Global Mediation of Tort and Insurance Coverage Cases

The so-called "tripartite relationship" arises when a liability insurance company retains an attorney to defend its insured in tort litigation. For the most part, the three members of the relationship (insurance company, defendant and defense attorney) are able to present a united front against the plaintiff or plaintiffs who brought suit. In such cases the defense attorney has no conflict representing both insurer and insured simultaneously; whatever differences there may be between the insurer and insured are not likely to complicate settlement discussions. The risks associated with not settling are limited to the traditional ones revolving around tort liability and damages.

A new set of risks is thrown into the mix when a tort lawsuit raises questions of coverage; e.g., do the facts of the case give rise to a duty under the insurance contract to indemnify and/or defend the insured? Unless the facts are fairly straightforward and clearly show that the policy does not afford coverage, most companies will not deny coverage unconditionally, but will instead pay for a defense, thereby keeping some control over the litigation, while reserving all rights to deny coverage later on.

While defending a tort action, a company will often retain separate counsel and bring another lawsuit (usually a declaratory judgment action) against its own insured to determine coverage issues. The plaintiff in the underlying tort case may be joined as a party in that action and will thus be bound by the court’s decision.

In such cases, the question arises: "Do we mediate before or after a decision on coverage?" The answer usually is: "It depends." Of course, if mediation comes before coverage issues are decided, the insurer(s), with separate coverage counsel, would have to participate for the process to have any chance of success.

I have heard some involved in such cases say: "There is no point in mediating the tort case until the coverage case is decided." But settlement of tort cases is almost always driven by uncertainty and risk. People and companies settle to avoid risk and uncertainty; therefore, the more uncertainty and risk, one can argue, the more mediation is likely to be successful.

Settlement usually happens when the parties come to grips with reality. If one of the realities is that there might not be any money available to the plaintiff, even if victorious, that is just another risk to be analyzed. Waiting until the coverage issue is decided might make the plaintiff’s case more valuable — or it might not. The effect is similar to that posed by a pending motion for summary judgment in the underlying tort case. Mediation often has a better chance of resulting in settlement if all parties in both cases come to the table before any of the coverage unknowns are decided.

On the other hand, in some cases the coverage questions are so complex — multiple companies, extended periods of exposure, different policy language, choice of law questions, etc. — that settlement is impossible (or extremely unlikely) until some or all of these issues are sorted out. For example, if because of all the unknowns the insurance company (or companies) will commit to paying so little money that the plaintiff feels that there is little to lose by not settling, it is probably best to structure the mediation to allow for advance clarification of some of the coverage issues.