ADR In The Context Of Insurance Coverage And Indemnity

Editor’s Note: This article first appeared in the January 2012 issue of the ADR Quarterly and is reprinted with permission.

 

Early Expert Evaluation

ADR in the Context of Insurance Coverage and Indemnity

Mark G. Cooper and Hal O. Carroll

Copyright © 2011 Mark G. Cooper and Hal O. Carroll

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Executive Summary

            Disputes concerning insurance coverage and contractual indemnity obligations have not been considered good candidates for conventional case evaluation methods because the issues that drive the result are contractual and legal in nature, unlike the factual disputes that underlie most tort claims, but Early Expert Evaluation can work well for these disputes.

            Disputes over coverage and indemnity obligations can be referred to an evaluator who is both neutral and knowledgeable in these areas, and who is empowered by the parties to take an active role in evaluating the contract and policy language involved.  The evaluator would engage each party in a discussion of the strengths and weaknesses of its position, and of the opposing parties’ position.  The evaluator can suggest a resolution in dollar terms or in the percentage of each party’s responsibility for the underling loss.

            If the parties desire, the evaluator can prepare a written report with a detailed analysis.  That report can contain as much detail as the parties request, ranging from a simple statement of dollars or percentages, to a detailed analysis of each party’s position.

            The resulting report can either serve to resolve the dispute or it can serve as a catalyst for further negotiations between the parties.  In either case, this process would result in substantial cost savings, by focusing the discussion early in the case, and by avoiding the risk of the defendants arguing their dispute “in front of” the tort plaintiff. 

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            Disputes involving insurance coverage and contractual indemnity have seemed resistant to the application of ADR principles and procedures.  Traditional case evaluation, for example, works well when the disputes are fact-based, but it’s seldom successful with disputes involving insurance coverage and indemnity, where contract issues predominate. 

            Insurance coverage and indemnity disputes have two characteristics that make it hard to fit them into the traditional ADR mechanism.  First, they are heavy on legal issues because they necessarily involve the interpretation of contracts, and the interpretation of a contract is pre-eminently a matter of law.[1]  Second, the legal issues relating to insurance coverage and the analysis of indemnity clauses are of a type that many practitioners are not familiar with. 

            A third characteristic is not present in all such disputes, but it is present in many.  This is the multiple party situation.  In construction site injury cases, for example, it is common to have more than one indemnity clause, more than one policy and more than one “additional insured” obligation.  This leads to a complicated web of obligations with contingencies abounding throughout the resulting matrix of possible payors and payees.  If, for example, two (or more) insurers both provide coverage, do they share equally or in some other way?  What if there are excess policies, with or without drop-down coverage?  If there are two indemnitors, how do they share the obligation?  What if one or more of the indemnity clauses is a step-over clause?  And how do the indemnity obligations mesh with the insurance obligations?

            When this happens, even the best of facilitators can come up short, simply because there are too many “what-ifs” to be resolved, and the principles that govern the resolution of them lie within a narrow specialty of practice.  That does not mean that ADR can never succeed, of course.  Facilitation can work in some situations, and some form of arbitration may also work.

            But we believe there is a form of ADR that can work well for these types of cases, even – perhaps especially – the multiple party case.  This is a specialized form of case evaluation – Early Expert Evaluation.

            The purpose of the evaluation, as the name suggests, is to get an early evaluation by a neutral expert of the parties' claims of insurance coverage and contractual indemnity.  The goal is to obtain an objective, comprehensive and detailed analysis – at the beginning of the dispute – of the issues and arguments with a view to determining the likely result if the insurance coverage and indemnity issues are brought before a court.

            The reason for using an expert as a neutral evaluator is not that counsel for the parties are lacking in expertise. On the contrary, attorneys who are experts recognize the benefit of having an expert who is also neutral take an active role in discussions.  The points that the evaluator raises in the discussions will focus each party’s attention on the strengths and weaknesses of each party’s analysis.  

What makes early evaluation by an expert more productive in these cases is that so much of the dispute focuses on the documents.  The parties dispute the interpretation of the documents and their application to the facts, but the language of the documents and the underlying facts are seldom disputed.

            The premise that underlies Early Expert Evaluation is that the evaluator will be someone who (1) is knowledgeable in the substantive law of insurance coverage and indemnity, (2) whose real-world experience in the area includes knowledge of how various arguments are received by the courts, and (3) who can take a neutral position. 

