An insurance coverage negotiation case study
Excerpts from and comments on The Mediation by attorney John J. Pappas from LexisNexis® Mealey’s™ Litigation Report Insurance Bad Faith Volume 23, Issue #16 · December 24, 2009
Backstory: the litigation subject of this case study was a first party policy coverage action seeking the policy’s $6 million policy limits plus interest, attorneys fees and costs for a total demand of $10.5 million. The offers and counters [with my commentary in italics] were as follows.
Demand: $10.5 million
Counter: $100,000
[The opening offer and counter are in the strato- and nanospheres. Neither the offer nor the counter is likely to exert an anchoring effect on the other party. Both parties rightly suspect that the other is posturing. See the Power of Framing and Anchors here]
Concession by Plaintiff: $10.25 million
[the Plaintiff continues bargaining in the stratosphere]
Concession by Carrier: Bracket: Carrier would put $250,000 on the table if Plaintiff would lower his demand to $2 million.
[the carrier tempts Plaintiff to abandon his high expectations (or abandon his posturing) by suggesting a bracket; the carrier thereby avoids putting any real number on the table in response to Plaintiff's small concession. though the $250,000 bottom range of the bracket likely has no anchoring effect, the suggestion that Plaintiff accept $2 million does]
Concession by Plaintiff: Bracket: Plaintiff would lower his demand to $6 million if Carrier would put $2 million on the table.
[plaintiff continues to bargain hard but shows weakness by using the carrier's suggested $2 million figure as the low end of the Plaintiff's proffered bracket. both parties are now circling the $2 million figure and are both being influenced by it]
Concession by Carrier: $1 million (abandoning bracketing).
[the carrier makes a significant move from $100,000 to $1 million, breaking the seven-figure barrier, offering one-sixth of the policy limits and signaling the possibility of getting close to the figure both parties are circling: $2 million]
Concession by Plaintiff: $4.5 million (abandoning bracketing).
[the plaintiff continues to maintain a relatively high level of aspiration for settlement, but nevertheless drops his demand significantly by moving from $10.25 million to $4.5 million, slightly more than two-thirds of the policy limits]
Concession by Carrier: $1.5 million
[the carrier continues to signal the potential that the case will settle in the range of $2 million by putting another $500,000 on the table, an insignificant move given the actual offers/counters but a strong signal that the "magic number" is $2 million]
Concession by Plaintiff: $4.25 million
[plaintiff is trying the carrier's patience by decreasing his demand by only $250,000, but probably rightly suspects that the carrier will not abandon the negotiation before putting at least $2 million on the table]
Concession by Carrier: “$1.9 million and this offer will stand for five days at which time it will automatically expire . . . $1.9 million but that is our bottom line number.”
[this is a dangerous practice for repeat players. the mediation privilege (in California at any rate) does not prevent a party to the mediation from sharing mediation communications; it only protects the parties from being forced to recount those communications in court or in an administrative or arbitral proceeding; nor will the settlement agreement, if one is concluded, likely prevent the parties from discussing negotiation strategy and tactics - only the amount for which the litigation settled. there is little to prevent insured's counsel from telling others that the carrier is bluffing when it asserts that it is putting its "bottom line" number on the table; most carriers solve this problem by asserting that the party representative has reached the end of his/her authority and must "make a telephone call" to obtain additional authority; true or not, it's better than blowing your bluff in the way it is blown here].
Concession by Plaintiff: “bottom line counteroffer . . . open for five days in the amount of $3 million.
[this is nearly as dangerous a practice for a plaintiff as it is for the carrier. although the party-plaintiff will not sue the same carrier again, plaintiff's attorneys will. there will be no reason for the carrier in future negotiations to believe the plaintiff's assertion that it has reached its "bottom line"]
The parties are now $1.1 million apart. The Plaintiff has moved from $10.5 million to $3 million — a decrease of $7.5 million. The carrier has moved from $100,000 to $1.9 million, an increase of $1.8 million. $3 million is half the policy limits and $1.9 million is one-third of the policy limits.
Then the following occurs (indented italics indicate the text of the Mealey’s article):
“Okay,” . . . said [defense counsel to the mediator] “go ahead and declare an impasse.”
