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Avoiding litigation with alternative dispute resolution.

IN RECENT YEARS, MANY U.S. EXECUTIVES have become increasingly disenchanted with attempting to resolve disputes through litigation. In the current business and legal environment, contracting an outside law firm to file a lawsuit that will - it is hoped - lead to a speedy and successful trial has become a complicated, time consuming and expensive process for many organizations. Because of these problems, many corporations are investigating less costly ways to resolve their disputes with other parties.

In response to the highly competitive marketplace, many property/casualty insurers have decided to avoid litigation whenever possible in an attempt to hold down costs. Through good faith negotiations, insurers can work with their insureds to settle claims directly, either through claims representatives, a company lawyer, or through claimants and their attorneys. By analyzing the claim, creating an appropriate bargaining strategy, and engaging in good faith negotiations, many of these claims can be settled at a reasonable cost.

Alternative dispute resolution (ADR) is an extension of this negotiation approach. Besides employing traditional negotiating techniques, ADR also utilizes certain novel methods such as mediation and arbitration, which have proven successful in helping disputing parties reach prompt, rational and mutually agreed-upon settlements. Because of the successes ADR has engendered, corporate risk managers will need to gain an understanding of how these techniques work and how they can help disputing parties reach settlements.

For companies wishing to pursue ADR, virtually every form of ADR can be obtained privately through one of the 35 regional offices of the American Arbitration Association (AAA). Best known for its work with arbitration, the AAA has also played a pioneering role in sponsoring mediation and other private dispute resolution procedures; many organizations find it useful to become an AAA member so they can receive information on a contractual basis.


Depending on the facts of the case, and the applicable law, insurance claims often involve significant liability and damage issues. However, rather than letting the courts determine the outcome of these issues, mediation involves using a mediator to convince both parties to settle their disputes. Throughout this process, the mediator helps the parties analyze the relevant issues and warns them of the risks of being unable to reach agreement. Mediation is a very successful technique; settlements are reached in more than 80 percent of the cases involving professional mediators.

In regard to casualty claims, the dispute often boils down to how much the insurer will have to pay to obtain a general release. An experienced mediator, familiar with the results of similar cases, can help the parties reach a settlement. Often, the amount that a court might award, minus the costs associated with litigation, provides a target amount that both parties can work toward.

Mediation facilitates the bargaining process by convincing the parties that they will be better off by reaching a settlement than by continuing to litigate. After considering this fact, the parties often work harder to settle their dispute. Another advantage to mediated settlements is that they do not appear on a public court record or in the press; this strict confidentiality can be an important consideration for both parties.


Since it does not rely on procedural rules, mediation is essentially an unstructured dispute resolution approach; the parties' willingness to bargain and the mediator's skill are the driving forces in the movement toward a successful resolution of the case. A mediator does not hold evidentiary hearings; instead, he or she conducts informal meetings with both parties to discuss the claim. When working with a mediator, the parties involved should be prepared to negotiate; generally, the parties are represented by their attorneys during this negotiation phase. At the outset, the mediator describes the rules, the order of presentation, and the confidentiality of the proceedings. After these preliminaries, each party has an opportunity to explain its position in separate meetings with the mediator.

In these meetings, called caucuses, the mediator engages in a candid discussion of the claim and helps the parties satisfy each other's demands, thereby moving toward a compromise. For the mediator, this process entails helping each party better understand the other party's positions on key issues, as well as its evaluation of and perspective on the dispute all without violating the often confidential nature of the claim. Throughout this process, the mediator may shuttle back and forth between the parties, bringing them back to joint sessions at appropriate intervals. During each caucus, the mediator clarifies each party's position, considers alternative views and seeks possible tradeoffs.

An effective mediator knows that positions shift as ideas meet opposition, as different facts are considered, or as perceptions change. The mediator encourages the parties to assess the consequences of continuing the dispute versus settling the claim. By making the parties focus on the risks and burdens involved in litigation, the mediator creates an atmosphere favorable to settlement.