The benefit that results from this is a substantial saving to the clients, as well as a result based on an analysis by someone who is familiar with the principles governing the issues, and with the techniques of analysis. 

The parties can design the details of the Early Expert Evaluation process in whatever way suits them, ranging from a process that mirrors simple facilitation to a process more akin to arbitration. 

          In some cases the evaluator would work much like a facilitator, drawing the parties out in explaining their positions.  The difference here would be that the evaluator, based on his or her expertise, would ask pointed questions concerning each party’s position.  The result would be that each party becomes more aware of the strengths and weaknesses of their analyses, from the perspective of someone who is neutral.

          We think that more often, the process would be more akin to evaluative mediation, where if no compromise is reached during the facilitative process, the neutral evaluator accompanies the analysis with a dollar figure or percentages reflecting each party’s responsibility for the ultimate verdict on liability.

          If the parties choose the evaluative mediation model, they can provide for case evaluation sanctions if the recommendation is rejected.  More often, we think the parties would prefer the recommendation would be advisory.

          Finally, the parties could choose to be bound by the result, as in arbitration, but we think that in most cases they would prefer the evaluation to be advisory.

What makes this process different from conventional ADR is that it brings the expertise of the evaluator to bear.  It is the analysis by an expert, and the evaluator’s “hands-on” participation in discussions, that sets this form of evaluation apart from conventional case evaluation or facilitation.  The process we propose is much more akin to evaluative mediation – the evaluative mediation model is generally understood to be a process that includes an assessment by the mediator of the strengths and weaknesses of the parties’ cases and a prediction of the likely outcome of the case – as opposed to the more common facilitative mediation.  In facilitative mediation, the mediator does not make recommendations to the parties, offer an opinion as to the outcome of the case, or even predict what a court would do.

            We believe there are two scenarios in which this procedure is most likely to be used with respect to indemnity clauses, and in a related way to insurance coverage.

First, Early Expert Evaluation by a neutral expert can be helpful very early in litigation, especially when there are multiple parties, each facing much risk because of the underlying injury, and there is no agreement on the various contract obligations.  Experienced attorneys in this area will recognize the value of early guidance, because the underlying litigation is going to be expensive, and they all understand the value of not litigating among the defendants “in front of the plaintiff,” so to speak.  This can avoid the risk presented by a situation where each claims handler, often located in a different state and unfamiliar with Michigan law, makes an initial determination, after which defense counsel writes a coverage opinion that largely mirrors the hoped-for outcome, and the parties then dig in and work toward filing a dispositive motion.  

If the parties’ attorneys are experienced in these areas, an early analysis and evaluation by a neutral expert serves as a catalyst for discussion and a basis for further negotiation.  If the parties’ attorneys are not experienced in this area, the process will educate them about the strengths and weaknesses of their positions and the other parties’ positions, and give each party a better understanding of the likelihood of the outcome it desires.

The second scenario arises later in the case – likely after significant underlying discovery has taken place, a neutral analysis by an expert would be beneficial where the parties and their attorneys and/or claims handlers felt more complete fact development would allow better analysis of the respective contract obligations.  Another late-case scenario would be where the attorneys and parties are less knowledgeable in the area of law or where their focus on underlying tort liability issues have let the indemnity and coverage issues just bump along with no clear direction, or perhaps where they have dug in about respect to their positions perhaps without fully appreciating the consequences or impact.

Procedures

The procedure in each particular case can be designed by the parties to suit their needs, so the following descriptions are offered as illustrations of possibilities.

Input.  In the simplest case, the parties could provide the evaluator with the underlying facts, the underlying complaint, the relevant contract and policy documents, and the question(s) they would like to be addressed.  They would not offer their own analyses for review.

The premise of the Early Expert Evaluation process is that the chosen evaluator is knowledgeable, so it may be possible to do away with the parties’ presentations of their own analyses, but more often, each party would also provide its own analysis in written form.  The evaluator would then respond to each argument.

Oral Presentation.  In most cases though, the parties would present their analyses (with or without prior written presentation) to the evaluator in a meeting.  The evaluator would then conduct a discussion much like facilitation, except that the evaluator would be more “hands-on,” and probe each party’s argument with questions based on the evaluator’s expertise. 

