Insurance Coverage Litigation: What Is the Role of Mediation?

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.

Source: 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.

Source: 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 the following.

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.

Source: 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.

[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."

Source: 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.

Source: 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 acknowledgment 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.