This mediation involved an insurance claim filed by a manufacturer seeking $31 million from its insurer because of the theft of computers from the company’s warehouse. [Note: certain identifying information has been changed in this case study to protect to the confidentiality of the mediation.] The computers – several thousand of them – were stolen by a small group of employees, who sold them on the “gray market” to used computer dealers. When the thefts were discovered, the manufacturer fired the employees, reported the thefts to the police, and filed a claim with its insurer. The stolen computers were never recovered.
The insurance company refused to pay the manufacturer’s claim, asserting that the units were outmoded – they were no longer being marketed by the manufacturer, and in fact were slated for destruction. The manufacturer agreed that the units were going to be destroyed, but pointed to language in the policy which protected it from “losses” arising from theft. The manufacturer claimed (with support from expert witnesses) that the demand for its products is affected by the supply of less up-to-date products in the marketplace.
The parties attempted to negotiate a resolution of the matter on their own and without outside counsel. Both sides believed that once outside counsel became involved, positions would harden and vast sums would be spent on litigation. The insurer responded to the manufacturer’s claim ($31 million) with an offer of $350,000, arguing (a) that the term “losses” does not encompass the market effect created by stolen goods, but that (b) the “nuisance value” of the claim (i.e., the cost of defending the claim in court) justified a $350,000 offer.
Although the manufacturer’s management team found the insurer’s offer insulting, the company was in dire straits financially and needed cash. As a result, the company responded with an offer to settle the entire claim for $5 million. This amount, it argued, was a bargain for the insurer because the wholesale value of the stolen equipment, even after deducting sales commissions, amounted to $31 million, and the manufacturer’s expert would testify that the weakened demand for the company’s newer computers would cost the manufacturer at least that much. The insurance company responded with an offer of $1 million, and argued that this was generous in view of the weakness of the manufacturer’s legal theory. The insurer cited the opinion of an expert who contended that the market effect of the thefts could not be accurately predicted or modeled because (a) the product was so new that there were no stable benchmarks from which to measure demand, and (b) the entry of multiple new manufacturers of computers each year, with a wide variety of features and functions, made it difficult to measure the effect of increased supply of any one variety of computer equipment. The manufacturer did not respond to the insurer’s offer, and negotiations stalled.
One year after the theft and the initial negotiations, the manufacturer filed suit against the insurer, and outside counsel for the two companies explored the idea of mediation. Both sides were skeptical about whether there was any chance that a mediator could bring the parties together because the gap was so large. They recognized, however, that the investment in mediation would be small in comparison to the potential savings. I was hired to mediate the dispute, and we scheduled an initial session.
Prior to the mediation session, counsel for each side submitted to me (and exchanged with each other) voluminous, well-argued briefs, citing cases that interpreted language similar to the language of the manufacturer’s policy. Each side believed that the cases it cited were dispositive. The reality, however, was that there were few, if any, cases directly on point because the language in insurance contracts differs widely.
The mediation session – attended by in-house counsel, outside counsel, and several representatives from each company – began with opening statements from outside counsel. Each expressed astonishment at the other side’s intransigence in the face of what each saw as an overwhelmingly persuasive case. The parties suggested that I meet with each side separately to determine how much flexibility each side had with regard to their settlement positions.
I began with the manufacturer, to see whether it would provide a counter-offer to the $1 million offered by the insurer. The manufacturer’s representatives and counsel told me that the company’s cash position had improved dramatically during the past year, and it no longer needed a quick settlement. Because it was prepared to go the distance with its claim, and the company’s management was angered by the insurance company’s apparent effort a year ago to take advantage of the company’s economic distress, the company’s new proposal for settlement was $10 million. I tried to persuade the company to make an offer that was lower than its previous $5 million proposal because any proposal higher than that amount would likely end the mediation. However, after a two-hour meeting with the manufacturer’s representatives, the lowest figure that they would authorize me to communicate was $6 million.
I then met with the insurer’s representatives and counsel and communicated the $6 million offer. That meeting also lasted for two hours. The insurer’s representatives were outraged, criticized me for wasting their time, and excoriated the manufacturer’s representatives for duping them into coming to a mediation with no intention to bargain in good faith. They asked me to give them one good reason to continue with the process. I explained that the manufacturer’s financial situation had changed, and it no longer had a desperate need for cash. In addition, a year had passed, and in Massachusetts the annual rate of pre-judgment interest is 12%, which substantially increased the potential value of the manufacturer’s claim.
I asked both sides if there was any possibility of their having an ongoing business relationship, and the answer on both sides was an emphatic “no.” Thus, the bargaining in this mediation was likely to be essentially distributive – i.e., negotiating a number and no other terms. The only potential for joint gains was the reduction of litigation costs associated that would occur if the case settled.