            Output.  As is explained above, the evaluator can recommend a resolution amount or percentage, and rejection of that recommendation can be accompanied by case evaluation-type sanctions, if the parties so choose.  If the parties choose, the evaluator can provide a written report with a detailed analysis of the contract language and the law supporting the recommendations. 

            Advisory or Binding?  As is mentioned above the result can be binding if the parties prefer, but more often it will serve an advisory function, to give the parties a candid view from a neutral perspective. 

            Uses of the Report.  If the parties ask the evaluator to provide a detailed written report, they would decide in advance what use can be made of the report.  It isn’t possible to prevent any party from adopting parts of the analysis in any motions that are later filed with the court if the case does not resolve, but the agreement would normally specify that no party may quote from or refer to the report with any form of attribution.

If the case is referred to Early Expert Evaluation by the court, then of course the court would specify what uses will be made of the report, or it may choose to leave that to the parties.  The referral agreement, which defines the terms of reference to the evaluator, must specify what uses can and cannot be made.  One possibility is to allow the parties to cite the report as persuasive authority for the court, or if the parties later go to some form of facilitation. 

Advantages

            The system of Early Expert Evaluation offers several advantages.

            Cost.  Like all ADR, the parties get the benefit of controlled cost.  This comes in part from the fact that the evaluation comes early in the litigation, and by avoiding some or most of the preparation that goes into motions, briefs, and reply briefs.  The fact that the evaluator is an expert in the field will simplify the presentation of the arguments.

Settlement.  The Evaluator’s report should provide the parties a better view, from the outside, of their claims and arguments.  This can enhance the possibility of settlement in two ways.  First, it may give each party a different view of its position.  Second, each party will know that the other parties now have the benefit of the report’s analysis and can use that if the case goes forward.

Expertise.  The factor that underlies these benefits is the expertise of the Evaluator.  Insurance coverage and indemnity law are fairly arcane areas, and many judges are not intimately familiar with them.  Bringing a complicated set of issues before a court that is unfamiliar with them and must also handle many other cases on a crowded docket can lead to decisions that are less than satisfactory.  The expertise that is necessary for Early Expert Evaluation has two components: theory and practice.  The Evaluator must be familiar with the details of the law that governs the interpretation of insurance policies and indemnity contracts, but must also be familiar with how cases of this type have been and are litigated and how they are seen by the courts.

Persuasive Effect.  The analysis should be more persuasive than conventional evaluation or facilitation, because of its timing and the expertise of the evaluator.  Even if the referring attorneys are themselves experts in the field, an opinion expressed by a neutral expert should have some persuasive effect.  Also, if an attorney is having trouble persuading his or her client of weaknesses in the case, a neutral analysis will provide support and perhaps “cover.”  

Summary

            Early Expert Evaluation is different from facilitation and other forms of ADR in that the evaluator is further removed from the process of negotiation.  By replicating the adjudicative process, it provides an evaluation that is objective, detailed and supported by analysis.  For some cases, this will be sufficiently persuasive that the parties will accept the analysis and resolve the case on that basis.  But even if the Evaluator’s analysis does not lead directly to settlement, it will focus the argument and give each party a better sense of the strengths and weaknesses of its position.  In this way, it will provide a basis for more effective negotiations between or among the parties.

            Early Expert Evaluation is not the only form of ADR that can be productive in resolving disputes involving indemnity and insurance contracts, but it is uniquely well adapted to the types of issues that those disputes present.

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            Mark G. Cooper is a co-founder and the current chair of the Insurance and Indemnity Law Section.  Mr. Cooper is a partner at Jaffe, Raitt, Heuer & Weiss, P.C. where he practices in commercial litigation, with emphasis on insurance coverage disputes for both policy holders and insurers.  His email address is mcooper@jaffelaw.com.  

            Hal O. Carroll is a co-founder and first chairperson of the Insurance and Indemnity Law Section, which was founded in 2007.  He practices in the area of appellate practice and insurance coverage and indemnity law for policyholders and insurers, in Vandeveer Garzia, PC. His email address is hcarroll@VGpcLAW.com.



[1] In theory, ambiguities are now supposed to be resolved by the trier of fact after testimony, Klapp v United Ins Group Agency, Inc, 468 Mich 459, 468; 663 NW2d 447 (2003).  In reality, this seldom happens and the rule is generally applied without such testimony.