In order to help the parties reach an agreement, the mediator narrows the differences between the parties; at appropriate times, the mediator may make suggestions about a final formula, emphasize the progress that has been made or verbalize offers. Throughout this process, the mediator ensures that all discussions remain focused on helping the parties reach a solution. At the conclusion of the discussion phase, the mediator then communicates proposals to the parties, and offers suggestions in regard to a settlement of the dispute. Then, when the parties finally reach an agreement, the settlement is confirmed in writing. However, if they fail to agree, they can arbitrate the remaining issues. Usually, though, a certified check is exchanged for a general release.

There are many advantages to using mediation to resolve a dispute. The first is that mediation allows the parties to negotiate their own settlement; in addition, the mediator, acting as a neutral third party, helps the parties explore alternatives that might not otherwise have been considered. Another advantage is that mediation often results in a quicker resolution than does litigation, thereby saving the parties money through reduced legal fees.

Since experienced and professional mediators are more effective than those with less experience, mediators should be familiar with the issues of their cases. Consequently, in the case of casualty claims, mediators should be knowledgeable of insurance issues. The AAA provides experienced attorneys and retired judges as insurance claims mediators. These individuals have been trained by the AAA in mediation skills and, based on their experience, are chosen to serve on a particular case.

When parties indicate a willingness to turn to mediation in a case, an AAA administrator can be called upon to appoint a qualified mediator. After examining the mediator's credentials, the parties can make any objections to the AAA that they may have in regard to the appointment. Since it is essential that both parties have confidence in the mediator's fairness and impartiality, the AAA will replace any mediator not acceptable to either party.


Arbitration represents another way to resolve insurance claims. Arbitration clauses channel legal disputes into private arbitration rather than into court. In the United States, a significant number of commercial agreements contain arbitration clauses that are based on the procedures put forth by the AAA. For insurance cases, a wide range of arbitration systems are currently being used.

As in mediation, the parties submit their dispute to an impartial third party. However, unlike with mediation, arbitration is not voluntary; its aim is to obtain a decision, which is usually binding upon the parties. In fact, under to arbitration, select the category of arbitrator they desire, or make changes in the rules of procedure. Most arbitration awards are final and binding, but the parties can agree that the award will be advisory, or subject to review. And, as with mediation, arbitration allows the parties to resolve disputes without publicity or government intervention. Consequently, arbitration allows the industry to avoid bad public relations, which might be detrimental to the companies involved, or to the industry in general. both state and federal statutes, arbitration clauses are enforced in accordance with their terms; this means that if one party refuses to arbitrate, a court will order arbitration. This procedure requires a court action - exactly what the involved parties want to avoid. If a clause refers to the AAA rules, the procedure is self-executing. The AAA initiates the case without court intervention, placing the burden on the reluctant party.

An enforceable arbitration clause ensures that contractual claims can be resolved efficiently. Arbitration clauses require the parties to submit issues over the meaning or application of the policy or contract. This process encourages good faith negotiations, thereby exerting pressure upon the negotiators to reach a solution. However, if the parties cannot reach a settlement, the arbitrator will decide the case for them.

Administered arbitration provides an efficient system for obtaining a legally enforceable decision. Hearings are relatively informal. The parties can specify the issues being submitted


Arbitration procedures are simple to conduct. Hearings take place in a conference room, with the parties sitting on opposite sides of a table, and the arbitrator at one end. The parties' attorneys make their opening statements, followed by testimony, cross-examination and documentary proof. When the evidence has been presented to the arbitrator, the hearing is closed. Under AAA rules, the arbitrator has 30 days to render an award.

Arbitrators have broad authority under the law and its aim is to the rules of the AAA. An arbitrator can issue subpoenas, the palties." fix the date of hearings, grant postponements, or proceed with a hearing in the absence of a party who fails to appear after being notified. Ex parte awards are enforced as long as there is an agreement to arbitrate.

Although the arbitrator's authority is derived from the agreement of the parties, he or she must conform to the standards of arbitration law. These laws require arbitrators to attend all hearings, listen to all material evidence, and disdose any prior relationship with the parties. Throughout the procesS, the parties' attorneys may argue among themselves and object to certain evidence, but the arbitrator has the discretion to make the ultimate decisions in regard to the evidence. There is no appeal from such rulings.

