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What insurers want from mediators?

by Matthew Rushton on 22 Feb 2013

what insurers want from mediators

Steve Jobs famously surrounded himself and his colleagues at Apple with a “Reality Distortion Field.” From within the reality-free vortex, designers, innovators and futurologists dared to think the impossible, and the products which spun out, for some, approached the sublime. Jobs et al were, arguably, proof of Alan Kay's aphorism that the best way to predict the future is to invent it.

For visionaries, then, reality is mundane, dull, and reactionary. Reality stifles innovation. A similar attitude exists in the UK mediation community where independent minds are free to think great thoughts from lofty heights above the ignorant currents of the market. The trouble is, mediation isn't selling like the iPad. It isn't even selling like litigation.

With this in mind, I learned a great deal from a week of meetings with senior figures in the London insurance market. On the question of what they want and expect from mediators, they were admirably clear and consistent, with underwriters, brokers and claims handlers speaking with one voice.

Before detailing their responses, it's worth considering the opportunity for mediation in the current market. The character and composition of the Lloyd’s market has changed since the early 1990s recession. Institutional investors have replaced Lloyd’s “Names” who previously invested private capital and had unlimited liability. The market is now more “active”, more stable, more professional and more commercial. Whereas an estimated 60% of market activity related to run-off claims (or discontinued policies) 20 years ago, such claims are a modest and decreasing activity. With on-going commercial relationships now predominating, many acknowledge that the golden age for insurance litigators is over.

For mediation, then, the impact is twofold: first, the overall volume of litigation is down (particularly between market players, and especially in reinsurance disputes), and secondly, there is a greater incentive to mediate to preserve commercial relationships.

The result is that ADR in various forms is widely and flexibly used. It is also worth noting that an estimated 80% of business written in Lloyds is US insurance, and most claims handlers have more experience of mediation in the US than in the UK. This fact may colour the stylistic observations which follow.

Observations about ADR

Mediation

Underwriters are already significant users of mediation, particularly in the US. Most described themselves as “reasonably sophisticated” about the process. Many noted that the number of claims they are prepared to litigate over time is reducing. On larger claims, some noted external lawyers remain resistant to the process, only advising suitability after several years of litigation. At the lower value, higher volume end of the market, underwriters noted that lawyers have become much more settlement-minded.

Users spoke to three principal benefits of mediation: 1) capping of risk 2) flexibility of outcome and 3) savings on legal costs. Benefits of unsettled mediations in narrowing issues, and increasing the likelihood of settlement were also noted.

Nevertheless, users articulated several objections, viz:

1) A dislike of two-day mediations - the first day often being wasted on technical details of limited bearing on the final outcome.

2) That the process depends on some degree of co-operation from the other side, which isn’t always forthcoming. Proposing mediation without appearing weak was still problematic.

3) Savings on legal costs tended to be minimal, as mediation only “works” when used close to trial and 85% of the costs have already been incurred.

4) Mediation is not always thought necessary, as sophisticated parties can settle disputes without third-party intervention.

5) The process often lacks teeth: see “Mediators” paragraph below.

Mediation Clauses

The London market tends not to use mediation clauses in insurance and reinsurance contracts. Some brokers noted a preference for escalation from mediation to litigation, bypassing arbitration. Arbitration was thought expensive and ineffective. Some of the more pro-mediation figures in the market thought that brokers could be more active in promoting mediation clauses; the brokers however can only do what their clients command, and demand for mediation clauses among clients is low.

Mediators

As mentioned above, the market expressed a clear view about what they want from mediators. And this is where mediation's idealism clashes with the realpolitik of the market.

First, insurers want mediators who understand the insurance business - not just the arcane language of insurance, but the wider commercial considerations of points in issue. The point would seem obvious, but flies in the face of what's become conventional wisdom, namely that a good mediator can mediate anything. And there was no shortage of anecdote about abandoned mediations when it became apparent to all sides that the mediator had no understanding of the subject matter.

Secondly, and equally obvious insurers want mediators to have read, digested - and to the extent that it's humanly possible - memorised the papers. This naturally begs the question as to who, precisely, are the mediators who receive papers to read and think, "Nah, I'll wing it"? In a buyers' market, it's a reckless, unprofessional and unconscionable game. And while it's hard to believe it happens, too many have suggested to the contrary for such remarks to be safely ignored.

Thirdly, and again departing from conventional wisdom, all consulted were clear that they wanted and valued the mediator's view of their case (and this desire no doubt informs whom parties select as mediator). Practically all mediators in the UK are trained to resist giving a view - and with good reason: done at the wrong time, or to the wrong party, or put insensitively, nothing can compromise impartiality and torpedo the process faster. That said, the desire to hear the mediator's view was so consistently expressed - and without prompting - that mediators who fail to do so will almost certainly be failing the market.

So what exactly do insurers mean when they say they want a mediator's view of their case? What are their expectations? It strikes me that it's like when your partner tries on a new outfit and asks your opinion. Clearly the safest thing to do is to head for the door fast, whistling loudly and pretending not to have heard; but it's also cowardly, unkind, and unhelpful. Is your opinion going to veto the inevitable? Speaking personally, no. What's required is an impressionistic view of the good and the bad, delivered supportively and tactfully. What's not being sought is an incontrovertible and final evaluation: the value of a mediator's opinion, like a husband's, has limits.

In conclusion, then, those the market favours with mediation appointments tend to be lawyers, and particularly those who've practised insurance and reinsurance litigation for decades. That in itself is not enough: they need to be astute, sensitive, well-prepared and experienced mediators. It's not surprising, therefore, that those the market favours with repeat appointments on substantial matters are few and highly valued. For those seeking acceptance in the market, the good news is that at least the entrance criteria are clear and well established. They might not be orthodox, conventional and doctrinally pure, but that's the reality and we distort it at our peril.

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Topics: Insurance, Mediation

Matthew Rushton

Written by Matthew Rushton