Insurance Coverage Litigation: What Is the Role of Mediation?
December 2005
It's the case of the year! Travelers Casualty and Surety Company v. Superior Court,
126 Cal. App. 4th 1131 (2005), examines the roles of mediation and mediators
in insurance coverage litigation, determines three important issues, and gets
it right.
by Jeff
Kichaven
Jeff Kichaven,
A Professional Corporation
Those roles are in one regard restrained, in another regard expanded, and
in a third regard clarified. With this guidance, mediators will be able to do
their jobs better. Not only insurers, but also policyholders and third-party
plaintiffs will find mediation increasingly valuable as a result.
Travelers Casualty arises out of the alleged
child sexual abuse litigation against the Catholic Church that has so roiled
our society in general—and the Los Angeles Superior Court in particular. Specifically, Travelers Casualty arises out of some 90 cases
of alleged child sexual abuse known collectively as "Clergy
Cases I." These cases and others like them, because of their number,
complexity, and societal significance, pose daunting challenges to the Los Angeles
Superior Court, and the court has gone to great lengths to get them settled
rather than tried.
In July 2003, Judge Peter D. Litchman was appointed as Settlement Judge.
Judge Litchman is widely regarded by the bar as one of the smartest and fairest
members of the bench. Yet, in Travelers Casualty,
the court severely criticized the core elements of his settlement process, and
restrained him in significant ways.
By Definition, Mediators Do Not Have Fact-Finding Powers and Cannot Issue
Coercive Orders
The court described Judge Litchman's errant process as follows:
- On April 30, 2004, Judge Litchman issued an order for the parties and
the insurers to participate in a "Valuation Hearing," after which the Court
would "render findings reflecting its determination of (i) the verdict potential
of the sexual abuse cases if they were to proceed [to a jury trial], and
(ii) the reasonable settlement value of such cases." According to the April
30 order, those findings were "intended to constitute an independent adjudication
of liability and damages, based on an actual trial as that standard has
been construed in California, and may be used by the parties or judicial
officers in subsequent proceedings only to the extent lawfully permissible
and for whatever legal relevance they may have." Judge Litchman felt this
method … was warranted by the parties' inability to reach a settlement.
126 Cal. App. 4th at 1135-36.
And, the court had no difficulty ruling, at the very outset of its opinion:
- Petitioners (Travelers Casualty and others) are the Church's liability
insurers. They seek to vacate a written order by a settlement judge purporting
to: (1) determine the good faith settlement value of the cases; (2) preclude
the insurers from declaring a forfeiture of coverage should the Church settle
without their consent; and (3) provide evidence of the insurers' bad faith
for future use. As set forth below, we grant the petition because the settlement
judge exceeded his authority by making factual findings and otherwise preparing
a coercive order in violation of the fundamental principles governing mediation
proceedings.
126 Cal. App. 4th at 1135.
Critical to this is the court's recognition of the statutory constraints
on the role of a mediator. Based on the California Evidence Code, the court
observed that:
- Although mediation takes many forms and has been defined in many ways,
it is essentially a process where a neutral third person who has no authoritative
decision-making power intervenes in a dispute to help the parties reach
their own mutually acceptable agreement.
126 Cal. App. 4th at 1138-39.
There was no doubt that all participants in Judge Litchman's settlement process
considered it to be a "mediation" and Judge Litchman to be a "mediator." Id. at 1139, n.8.
Judge Litchman crafted this process to put pressure on the insurers to finance
a settlement that the insurers did not, for whatever reasons, want to make.
Apparently, the Church wanted to settle with the plaintiffs without their insurers'
consent, with a covenant that the plaintiffs would not seek collection from
the Church's assets, but rather solely from its insurers. Such an agreement,
however, would have resulted in a forfeiture of the Church's coverage under
the No-Voluntary-Payments provisions of its policies. Id. at 1141.
The forfeiture would not result, though, if an "actual trial" to determine
the Church's liability had preceded the settlement. As the court observed:
- [T]he ("actual trial") rule demands proof of an insured defendant's
liability to a third party plaintiff through some form of independent fact-finding
determination as a prerequisite to holding the defendant's insurance liable
to either the insured or the third party for benefits under the policy.
A variation of the rule was applied in Hamilton
v. Maryland Casualty Co., (2002) 27 Cal. 4th 718, 725-726 … where
the court held that an insurance company defending its insured cannot beheld
liable on the policy where the insured settles without the insurer's participation
or consent and without the benefit of an actual trial to determine its,
and thus the insurer's, actual liability."
Id. at 1136, n.3.