Bob [the carrier's adjuster] then said, “Before you do, why don’t you ask the insured if he would be willing to sit down in a room with me for a few minutes — only with me — with no attorneys, no public adjusters, no one in a room but us to see if we can’t take this opportunity maybe to resolve this claim.”
[The mediator] said, “Okay, I’ll do that,” and then left the room to Bob [the adjuster] and I [defense counsel].
“Well, Bob, you think you can get him down to $2 million [the allegedly "real" bottom line]?” I asked.
“I don’t know, John, I don’t know, but it’s worth a try.”
Steve [the mediator] was back in ten minutes and said that the other side was willing to meet with Bob at which time Bob left the room with Steve. I began packing our bags.
Twenty minutes later Bob returned to my room and informed me with a big smile that the case had settled. Of course, I asked how much. He smiled and said more than you probably would like John. “I’m sure of that,” I replied. “But as long as you and the company are happy, I’m happy. How much?”
“$2.25 million.”
“Okay,” I said. “Are you satisfied with that resolution?”
“Yes, I think taking everything into consideration, it’s a good settlement from a business perspective.”
We then proceeded to work up the release papers with the other side and the mediator and I then drove Bob to the airport. As I drove Bob to the airport I could not resist commenting, “Well, I guess one thing is true.”
“What’s that John?”
“It was a fraudulent insurance claim. He was claiming more than $6 million on a $6 million policy but was willing to settle for $2.25 million — $3.75 million less than the limits of that policy. Seems to me that they knew all along it was an inflated insurance claim.”
Anchoring
The parties routinely divide the delta between offers in an attempt to forecast where the other side is headed based upon the truism that litigation will invariably settle half-way between the first two reasonable offers. What a reasonable offer is constitutes the art of this predictive “rule.” In this scenario, not knowing what the eventual settlement would be, I’d say the first reasonable carrier offer was $1 million and the first reasonable insured demand was $4.5 million, which would predict a settlement somewhere in the range of $2.75 million.
If $3 million is considered the first reasonable demand and $1 million the first reasonable offer, the predictable range of settlement would be $2 million. Had I been mediating this case, I would have predicted (to myself only) that the parties were heading toward $2 million as soon as the carrier made its first conditional concession – the bracket – which included the $2 million number.
Brackets
Most mediators and litigators say that “brackets don’t work” even though they routinely fly them up the flag pole. It is true that the parties often abandon brackets when it appears that neither the first bracket offered nor the first bracketed counter would be acceptable to either party. As you can see from this example, however, the parties’ brackets strongly signaled their willingness to settle in the $2 million range. I would not conclude that these brackets “failed.” Rather, they were simply two of the steps taken toward agreement. Note that in having suggested a bracket in which the Carrier commenced future negotiations at $2 million, Plaintiff was highly unlikely to accept $2 million to settle the case. Never underestimate the power and burden of face saving. The case could perhaps have been settled for any number over $2 million ($2.1 for instance) but not at two.
The Number and Size of Concessions
Many bargaining truisms exist concerning the number and size of concessions made by the parties. The social scientists who study these things tell us that people tend to be more satisfied with the outcome of negotiations where the other side makes numerous concessions even if they are small or inconsequential (see Outcome Satisfaction in Negotiation here). Large concessions also tend to increase party satisfaction (see Making the First Offer here). Here, counsel for the carrier leaves his client with the observation that the carrier was “right” all along about the fraudulence of the claim based upon the size of plaintiff’s concession
It was a fraudulent insurance claim. He was claiming more than $6 million on a $6 million policy but was willing to settle for $2.25 million — $3.75 million less than the limits of that policy. Seems to me that they knew all along it was an inflated insurance claim.
“Winning”
This last quoted comment – the way in which litigation counsel frames the settlement as probative of the merit of the carrier’s defense – provides a particularly important lesson for counsel; commercial clients; and, mediators. Litigation and trial counsel have one goal and one goal only. They pursue that goal with fervor, intelligence, insight, experience, hard work, and sleepless nights. They are paid to win. They are not engaged to settle the case even if they and their clients know the case will likely be settled. A settlement that doesn’t feel like victory is a failure for litigation and trial attorneys. It is also a failure for the mediator.
