The COVID 19 pandemic has radically altered the insurance claims and underwriting environment and has resulted in more than 1,500 insurance coverage litigations. In the third of three essays on lessons for risk management professionals, Peter A. Halprin, our guest columnist and a Partner at Pasich LLP, discusses mediation as a risk mitigation tool for risk management professionals.
At the time, having recently led clients through various alternative dispute resolution provisions in their insurance policies, I was struck by the fact that these provisions often appeared (or did not appear) in insurance policies with little forethought. Appearing in the “Conditions” sections of insurance policies, these provisions were viewed as fixed parts of the policies. There is no reason to fault risk managers for thinking this way. After all, they are often primarily focused on the limits, retentions, and coverages available under a program. As such, and hopeful about the prospect of coverage when a claim arises, risk management professionals may not be thinking about what happens when a claim is disputed.
Dispute Resolution Mechanisms
As such, the Philadelphia RIMS program began with a review of three key dispute resolution mechanisms – negotiation, mediation, and arbitration. I was struck by how many in the audience needed appreciated beginning with a discussion of the meaning of these terms. Given that, short descriptions of these mechanisms (I came up with these definitions of the mechanisms in “Arbitrating Insurance Coverage Disputes and the New ARIAS Rules,” Risk Management Magazine (Feb. 20, 2020)) are described below as follows:
Negotiation. Negotiation can take many forms. When found in an insurance policy, there is generally a requirement that the negotiation be undertaken in good faith. A third-party neutral is typically not involved as negotiation generally involves senior executive officers of the two parties (e.g., the vice president of claims for an insurance company and the head of risk management for the insured).
Negotiation provisions, as with some mediation clauses, may include a “cooling-off period” whereby the parties are barred, for example, from filing suit until a set period of time has passed. Cooling-off periods are designed to permit the parties to reconsider their positions before moving ahead with an escalation of the dispute.
Mediation. Mediation is a meeting among disputants, their representatives, and a mediator to discuss settlement. In distinguishing it from arbitration, it is important to note that mediation involves a neutral who is generally there to facilitate the parties’ resolution of their dispute. It is not typically binding. Parties can walk away from mediation if they do not like the deal that is being offered.
Arbitration. According to the American Arbitration Association, arbitration is “a creature of contract; it involves one or more impartial persons to adjudicate the dispute; it is generally binding, and; it is generally private and confidential.”
While insureds have traditionally preferred litigation to arbitration, the above characteristics may explain why arbitration is suitable for resolving insurance disputes in particular cases, such as a cyber insurance dispute, where confidentiality may trump other process concerns.
Multistep Provisions. Multistep provisions generally involve some combination of the above. For example, a three-part multistep clause might require the parties to first negotiate in good faith. Then, if negotiations fail, mediate, and then, if mediation fails, proceed with arbitration or litigation.
Mediating COVID Business Interruption Claims
Returning to the more than 1,500 pandemic insurance lawsuits in the United States, as of April 11, 2021, the Covid Coverage Litigation Tracker has more than 300 decisions in its database (Covid Coverage Litigation Tracker).
As I wrote in a recent article in the New York Law Journal, I believe it is time to consider mediating these disputes.
(Peter Halprin, Andrew Nadolna, and Rebekah Ratliff, “Isn’t It Time to Consider Mediating COVID-19 Business Interruption Insurance Claims,” New York Law Journal (March 12, 2021). The primary reasons are as follows:
- There is considerable uncertainty. Insurers had considerable success in the early going, particularly in federal court, on policies with virus exclusions. Insureds, on the other hand, seem to be fairing better in those cases in state court where policies do not include virus exclusions. But given that insurance is a matter of state law, and these cases are in different procedural postures in different states (and that federal appellate courts might certify state law questions to state high courts), we should expect a flurry of appellate rulings over the next twelve months and beyond.
- Even appellate rulings may not satisfactorily resolve the issues. Because the first slate of appellate rulings will likely – sequentially – involve the first filed cases, they may involve different allegations and issues than the cases that were recently filed by large companies with significant business interruption losses. (Shawn Rice, “Big Businesses Step Into Pandemic Insurance Coverage Fight,” Law360 (April 5, 2021) (“Science and specificity are likely to take center stage in pandemic-related insurance litigation…”).
- The stakes remain high. Because the risk to both sides of a significant financial impact remains from a ruling one way or another, but particularly for carriers given their systemic risk, leaving this to the courts involves too much uncertainty. Moreover, for many insureds, some money now is worth far more than winning it all later when – presumably – the company will have recovered from the pandemic. Likewise, for carriers to limit their exposure and solidify their financial positions, it makes sense to consider negotiations.
Unfortunately, however, it appears that carriers are generally opposed to mediation at this time. From speaking with industry insiders, the general opposition amongst carriers appears to be rooted in three strains of thought: (1) choosing litigation as a primary claims avoidance strategy, paired with early successes in litigation; (2) inability to deal with individual claims on their own merit given the sheer number of claims against them; and (3) concern about being seen as “caving” or the word getting out about such.
And, because mediation is a creature of contract, insurers cannot be compelled to mediate disputes absent specific policy language or a court order. (During Superstorm Sandy, courts often required parties to mediate as part of their standing orders and case management plans.)
While even a mediation or negotiation provision in an insurance policy is not guaranteed to result in the parties resolving a dispute, the requirement to do so can push parties to resolve their disputes. And, even if they do not resolve disputes at mediation, the mediation process can put the parties on a path to settlement by narrowing the scope of the dispute (or issues in dispute).
For risk management professionals, the main takeaway here is to try to be cognizant of what might happen if a claim is denied. If a claim is denied, what is the organizational priority? Would the company prefer a longer process involving a multistep dispute resolution provision, with multiple resolution offramps? Does the organization want to have the right to sue? Or is it important to find a middle ground with a provision that provides for mediation, for example, at the insured’s option?
Once a dispute arises, if the desired dispute resolution mechanism is not in the policy, it may be hard to get an insurer to voluntarily agree to proceed with mediation or arbitration. As such, risk management professionals should work with their legal teams to decide how they would want to handle a dispute when procuring a policy, as it may be challenging to do so after the fact.