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An overview of mediation and the insurance industry

by Philip McMullan on 26 Jan 2017

insurance_industry

Disputes are endemic in the insurance industry, and though better controlled now than in previous decades, room for improvement remains. Policy wording is increasingly consistent and less open to interpretation, but liability and converage disputes are encoded in the industry's DNA.

Where disputes are so commonplace, it would be natural to assume that companies would look to ADR as a more efficient and effective means of resolving issues. While the insurance sector is a big user of arbitration for large commercial disputes, take up of mediation services remains relatively low, particularly in areas like personal injury, property and employment, where it might prove most useful. What's more, the UK is certainly behind other jurisdictions, notably the US, in using mediation as a quicker and more cost-effective means of resolving issues.

The US position

Harry Mazadoorian is professor of dispute resolution law from practice at Quinnipiac College School of Law in Hamden, Connecticut. Speaking to KPMG in a report about the use of ADR by US insurers he says: "There's a myth that the insurance industry has a wondrous capacity for reserves and that it doesn't pay claims, in order to hold onto and use policyholders' funds. That's simply not true. The transactional costs of litigation far exceed the savings that can be generated by holding onto the money. More than 90 per cent of lawsuits are settled before adjudication. The transaction costs and delays companies face in connection with litigation argue in favour of finding an earlier resolution to disputed claims."

Mazadoorian says that, in the US, as a growing number of policy disputes get added to overcrowded court dockets, the insurance industry is increasingly turning to ADR to settle pending claims.

ADR is best suited for claims in which the parties are not disputing any liability issues, just the amount of the claim settlement, he adds. US courts are increasingly recommending its use in personal injury claims. But while some policies issued today contain ADR provisions, the majority still do not.

"Property insurance policies, while providing appraisal clauses for quantum disagreements, typically do not provide remedies for liability disputes short of litigation," says Gail Bonitati, director, forensic and litigation services of KPMG in Rhode Island. "The general belief was that the insurance company stood a better chance in court with all of the evidentiary processes, precedents, smart judges, and the appeals process available."

However, that belief often did not prove true when cases actually went to court, she adds. Unless fraud is involved, "an insurance company is much better served by trying to resolve liability disputes via some sort of alternate dispute mechanism as opposed to litigation," she says. "The long-held notions seemed to hurt rather than help. The prevailing wisdom of seeking a bench trial did not bring the 'learned' decision that one had hoped for, litigation stretched out over years and years, and that at the end of the day, there were no winners."

In the UK, the mindset from both insurance panel and claimant solicitors probably reflects the prevailing wisdom that clients' interests are better served by litigation. However, there are nascent signs that this conventional wisdom is beginning to be effectively challenged.

Mediation and the insurance industry

Speaking at an industry event Debbie Masucci, chair of the board of the International Mediation Institute and a former vice president of AIG, set out how she worked to bring mediation to the forefront of the dispute resolution culture at the global insurer. From an insurance industry perspective, she contended that embracing mediation could help: 

  • Control legal spending;
  • Lower claim durations;
  • Retain control over the process and outcomes;
  • Preserve relationships.

She suggested insurance panel solicitors should look to mediation to help them deliver on important key performance indicators, such as claim duration and legal costs, and that mediations are an opportunity for panel solicitors to impress in front of insurance clients. She was less convincing on the issue of claimant solicitors, saying they would benefit from satisfied clients who get settlement at the right price at an earlier stage of proceedings.

It's clear that the insurance sector could benefit from broader take up of mediation, especially for quantum disputes where liability is already settled. But there are hurdles to overcome. Claimant solicitors are less likely to be on board, while clients operating on a no win, no fee basis are broadly incentivised to gamble on litigation.  The UK courts have shown themselves recently to be increasingly interventionist in managing how parties settle their disputes. Conventional wisdom notwithstanding, increasing use of mediation could be a win for all concerned.

Winning at mediation

Topics: ADR, Mediation

Philip McMullan

Written by Philip McMullan