I do not want any of my readers to think that “spinning” a settlement as victory is disingenuous. First, to obtain a settlement such as the one examined here is a victory. The $10.5 million may have been an unreasonable opening demand, but it was the amount lost by the Plaintiff ($6 million in losses + interest + costs + attorneys’ fees). Whether or not there was coverage for the $6 million in losses is the only issue to be resolved thumbs up or thumbs down by a jury for whom policy language is going to be more mysterious than it is to the Court, and coverage counsel know that the Court’s ability to interpret policy terms ain’t so great itself.
The account does indicate that the carrier had recently lost a summary judgment motion, undermining its claim that the demand for coverage was fraudulent (a bit of over-reaching that you can see in the full text of the article makes the case more difficult to settle than it would have been had the carrier simply claimed the loss wasn’t covered). The adjuster may well have felt that paying 1/3rd of the policy limits was a victory in light of the recent purely legal defeat and there’s little doubt in my mind that the summary judgment victory emboldened the Plaintiff to keep his demands high in the early part of the negotiations. We don’t know how fair or unfair the Plaintiff believed the settlement to be, but I’ve little doubt that Plaintiff’s attorney ascribed the considerable concessions made by the carrier as resulting from his skill in defeating the carrier’s motion for summary judgment.
An astute mediator will take every opportunity to help the client understand that the settlement represents a victory for each side based upon each side’s attorney’s ability to posture the case in such a way that a resolution acceptable to both parties could be reached. In my five years of experience as a full-time mediator, there have only been a handful of instances where I formed the opinion that one side was ‘getting the better’ of the other side based upon competent lawyering skills on one side and incompetence on the other. I may be disrespectful of the Bench from time to time, but I’m rarely disrespectful of the practicing Bar, who do an extraordinarily difficult job with great devotion and effort.
I invite comments from mediators, litigators and clients who may view the dynamics of this negotiation case study differently than I have. There’s no right answer. That’s why it’s an art.
Further insights for policyholders and their counsel can be found at John DeGroote’s Settlement Perspectives (Insurance Coverage: Ten Tips and Four Rules for Policyholders) and my husband Stephen Goldberg’s Catastrophic Insurance Coverage Blog (Mediating an Insurance Coverage Dispute). My husband’s partner, Scott Godes, also has great policyholder advice at the Corporate Insurance Coverage Blog.
This is a very real fact pattern. I don’t understand though why experienced attorneys would resort to the game playing. Attorneys should avoid tit-for-tat responses. They are juvenile responses to serious negotiations.
I agree that you can usually tell where the other party is headed after awhile. But I always assumed that the other side could tell where I was headed. The mediator did not seem very effective, or the parties were not listening to the mediator. Mediators, in my experience, do not want to convey useless and counter-productive offers back and forth.
In a recent case – that settled – the offer we received was so out of line that it almost stopped the negotiations. There was no place to go even with a meaningful counteroffer. Even the mediator told me that he told the other side that the offer was a big mistake. That offer, and some later offers, delayed a settlement and almost killed the negotiations. We finally got to a place we thought was fair, but that was a good example of the initial offer (or counter offer) being in the stratosphere and almost killing the effort. Your case study was similar with the two offers designed to avoid hard bargaining.
Gavin Craig
Exactly, what’s the point? I know you don’t want to go in with your best offer, but so far from the ball park only makes me want to take the client and leave. Sometimes, just getting to a negotiation is a victory without trying to play games. Then again, it seems that all of my mediations really catch steam around 4 PM, I just don’t know why that is (aside from the fact that the posturing is over and the venting has been done by then)
Thanks for dropping by to comment Chris and Gavin. I wish I didn’t see as much of this negotiation “strategy” between litigants and their attorneys as I do. I have a few suspicions about why so many litigators negotiate in this fashion, as well as some ways in which I help the lawyers and their clients proceed in a more reasonable fashion.
First is blind hope coupled with inadequate negotiation skills and fear of losing the opportunity to cash in (or out) on an opponent’s incompetence.