The court found that Judge Litchman expressly intended his settlement process—although
a mediation—also to be an "actual trial" with serious legal and practical implications
for Travelers Casualty:
- By ordering that his settlement valuation constituted an actual trial
for purposes of precluding a declaration of coverage forfeiture by the insurers,
Judge Litchman purported to make binding factual determinations. He also
ruled that the Valuation Order could be used as evidentiary fodder for any
future bad faith claim by the Church against the insurers. Finally, the
order stated that it would become available to the parties for use in open
court within 60 days, unless barred by this court. The net effect of these
provisions was two-fold: First, they purported to cut off the insurers'
rights to declare a coverage forfeiture in the event of an unauthorized
settlement; second they dangled over the insurers' heads the threat of a
bad faith action that was already fortified with the weight of a judge's
findings. This left the insurers backed into a corner where the easiest
way out would be to withdraw their reservation of rights and pay money to
settle the cases.
Id. at 1142.
It was obvious to the court that "the Valuation Order's factual findings
and future use provisions were coercive" and "(a)s a result, the court abandoned
its designated role as a neutral facilitator without decision making authority." Id. The Valuation Order was therefore vacated.
The role of the mediator is constrained. No fact-finding. No actual trials.
While at first this may appear to be a victory for insurers over policyholders,
that view would be too narrow. It is just as easy to envision a settlement-driven
judge using a "Valuation Process" of this type when she believes that the barrier
to settlement is a "greedy plaintiff" or an "aggressive policyholder," rather
than "stubborn carriers." Travelers Casualty protects carriers, policyholders,
and third-party plaintiffs alike from improper processes. It is a victory for
the integrity of both trials and mediations.
Trials are supposed to be conducted by rules of evidence, civil procedure,
and substantive law in order to guarantee fairness of results from an objective
point of view. Judge Litchman did not conduct the Valuation Hearing by those
rules. The Valuation Order did not deserve to be treated as the result of an
"actual trial" because it was not the result of an actual trial. Mediation is
a flexible process and provides results—whether they are settlements or not—that
are best in the subjective views of the participants at the time. When serving
as a mediator, Judge Litchman did not have the right to adjudicate anything
for or against anyone.
By keeping the demarcation between trials and mediations clear, the court
imposed a healthy constraint. Mediators can't adjudicate. This is completely
consistent with mediation's paramount value, self-determination. This self-determination
is at the heart of mediation's appeal to sophisticated litigants. Now free of
the fear that mediators will overreach and purport to impose adjudicative fact-findings
or other coercive orders, sophisticated litigants should now find mediation
even more appealing.
By Definition, Mediators Can Evaluate Claims, and Offer Opinions—As Long
as They Don't Issue Orders
For years, an academic debate has brewed over the relative virtues of "facilitative"
and "evaluative" mediation, and whether "evaluative" mediation qualifies as
mediation, and for the protection of the mediation confidentiality statutes,
at all.
In the real world, both litigators and mediators scratch their heads at this
"debate." To one degree or another, commercial mediation involves "evaluations"
or varying types and degrees, and always has. Yet a smidge of a doubt has lingered
as to whether some court somewhere would respond to the academic debate by ruling
that "evaluative mediation" was not really mediation and not protected by the
confidentiality statutes.
Thankfully, Travelers Casualty has wiped that smidge away. Mediators can
"express opinions on the merits" and still be conducting a "mediation." Id. at 1140 n. 8 and 1144 n. 15. The role
of mediation is now officially expanded to encompass both facilitative and evaluative
techniques. This, too, will increase the appeal of mediation to sophisticated
litigants.
By Definition, Insurers Can Be Parties To Mediations Even If They Are Not
Parties to the Underlying Third-Party Lawsuits
Liability insurers often participate in the mediations of lawsuits in which
they are not named as parties. Mediation confidentiality statutes often grant
rights and obligations to "parties to the mediation" or "participants in the
mediation." See, e.g., Cal. Ev. C. 1121. Insurers are sometimes unclear as to
whether they qualify under these definitions. Although admittedly in dictum
(126 Cal. App. 4th at 1146, n.18), the court opines that, for at least "some
aspects of mediation confidentiality," liability insurers have the statutory
rights and obligations as other mediation participants.
The ban on actual adjudication, the recognition of the reality of evaluation,
and the acknowledgement of liability insurers as mediation participants will
all serve to increase the utility of mediation to insurers, policyholders, and
third-party plaintiffs alike. The rules of the road are clearer, more realistic,
and have greater integrity, than ever. All mediation participants will know
what to expect, and what they no longer have to fear. The Travelers Casualty
court has surely advanced the state of the art.
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