent pilot project with Cybersettle.com and St. Paul's largest claim operations in New York and the Northeast. Using this service "is like having the two sides in a mediation write their settlement figures on pieces of paper and hand them to the mediator," he said. "The only difference is its done electronically."

The use of alternative dispute resolution to settle claims has been growing, according to surveys of insurers conducted by the Insurance Services Office Inc. This table shows the methods used to settle disputes in which suits were filed and involved closed claims of $75,000 or more.

Setting Disputes