“What if I don’t ask for the heavens and all of their stars? The defendant might be willing to give it to me. By making a “reasonable” opening offer (one I believe truly reflects something close to the actual value of this case) I may be squandering my opportunity to score big (or small) here.”
Second is the belief that making an opening offer within a light-year’s distance of a possible resolution, the lawyer and his client are not demonstrating their commitment to try the case unless something close to their original demand is put on the table. By the time the client arrives at a mediation, he’s expended tens to hundreds of thousands of dollars in attorneys’ fees that are likely unrecoverable. The client therefore often believes his pre-litigation demand should be increased, not decreased, despite the fact that his case has not gotten significantly better (and often has gotten much worse) than when he brought the dispute all shiny and new and uncontradicted to his attorney years before.
Third is the attorney’s lack of client control. I cannot tell you how often I’ve mediated cases where the client representative and his counsel met for the first time only a few days earlier. The attorney has generally been “spinning” interim defeats as injustices at the hands of incompetent judges and interpreting most negative information gleaned during the course of discovery in such a way that it actually supports, rather than undermines, the client’s position. Many attorneys are either incapable of delivering bad news to the client in a way the client can hear it and many clients see an attorney’s attempts to explain the weaknesses of their case as acts of betrayal.
In any event, both sides are generally hoping that the mediator will do his or her job skillfully. That job includes helping the clients understand that victory is uncertain and its continued pursuit an exercise in throwing good money after bad. Think Vietnam war. Think quagmire. Think sunk costs. Think the unquenchable thirst for justice.
I personally believe attorney-mediators are generally better at this latter task than most judges. We understand what the attorney is up against. We understand the delicacy of his or her relationship with the client. We viscerally “get” the way a case can suddenly go south, often because of client revelations somewhat shockingly revealed in deposition or by the extremely late delivery of documents the client “forgot” he had stored in the garage. Former practicing lawyers are, I find, also GENERALLY better at helping the clients change their own minds rather than bullying them into accepting the opinion of a retired Judge who’s known about the facts and law of the case for a sliver of the time the client and his attorney have been living it.
As to opening offer posturing, I do make a big effort to discourage the practice. Everyone needs to understand, however, that the client is angry, as is his attorney even in “non-emotional” commercial cases with corporate clients – the client particularly so because he or she has been prevented by the adversarial process from telling his or her full story of injustice because so many elements of it are “irrelevant” to the lawsuit.
I imagine that the (nearly entirely absent) mediator in this case was working with both sides in an effort to bring the closer to reality. You don’t “see” or “hear” the mediator in this hypothetical because the tale is being told from the point of view of defense counsel. If I cannot help the Plaintiff understand that a reasonable opening offer is more likely to influence his opponent (“anchor” the negotiation in his favor) than an outrageous opening demand, I deliver that number in a way that will go down as easily as possible. “It’s an OPENING offer; not a realistic demand that the case settle for that number or anywhere in its vicinity.” “It’s the way in which the Plaintiff is expressing his anger and frustration about the last three years of litigation with his carrier and yes, the insured REALLY DOES believe the policy covers this loss and REALLY DOESN’T understand the fine points of insurance coverage law and policy interpretation. If you’ll have a little patience, I believe we’ll eventually get within the realm of reason.”
It’s very hard for a defendant to respond to a stratospheric demand with a reasonable offer. I’m certain I don’t have to explain that to any practicing litigators. Tit for tat is, by the way, the most successful means of obtaining cooperation from your negotiation partner. If they begin uncooperatively, you cannot proceed cooperatively without risking entering a spiral of victimization. You must retaliate, that is, slap your bargaining partner on the wrist for being so unreasonable, hoping that your retaliatory action will bring him or her into the proper state of mind. (“two can play this game”; “if you want to waste your time and mine in this manner, that’s fine with me but I’m not going to negotiate like this for very long so I expect to see a reasonable demand pretty soon or I’m out of here” etc., etc.) Once you’ve retaliated AND your partner has brought himself into the realm of reason, you must then quickly forgive and cooperate in response. It would be nice to be able to say, “oh can’t we avoid this stupid process and just BEGIN with reason,” but this method of negotiation is more or less hard-wired into us from an evolutionary stand-point.
