In the following guest post,  Giulio Zanolla, a principal at Zanolla Mediation,  and John F. McCarrick, partner and chair of the Financial Lines Practice Group at White and Williams LLP, take a look at the ways that parties to a D&O insurance coverage dispute can make the most of the policy-mandated mediation process. I would like to thank Giulio and John for allowing me to publish their article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Giulio and John’s article.

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Many D&O insurance policies include a contractual requirement that the D&O insurer and policyholder attempt a negotiated resolution, typically through mediation, of any coverage-related dispute between the parties before the parties can resort to litigation or arbitration.[i] However, too often such requirements lead to an unproductive mediation session – not because the process is flawed, but because the parties can have unrealistic expectations about what can be achieved through a mandatory mediation process. Like parties contemplating a divorce, policyholders and insurers tend to focus on securing a “win” over the other party, and view the mediation session as an unwelcome but necessary interim step along the path to securing that “win.”

Why are these mandatory mediations often unsuccessful? In some instances, the mandatory mediation occurs too early in the dispute’s lifecycle to allow the parties to achieve resolution without a sufficiently complete information base of relevant facts and legal analysis. In these early cases, the lack of information often prevents the parties from exchanging meaningful concessions or obtain the necessary authority to pursue an overall settlement in a one-day mediation session. This is especially true if the mediation process is reduced to a shuttled bargaining dance between caucus rooms. Next, the parties are so focused on resolving the major issue in dispute that they don’t even get around to discussing secondary or tangential, but still-necessary, issues.  Another problem: parties are often overly concerned about possibly showing weakness to the other side through any contemplation of a compromise and maintain fierce advocacy postures. Given these dynamics and mindsets, it’s not surprising that parties take rigid negotiating positions and neglect the opportunity to expand the discussion beyond sterile positional bargaining.

But here’s the thing: it’s fine to engage in a mandatory mediation process while still fully intending to arbitrate or litigate the core dispute later on.  And if that’s the shared goal, the mandatory mediation process can be a highly effective way to narrow the dispute to core disputed issues, and to either temporarily or permanently come to agreement on issues that won’t affect the core dispute, but that could end up being distractions or independent cost drivers if they are left to be part of the main event down the road.

So, how do we transform an early mediation requirement from ‘checking the ADR box pre-litigation/arbitration’ into a fruitful procedural juncture to bring the parties closer to resolution?  We have some ideas.

For starters, keep in mind that the main characteristic of any well-constructed mediation process is its inherent flexibility. In other words, the mediation process can be structured to accomplish what you want to accomplish. How does this work in practical terms? For one thing, parties and their counsel should think about process design well in advance of the mediation session, and consider some of the following challenges:

1. Is each party able to neutrally and objectively summarize the other party’s baseline positions? If not, why not?  Treating the other side as an unprincipled adversary leaves very little room for constructive dialogue.
2. Are the parties diametrically opposed on a single issue, or are there multiple issues that need to be resolved? For example, are the parties fighting about coverage for defense costs, settlement, or both?  Do all of those issues need to be resolved at the same time, especially if the parties are working off incomplete information relating to ultimate coverage?
3. If the parties’ positions are extremely divergent, what are the most plausible reasons? Is there fundamental disagreement on legal analysis and interpretation? Disagreement on facts? Disagreement on technical issues (including damages evaluation)? Information asymmetry (one side has relevant information that the other side does not have)? Can the mandatory mediation process be used as a way to talk through those disagreements and share information in a way that narrows the scope of the dispute?
4. Is the dispute being animated by personality conflicts between the parties, either at the principal level, or at the outside counsel level? Are those conflicts creating an independent barrier to a mediated resolution?
5. Is there a way to allow both parties to develop further understanding of the main or secondary reasons for disagreement, without locking in positional concessions?
6. Are there business issues at the policyholder or insurer level, e.g., reserving, settlement authority, etc., that are preventing an early resolution?

In mediation, the parties have an opportunity to address any one or all of those possible reasons for diverging position and they can structure the process in order to do so. Optimally, the parties can invest the time and effort in a mandatory mediation to inform, educate, and listen to, the other side.

