Coverage Mediation: When & How

By Lane Finch

Tort claimants and their attorneys sometimes come to mediation with unrealistic expectations about the availability of insurance coverage to pay their claim. They often just focus on the liability issues and their damages; that focus may not be enough. There may be limits on what the defendant can offer in response to the claimant’s liability and damage claims because of coverage defenses that impact how much the defendant’s insurer is willing to pay. Sometimes these coverage issues are significant enough that the claimant and the insured must consider the possibility there may be no insurance money available to satisfy a judgment.

Litigants should seriously assess the potential impact of coverage defenses before they agree on a mediator and even before they agree how they will mediate their case. An experienced coverage mediator can increase the odds the claimant-side understands the coverage limitations and the insurer-side understands potential shortcomings in its coverage defenses.

Somethings are obvious. For example, in a declaratory action concerning the duty to defend or in a matter asserting bad faith, the need for a mediator who understands insurance coverage is obvious. What about in a case involving multiple fatalities allegedly caused by construction defects? Such a case may involve multiple insurers covering different risks (from general liability to professional liability) and multiple layers of coverage with differing policy terms and exclusions. Although not initially obvious, once the coverage issues impede settlement of the wrongful death claims, you may recognize the need for a separate mediation of the coverage issues before or concurrently with the mediation of the tort claims.

Sequential mediations can help the parties resolve coverage problems before tackling resolution of the tort claim. The coverage mediation can determine how much insurance money is available to settle the tort claim. It can also allow the insurers and the insured to agree on what coverage limits will be available for resolution of the underlying claim. Thus, a coverage mediation can define the “pot” available for the next mediation which will address the tort claims.

The coverage mediation can also help multiple insurers define their relationships with each other. They can explore and decide which primary policies will provide coverage and which ones are willing to pay limits. That, in turn, can lead to agreement on which excess policies are in play. The parties can then explore and agree on coverage limits available from the excess carriers. The coverage mediation lays the foundation to then mediate the underlying claim.

Mediating coverage issues first can improve the efficiency of the tort mediation and increase the likelihood of success of that mediation. However, the insurers will need to remain involved in the tort mediation because those negotiations may evolve in ways that change the exposure faced by different insurers. That possible evolution may suggest concurrent mediation of coverage and tort claims is preferable.

Concurrent mediation of tort and coverage claims offers to kill two birds with one stone. It allows the tort claimants, and their attorneys, a more in-depth understanding of the coverage issues and impediments. That may lead those stakeholders to better understand why they may not receive settlement offers consistent with what they consider to be the “full value” of their claims. This additional knowledge allows them to factor in the possible lack of coverage or limitations on the amount of insurance money available. Through concurrent mediation the insurers may gain a better perspective on the tort claims which persuades them of the benefit of settling at mediation as opposed to trying to prove their coverage position to a judge or jury.

However, concurrent mediation can also create frustrating delays. The tort claimants may become impatient while waiting for the defendants and their insurers to hash out coverage issues, including contributions by various insurers. In the other room, the insurers can also lose patience during protracted negotiations with the tort claimants.

Some of the inefficiencies and problems associated with concurrent mediation may be alleviated by using a two-mediator team. One mediator can focus on resolution of the tort claim. Simultaneously, the other mediator can be working towards achieving consensus on the coverage issues. The two mediators can also work together to resolve tort issues impacting coverage, and vice versa.

Engaging a mediator with extensive coverage knowledge and practical experience is essential. Whether you decide on sequential or concurrent mediation of a tort claim where there are significant coverage defenses, inter-insurer conflicts, or other insurance-related issues, having a mediator who knows how to resolve coverage issues may determine whether the parties can resolve the underlying claims.