Arbitrators are inclined to accept evidence that might not be allowed by judges. This does not mean that all evidence is given equal weight or that the arbitrator will not reject repetitious evidence; in fact, arbitrators can become impatient with repetition, or when the parties' attorneys make too many technical objections.

When the conflict involves a dispute over value, as is often the case in insurance arbitration, the parties can obtain additional protection in a variety of ways; For example, last offer arbitration - sometimes called baseball arbitration - limits the arbitrator, in the case of an insurance dispute, to selecting between the last demand of the claimant or the last offer of the insurance carrier. This encourages the parties to negotiate towards the true value of the claim. Since neither party wants the other's last offer to be selected by the arbitrator, these claims are usually settled quickly.

A similar result can be achieved by using hi-low arbitration. In this procedure, the parties agree to restrict the arbitrator to reaching an agreement that falls within a specified monetary framework. For example, the parties can agree that a particular award should fall somewhere between $20,000 and $60,000. The terms of the stipulation are not divulged to the arbitrator but are binding upon the parties. This protects the parties from any award that might fall outside the negotiated monetary limits. The last offer and hi-low methods are effective because they guard both parties against an occasional award that might fall outside the range of their expectations.

An arbitrator must provide a fair hearing by giving both parties an opportunity to present their cases. The AAA rules state: "The arbitrator shall be the judge of the relevancy and materiality of the evidence offered, and conformity to legal rules of evidence shall not be necessary."

The rules of the AAA provide for an efficiently administered arbitration procedure. Not only is the AAA familiar with local arbitrators, but it is prepared to carry out the other steps that often become necessary in a contested arbitration, such as deciding challenges, questions of the necessity for arbitration and locale. In casualty claims cases, arbitrators who are familiar with the nature of these claims can be selected. The insurance panel of the AAA contains hundreds of experienced trial attorneys that are screened by regional advisory committees comprising leading practitioners and claims managers.

Many corporate risk managers and insurers are taking advantage of the availability of experienced arbitrators. A panel assembled by the AAA is an excellent resource. Attorneys for both parties can ask the AAA to provide them with a list of names that contains biographical information about the arbitrators. A disclosure procedure indicates any conflicts the arbitrator has with the parties or their attorneys. Then, under AAA rules, the parties can, if they wish, challenge the appointment.

In addition, at the request of either party, the AAA will invite other parties to join in the process, attempting to bring them together. For example, an intercompany arbitration system was established by the American Insurance Association in the early 1960s, and is now administered by Arbitration Forums, a service organization in Tampa, Florida, that handles intercompany and third-party arbitration. It has taken many thousands of coverage issues out of the courts, to be resolved by panels of industry executives. Litigation has been almost abolished for these kinds of disputes, which involve the allocation of liability between carriers.

Arbitrators in the United States serve under an American Bar Association-AAA Code of Ethics. They must disclose any fact that might create an aura of bias. Under AAA administration, the disclosure procedure is mandatory, and the code is brought to the attention of the arbitrators. Finally, compensation of arbitrators is arranged by the AAA. The AAA administrator may make arrangements for a deposit for the fees. Generally, the parties share the fees.


In order to resolve claims without turning to litigation, insurers and corporate risk managers are increasingly resolving their business disputes through the use of negotiation skills and ADR techniques such as mediation and arbitration. Sometimes these approaches are established by state law. For example, in New York, a permanent panel of arbitrators serves under AAA administration in a system monitored by the New York Insurance Department.

In addition to the various private agencies providing ADR techniques, the courts offer their own ADR procedures. Many federal and state jurisdictions require parties to participate in arbitration or mediation procedures before earning the right to a trial de novo (or trial anew). However, these procedures do not constitute ADR techniques in the true sense of the term: They require a summary hearing before a panel of lawyers, who evaluate the claim. If one of the parties is not willing to settle, a trial can be obtained, often after a penalty fee has been paid. These court-administered evaluations, while not legally binding, frequently result in settlements.
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Author:Coulson, Robert
Publication:Risk Management
Date:Jan 1, 1993
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