The Importance of Adding a Mediation Provision to Representations and Warranties Policies

I recently mediated a dispute involving a claims-made policy with a condition precedent to either side commencing litigation: mediation. Specifically, the policy stated the following: 

The Insurer and the Insured agree that they will attempt in good faith to negotiate a resolution to any dispute arising out of this Policy. In the event any dispute cannot be resolved by negotiation, the Insurer and the Insured agree to submit the dispute to non-binding mediation, the terms of which shall be subject to negotiation. If the parties cannot agree to such terms within thirty (30) days of either party requesting the mediation, the matter will be submitted to JAMS for mediation, with each party bearing their own costs. Should the mediation fail to result in a settlement of the dispute, no party may commence an action against any other party until at least thirty (30) days after the conclusion of the final mediation session.

For various reasons, the mediation was very challenging because both sides lacked sufficient information about both the policyholder’s claim and the insurer’s defenses to that claim. Clearly, there were legal issues that needed to be resolved. And, importantly, there were many questions that both sides had about each other’s claims. The mediation commenced relatively early in the dispute resolution process: The insured had made a claim under the relevant policy. The insurer had issued its initial reservation of rights letter followed by a series of requests for information. Nonetheless, it suggested that there likely was no coverage, or even the potential for coverage, under the policy. The insured answered some of the insurer’s questions, provided additional information and had some conversations with the insurer’s counsel and the insurer’s senior claims representative. While those answers and conversations somewhat narrowed the informational gap, in the policyholder’s view, the insurer was moving too slowly because the underlying claim, which was in litigation, was developing quickly. Accordingly, the policyholder triggered the pre-filing mediation provision of the policy.

Much of the mediation focused on narrowing the information gap between the parties. Many legal issues were dependent upon the resolution of certain complex factual issues, and because the parties had not commenced discovery—either written or deposition discovery—they could only agree to disagree about the importance of the facts they had. There were also disagreements about the breadth of the requests for information, which almost derailed the mediation itself. At the end of the mediation day, the parties had reached an impasse and agreed that the 30-day cooling-off period had begun to run. The parties continued to talk both during the cooling-off period and through the policyholder’s filing and service of a coverage lawsuit. The case settled within 30 days of the policyholder filing suit.

This pre-filing requirement is relatively common in many directors and officers liability insurance policies and other claims-made policies. It is a provision that we see in many representations and warranties policies. It also is a provision that I regularly recommended including in the many representations and warranties policies that I or my team negotiated when I was practicing law.

About three years ago, I “switched sides” from advocate to mediator, and I began to mediate disputes as pre-conditions to litigation and arbitration. Most of these disputes were quite challenging because, at the time the pre-filing mediation was triggered, both sides lacked sufficient information to make meaningful settlement decisions. For example, many of the insurers lacked the information they needed to obtain the necessary authority to settle the claim, and many of the policyholders viewed the insurers’ requests for information as excessive or unnecessary, thereby casting a pall over the mediation process.

After almost three years of experience mediating many of the pre-condition disputes, including those arising under representations and warranties policies, I still encourage parties to build into their policies a mediation provision. However, I would recommend the parties defer satisfying that condition until they have closed the information deficit from which they each suffer. One way to do that is to require the parties to utilize and adapt for mediation Rule 17(a) of the JAMS Comprehensive Arbitration Rules & Procedures^[1], or to negotiate and apply a streamlined version of it, before pre-mediation statements are exchanged and the mediation session commences. If there are disputes about compliance with the rule or reaching an agreed-upon version of it, the mediator will resolve those disputes with the goal of narrowing the information gap to provide both the insurers and the insureds with the information they need to make meaningful settlement recommendations to their clients.