During mediation of a claim for disability-insurance benefits and damages for the insurer's alleged bad faith, the parties reach an impasse. The plaintiff's counsel asks the mediator what range of outcomes her client should expect if the case proceeds to trial. Defense counsel asks whether the insurer should be concerned about a punitive-damages verdict.
Many of the best mediators properly avoid answering such questions. But with little progress being made and time running short, the mediator may choose to give an evaluation. Even for a mediator who has settled dozens of such cases, and has tried many to verdict as a lawyer, disability cases are notoriously elusive to evaluate and maddeningly difficult to settle. However, with a few simple strategies, the difficulties of mediating a disability-insurance case may be overcome.
Disability insurance typically provides monthly benefits of a percentage of the policyholder's normal salary upon proof that the policyholder is totally disabled. The definition of total disability will vary but often involves two stages.
For the initial period, in order to receive benefits, the policyholder must be unable to perform the substantial duties of his "own occupation." Thereafter, entitlement to benefits requires inability to work at "any occupation" for which the policyholder is reasonably suited. A lawsuit involving a privately paid insurance policy, not part of an employee-benefits plan, may recover additional damages if the insurer has acted in bad faith.
Juries tend to approach disability cases with deep skepticism toward both the policyholder and the insurer. Antipathy toward insurers is widespread, generated by negative experiences with insurance companies or media exposure of insurer misconduct. But unless the policyholder presents an obvious, serious physical impairment, juries also tend to be unsympathetic toward a claim of total disability.
For one thing, jurors themselves typically work full time, often despite physical or mental impairments. So they are naturally loath to put a superficially able-bodied plaintiff on a monthly dole. They are particularly suspicious of claims of disability based on mental conditions, such as anxiety or depression, or on "soft" physical impairments, such as high blood pressure, alcoholism or any condition that can be controlled by medication.
It is difficult to predict how this dual skepticism toward the policyholder and the insurer will play out in a courtroom, since it depends so much on how the jury reacts to the policyholder as a witness.
Reaching a settlement in disability cases is distinctly more challenging than settling other business disputes or even other insurance claims. To begin with, these plaintiffs, by definition, are sick, depressed, disoriented and financially needy. They not only suffer from some health difficulty but also have been removed from an occupation and workplace, isolating them from their former social life.
Often, for the first time in their lives, disability claimants feel useless. They typically have spent a lot of time alone and a lot of time responding to the insurer's legitimate, but annoying, demands for information. Therefore, plaintiffs usually arrive at the mediation brimming not only with self-pity but also with deep resentment toward the insurer.
The plaintiff's mindset makes him very susceptible to exaggerated enthusiasm about the claim. It is easy for someone who perceives himself as "totally disabled" to overlook the requirements in the policy that must be satisfied to justify paying the claim. It is also easy for a plaintiff to confuse an insurer's ineptitude or negligence in handling the claim with the unreasonable and oppressive behavior needed to establish bad faith.
Poor advice by counsel can compound the problem. It is easy for the plaintiff's counsel to become dazzled with reports of huge verdicts in other cases, to become unduly outraged by the insurer's minor missteps in claim-handling and to overlook the need to satisfy policy language.
These cases may resemble personal-injury cases, but they are purely contractual disputes that require close analysis and performance of all policy conditions. Often, the plaintiff and his counsel arrive at the mediation ready to overlook the obstacles to success on the claim. Counsel will benefit his client by managing his own, as well as his client's, expectations.
Insurers arrive at mediations with corresponding blind spots and institutional biases. First, a claims adjuster rarely brings genuine authority to respond to developments at mediation.
An internal committee typically has assessed the file so that the adjuster rarely has any meaningful discretion. While exceptions occur, the best that the mediator usually can hope for is to persuade the adjuster to recommend a proposed settlement in excess of his authority to the committee.
Second, insurers often undervalue the emotional content of the plaintiff's claims. The policyholder's counsel easily can exploit the emotional aspects of the case before the jury.
Third, insurers are reluctant to face up to a case's realistic danger because they do not want to set a bad precedent for future cases. In addition, insurers and adjusters often believe that the policyholders with whom they have a dispute are untruthful or unbalanced. A mediator often spends hours persuading an adjuster to accept the possibility that the plaintiff's story is at least plausible enough to convince a jury.
Insurers may justify this bias by noting that they pay over 90 percent of claims, so that the claims that become lawsuits are indeed without any merit. Nonetheless, adjusters frequently ridicule perfectly plausible accounts of disability, to the extent that they become unable to objectively evaluate the claim.
This dichotomy of attitudes creates far more than the usual suspicion of the other side's case and inability to be objective. Fortunately, the mediator has a few cards to play that may save the day.
First, a settlement is very likely to better satisfy the interests of both sides than a judgment. If at trial the policyholder establishes an entitlement to benefits but does not prove bad faith, then he or she will be put back "on claim" - that is, will have to submit a monthly claim form, will receive a monthly check and will have to continue to prove he or she is disabled. Only if the policyholder proves bad faith can the court award benefits in a lump sum discounted to present value.
Returning to monthly benefits is usually unsatisfactory because it requires the policyholder to continue to interact with the insurer, probably fails to alleviate financial needs and leaves no easily available fund to pay counsel.
The insurer also typically is seeking a lump-sum settlement to eliminate claim-handling costs, lower reserves or just part ways with a troublesome policyholder. Therefore, from both points of view, a negotiated settlement offers significant advantages.
The mediator can emphasize to the plaintiff the therapeutic benefits of moving on with his life. For a physically, financially and emotionally fragile plaintiff, a disability bad-faith case is a wrenching and draining experience. Obtaining and investing a lump-sum settlement satisfies interests beyond mere financial gain.
Finally, if the mediator can impress on both sides the heightened unpredictability of these cases at trial, they may choose the certainty of a compromise.
Martin Quinn, based in San Francisco, is a mediator and arbitrator with JAMS. He specializes in resolving complex business and tort cases.
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