After several rounds of back-and-forth bargaining (as shown in the chart below), the parties found that they were at an impasse, with the manufacturer demanding $4.6 million and the insurer offering $2.75 million. Both parties thought that case evaluation would be useful, and despite my recommendation that they use someone other than me as the case evaluator (because my evaluation might impair my usefulness as a mediator), the parties asked me for an evaluation of the likely outcome of the case is it were tried. I provided a set of risk-analysis charts (copy below), illustrating the various uncertainties in the case and the risk-discounted value of the claims. I then added to those figures the statutory pre-judgment interest and predicted a risk-discounted value of all of the manufacturer’s claims of $4 million.
In response to the case evaluation, the manufacturer dropped its demand to $4.48 million, and the insurer raised its offer to $4 million, but added to the settlement terms the release of another claim by the manufacturer from a different case. The manufacturer responded by offering to settle for $4.5 million and a release of all claims. Once again the parties were at an impasse.
This time I suggested the possibility of a “mediator’s proposal.” I explained the ground rules as follows: I would make the same proposal of settlement to each side and then, after the parties had considered the proposal, I would talk with each side separately on a confidential basis to find out if they would be willing to settle on the terms that I proposed. I promised confidentiality with respect to the answer, and told the parties that I would either report no settlement (because one side or both sides declined to accept the mediator’s proposal) or that there was a settlement because both parties had said “yes.” The idea behind the mediator’s proposal, as a process option, is that each side has an opportunity to say “yes” without letting the other side know that the answer is “yes,” unless both sides are in agreement.
I made a proposal of settlement at $4.25 million with a release of all claims. On a confidential basis, the manufacturer agreed to that figure but the insurer did not. I reported to the parties that there was no settlement.
The insurer then renewed its offer to settle for $4.0 million, but this time with a release of only the claim that led to mediation. In response, the manufacturer’s team told me privately that they were still willing to settle at $4.25 million. “If you think it would be helpful,” the manufacturer’s representatives told me, “let them know that we would be willing to split the difference and settle at $4.125 million.” I suggested that this might not be wise, and that a smaller move – to $4.375 million – might allow them to “test the waters,” so to speak, and see whether the insurer still had some flexibility. The manufacturer accepted this advice, and the insurer responded with a $4.125 million offer that the manufacturer accepted, settling the case.
This case was unusual in several respects.
First, I have rarely seen cases where the mediation continued after Party A made an offer that was materially worse for Party B than Party A’s previous offer. The manufacturer did that in this case (raising its demand from $5 million to $6 million), but the insurer continued with the negotiation – after a good deal of persuasion – because of the one-year hiatus in the negotiations and because the manufacturer’s financial crisis had passed. One of the learning points here was that even when one side or the other violates the norms of distributive bargaining, all hope of settlement is not always lost.
Second, I learned that even the driest business cases – and could anything be drier, at least for the insurer, than a coverage dispute? – can generate a lot of emotion. In my two-hour caucus session with the insurer, after the manufacturer raised its demand to $6 million, the insurer’s representatives were hurling the saltiest invectives about the manufacturer’s motives and integrity, and accusing me of naivete and worse. Venting, I learned, is an essential ingredient in some mediations.
Third, although mediators usually avoid such explicitly evaluative techniques as a mediator’s proposal or a case evaluation – at least until it becomes clear that the parties are at an impasse – I learned that the parties in commercial cases often want such input. Of course, many mediators believe that such techniques are inconsistent with true mediation, which they would describe as purely facilitative. I learned that it is possible, even after providing explicitly evaluative input, to facilitate the parties’ negotiations. Doing so was made easier in this case because the parties were highly sophisticated and thus were only somewhat influenced by my opinions about the value of the case.
Finally, I learned that even highly sophisticated parties sometimes need negotiation coaching from the mediator. In the final stages of the negotiation, the manufacturer was too ready, in my opinion, to put a near-final number on the table. To be sure, there are risks in giving such advice – it can back-fire. But mediators often help choreograph the bargaining dance that leads to settlement. When we are using caucus sessions, we have information that the parties lack regarding each side’s flexibility or lack of it. In this case, the advice worked. My suggestion that the manufacturer proceed somewhat more slowly (moving from $4.5 million to $4.375 million instead of $4.25 million) worked – it elicited an offer from the insurer than settled the case.
The bottom line is that mediation requires creativity at times, regarding process as well as outcome. At the same time, it is vital that the mediator and the parties agree (as they did in this case) on every important aspect of the process, or the mediation is likely to fail.