So don’t expect negotiations to get significantly easier or less frustrating anytime soon. This, by the way, IS why mediators exist – to keep the parties in the room and, if the mediator is EXTREMELY SKILLFUL, to convince the litigants that having an actual reasonable conversation with one another about needs and constraints is often not simply helpful, but necessary for resolution. And any mediator who cannot conduct a joint session that doesn’t wheel out of control hasn’t done his or her homework.
I’m rambling. I can stop rambling along like this once my book is published in 2010 by just sending you both copies!
Best for as frustration-free a set of settlement negotiations in 2010 as possible,
Vickie
(did I say you really ought to hire me? I was a terrific litigator but am an inspired mediator if I do say so myself)
Thanks for dropping by to comment Chris and Gavin. I wish I didn’t see as much of this negotiation “strategy” between litigants and their attorneys as I do. I have a few suspicions about why so many litigators negotiate in this fashion, as well as some ways in which I help the lawyers and their clients proceed in a more reasonable fashion.
First is blind hope coupled with inadequate negotiation skills and fear of losing the opportunity to cash in (or out) on an opponent’s incompetence.
“What if I don’t ask for the heavens and all of their stars? The defendant might be willing to give it to me. By making a “reasonable” opening offer (one I believe truly reflects something close to the actual value of this case) I may be squandering my opportunity to score big (or small) here.”
Second is the belief that by making an opening demand or counter within a light-year’s distance of possible resolution, the lawyer and his client are not demonstrating their commitment to try the case unless something close to their original demand or last counter is put on the table. By the time the client arrives at a mediation, he’s expended tens to hundreds of thousands of dollars in attorneys’ fees that are likely unrecoverable. The client therefore often believes his pre-litigation demand should be increased, not decreased, despite the fact that his case has not gotten significantly better (and often has gotten much worse) since the time he brought the dispute all shiny and new and uncontradicted to his attorney years earlier.
Third is the attorney’s lack of client control. I cannot tell you how often I’ve mediated cases where the client representative and his counsel met for the first time only a few days earlier. The attorney has generally been “spinning” interim defeats as injustices at the hands of incompetent judges and interpreting most negative information gleaned during the course of discovery in such a way that it actually supports, rather than undermines, the client’s position. Many attorneys are either incapable of delivering bad news to the client in a way the client can hear it and many clients see an attorney’s attempts to explain the weaknesses of their case as acts of betrayal.
In any event, both sides are generally hoping that the mediator will do his or her job skillfully. That job includes helping the clients understand that victory is uncertain and its continued pursuit an exercise in throwing good money after bad. Think Vietnam war. Think quagmire. Think sunk costs. Think the unquenchable thirst for justice.
I personally believe attorney-mediators are generally better at this latter task than most judges. We understand what the attorney is up against. We understand the delicacy of his or her relationship with the client. We viscerally “get” the way a case can suddenly go south, often because of client revelations somewhat shockingly revealed in deposition or by the extremely late delivery of documents the client “forgot” he had stored in the garage. Former practicing lawyers are, I find, also GENERALLY better at helping the clients change their own minds rather than bullying them into accepting the opinion of an “authority” who’s known about the facts and law of the case for a sliver of the time the client and his attorney have been living it.
As to opening offer posturing, I do make a big effort to discourage the practice. Everyone needs to understand, however, that the client is angry, as is his attorney, even in “non-emotional” commercial cases with corporate clients – the client particularly so because he or she has been prevented by the adversarial process from telling his or her full story of injustice because so many elements of it are “irrelevant” to the lawsuit but remain relevant to the dispute itself.
I imagine that the (nearly entirely absent) mediator in this case was working with both sides in an effort to bring them closer to reality. You don’t “see” or “hear” the mediator in this hypothetical because the tale is being told from the point of view of defense counsel. If I cannot help the Plaintiff understand that a reasonable opening offer is more likely to influence his opponent (“anchor” the negotiation in his favor) than an outrageous opening demand, I deliver that number in a way that will go down as easily as possible. “It’s an OPENING offer; not a realistic demand that the case settle for that number or anywhere in its vicinity.” “It’s the way in which the Plaintiff is expressing his anger and frustration about the last three years of litigation with his carrier and yes, the insured REALLY DOES believe the policy covers this loss and REALLY DOESN’T understand the fine points of insurance coverage law and policy interpretation. If you’ll have a little patience, I believe we’ll eventually get within the realm of reason.”