If the parties have a novel coverage argument that they are considering eventually presenting to a judge or arbitration panel, the mediator can provide important feedback to help the parties gauge the likely receptivity of an eventual judge or arbitrator to a particular issue.  Finally, the parties also can analyze any legal, technical or factual issues with the assistance of a neutral set of eyes to impartially assess the developing body of information exchanged in the privacy of a confidential and protected setting.[ii]

And if we’re going to talk about process, it’s important to point out that the best process in the world won’t aid the parties’ shared goal of focusing and slimming down a coverage dispute if the mediator’s attention to the issue is limited to the mediation day, and a few hours of preparation beforehand. Finding a mediator with the availability – both during and in the days and weeks after your initial mediation session, and tenacity and commitment to your designed mandatory mediation process will be key to the success of whatever goals the parties set for the mandatory mediation.  In fact, we recommend that parties to mandatory mediation processes seek out mediators who will take on your bespoke mediation process with determination, energy and creativity, and who won’t treat the session as a “split-the-difference” bargaining exercise.

So what are some reasonable and positive outcomes parties could have following the conclusion of a mandatory mediation process – even if the core coverage dispute remains unresolved?  Here are some we have recognized in our collective experiences:

• A better understanding of the business or precedential dynamics driving the other party’s negotiating position;
• A better understanding of the specific interests of the parties that could constitute “drivers” or obstacles to the settlement (e.g. value of ongoing business relationship, an insured’s imminent need of liquidity, a carrier’s interest in avoiding bad legal precedent on policy interpretation or potential bad faith litigation, etc.);
• A narrowing of the issues in dispute to only one or two core issues that may need to be subsequently further analyzed, discussed or eventually adjudicated through litigation or arbitration;
• A more developed understanding of the strengths and weaknesses of the parties’ respective coverage cases;
• An interim defense cost funding arrangement that provides support for the policyholder’s defense while reducing the threat (whether real or potential) of bad faith exposure to the insurer;
• A clearer understanding of the real spread (monetary or otherwise) between the parties’ respective positions, which allows more realistic evaluations of the costs/benefits of continuing on to litigation or arbitration;
• A better sense of the variables involved in negotiating next steps to continue develop the path to resolution, including, for example, the following:
  • Is additional briefing helpful to articulate the arguments in further depth?
  • Is the involvement of technical expert analysis needed?
  • Could a specific core issue be resolved through a streamlined binding/non-binding arbitral decision?
  • Would continuing settlement discussion be potentially fruitful once the parties have had the time to process the acquired new information with their internal constituencies?

If parties to D&O insurance contracts containing mandatory mediation provisions recognize that the mediation process does not need to be interpreted as a binary function that can only lead to either a quick settlement or (most often) prolonged frustration, the chances of successfully implementing the contract’s dispute resolution provision increase dramatically.

By adopting the suggested approach to an early mediation attempt (as well as to any mediation process), the parties can even acquire the case-specific tools needed to develop the appropriate case resolution strategy timely, effectively and efficiently, while preserving the confidentiality of the discussions, and shifting the focus of parties and counsel from an adversarial mindset to a problem-solving one.

Mediation is a process that involves (or at least should involve) much more than just compromise. It represents a safe “test ground” for investigating positions, interests and available resolution options. If parties become accustomed to think of mediation in these terms, a compromised solution that all involved consider preferable to the adversarial alternatives becomes the natural outcome of a thoughtfully structured process in the vast majority of cases.

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Giulio Zanolla is a principal at Zanolla Mediation and can be reached at giulio@zanollamediation.com.  John F. McCarrick is a partner and chair of the Financial Lines Practice Group at White and Williams LLP and can be reached at mccarrickj@whiteandwilliams.com.

[i] These provisions typically also include a requirement that any mediation process be followed by a sixty or ninety day “cooling off” period before the parties can resort to litigation or arbitration,

[ii] The parties can even request that the mediator engage a neutral expert to be brought into the process to analyze the parties’ positions on relevant technical issues.