I’ve even said – to a client or attorney I believe will step up to the line of reason (which is almost always the point of impasse) – “someone has to be the first to step up to the line of impasse and I think you’re the guy (usually they’re men in my practice) with the cojones to do it.” People DO rise to the occasion.
Tit for tat is, by the way, the most successful means of obtaining cooperation from your negotiation partner. If they begin uncooperatively, you cannot proceed cooperatively without risking entering a spiral of victimization. You must retaliate, that is, slap your bargaining partner on the wrist for being so unreasonable, hoping that your retaliatory action will bring him or her into the proper state of mind. (“two can play this game”; “if you want to waste your time and mine in this manner, that’s fine with me but I’m not going to negotiate like this for very long so I expect to see a reasonable demand pretty soon or I’m out of here” etc., etc.) Once you’ve retaliated AND your partner has brought himself into the realm of reason, you must then quickly forgive and cooperate in response. It would be nice to be able to say, “oh can’t we avoid this stupid process and just BEGIN with reason,” but this method of negotiation is more or less hard-wired into us from an evolutionary stand-point.
So don’t expect negotiations to get significantly easier or less frustrating anytime soon. This, by the way, IS why mediators exist – to keep the parties in the room and, if the mediator is EXTREMELY SKILLFUL, to convince the litigants that having an actual reasonable conversation with one another about needs and constraints is often not simply helpful, but necessary for resolution. And any mediator who cannot conduct a joint session that doesn’t wheel out of control hasn’t done his or her homework.
I’m rambling. I can stop rambling along like this once my book is published in 2010 by just sending you both copies!
Best for as frustration-free a set of settlement negotiations in 2010 as possible,
Vickie
(did I say you really ought to hire me? I was a terrific litigator but am an inspired mediator if I do say so myself)
Great thoughts again Vickie. I think some of the issue is that many mediations may occur too early in the process (i. e. before any discovery has completed) so all of the warts have not shown themselves to the clients or even their lawyers. I know it surprises you, but sometimes clients (whether intentionally or not) don’t follow the “give your lawyer everything” advice.
A good mediator (and I know you are one, though I haven’t had the privilege of using your services) will get this under control.
Thanks for the book offer.
Happy New Year.
Thanks Chris – No it doesn’t surprise me at all that clients don’t tell their lawyers everything – even that they lie to counsel who learns the truth when his client is on the witness stand (happened to me first trial first year of practice). And yes, mediations need to be timed right as well – sometimes at the point when the client’s pain is so great it crashes thru his belief that litigation will make him whole and the process will find his cause just.
In other words, 2 weeks before trial!
Have a great New Year!
The case study provides an excellent example of why I hestitate to term the process described as being “mediation.” I view this process as being a settlement conference: it’s primarily about distributive gamesmanship. The communication is guarded and everyone’s cards are held tight to the chest. There is no evidence of any exploration of interests. The process remains solely focused on the surface issue (money).
Some (okay, probably most!) attorneys would roll their eyes and dismiss my take on this as being naive and unrealistic. Perhaps they’re right. Yet, even at the most basic level, as a mediator, I’d appreciate it if more attorneys actually communicated with their clients about interests. Without such communication, the door to creative, integrative solutions remains closed.
Also on the subject of communication between attorneys and their clients: if I were a client, I would much prefer an attorney who is straightforward and realistic about the risks associated with my case. Clearly, trust between an attorney and a client is crucial – when attorneys posture, justify adverse decisions, etc. they risk eroding (or obliterating) their client’s trust in the attorney’s motives, judgment, and competence.
Sorry to take this discussion in a somewhat different direction – I seem to have a weird talent for that!
Take care.
Debra Healy
agree2agree
Healy Conflict Management Services