Good Faith, Bad Faith, No Faith: Will a Subjective Good Faith Standard Influence How Litigants Approach Mediation?

Brian J. Laliberte | Tucker Ellis | November 16, 2017

I. Introduction

Mediation as a dispute resolution mechanism does not succeed because courts, statutes, or rules impose a good faith standard on participants or sanction bad faith conduct. Mediation succeeds because litigants and their lawyers prepare their case, know their objectives, and work to achieve them. Ideally, requiring lawyers and litigants to adhere to minimal objective good faith requirements, to act professionally and civilly, and to respect the process should be sufficient to facilitate meaningful participation in mediation. Often, it is not. In some cases, lawyers and litigants misbehave and frustrate the process. Will a subjective good faith mediation standard influence how litigants approach mediation?‡

II. Good Faith/Bad Faith/No Faith

A. Objective Good Faith

What is good faith mediation? Most courts interpret the concept narrowly. Generally, it has been limited to requiring parties to do the following: (1) provide a mediation statement prior to the mediation date; (2) attend the mediation; and, (3) have a representative with authority to settle present. These are the most basic and widely accepted objective good faith mediation requirements.

These requirements often are memorialized in detailed pre-trial mediation orders issued pursuant to Fed. Civ. R. 16. Rule 16 authorizes the use of pretrial conferences to “formulate and narrow issues for trial and to discuss means for dispensing with the need for costly and unnecessary litigation.”i As such, “[p]retrial settlement of litigation has been advocated and used as a means to alleviate overcrowded dockets, and courts have practiced numerous and varied types of pretrial settlement techniques for many years.”ii Indeed, since 1983, “Rule 16 has provided that settlement of a case is one of several subjects which should be pursued and discussed vigorously during pretrial conferences.”iii

Rule 16 also addresses a court’s authority to sanction litigants for failing to comply with pretrial orders including orders directing them to mediate and to do certain things prior to a scheduled mediation. Rule 16 states:

On motion or on its own, the court may issue any just orders, including those authorized by Rule 37(b)(2)(A)(ii)-(vii), if a party or its attorney:

(A) fails to appear at a scheduling or other pretrial conference;

(B) is substantially unprepared to participate or does not participate in good faith in the conference; or

(C) fails to obey a scheduling or other pretrial order.

In addition to rule-based powers to sanction, Courts have inherent powers to control the proceedings before them and to see to “the orderly and expeditious disposition of cases” through sanctions and other means.iv

Complying with a court’s mediation order, appearing at mediation, and sending a representative with authority to negotiate (and/or with access to higher corporate authority), are basic requirements any litigant and its lawyer can meet. If, for some reason, one of those requirements cannot be met, it behooves counsel for that litigant to contact opposing counsel, the mediator, and/or the court to obtain relief. A litigant’s unexcused failure to satisfy minimal objective good faith mediation requirements likely warrants sanctions. Such sanctions should be designed to compensate the non-offending party for the fees and costs expended to prepare for and attend mediation. They should not, however, serve to influence the outcome of the case. In short, objective good faith mediation requirements should serve the interests of judicial economy and case administration without imposing punitive or coercive sanctions upon litigants.

B. Subjective Good Faith

Courts have struggled to define subjective good faith requirements intended to evaluate the quality of litigant participation in mediation. The district court in In Re A.T. Reynolds & Sons, Inc., explained the pros and cons of using subjective good faith mediation standards.v

It vacated sanctions entered by the bankruptcy court after an unsuccessful mediation between two creditors. The bankruptcy court held that one creditor (Wells Fargo) failed to mediate with another creditor in good faith. It explained that:

Passive attendance at mediation cannot be found to satisfy the meaning of participation in mediation, because mediation requires listening, discussion and analysis among the parties and their counsel. Adherence to a predetermined resolution, without further discussion or other participation, is irreconcilable with risk analysis, a fundamental practice in mediation…. [T]his Court has authority to order the parties to participate in the process of mediation, which entails discussion and risk analysis.vi

The bankruptcy court found that Wells Fargo engaged in bad faith mediation for the following reasons: (1) Wells Fargo failed to meaningfully participate in mediation because it “insisted on being dissuaded of the supremacy of its legal obligation in lieu of participating in discussion and risk analysis;” (2) the Wells Fargo corporate representative (a) only had authority to settle for a predetermined amount, despite the potential actual amount in controversy; (b) the representative was only prepared to discuss certain specific legal issues; (c) the representative had no authority to enter into “creative solutions that might have been brokered by the Mediator;” and, (3) Wells Fargo “sought to control the procedural aspects of the mediation by resisting filing a mediation statement and demanding to know the identity of the other party representatives.”vii It then concluded that “attendance without participation in the discussion and risk analysis… constitutes failure to participate in good faith.”viii

The district court rejected the bankruptcy court’s qualitative analysis of Wells Fargo’s participation in the mediation. It explained that such an analysis: (1) interferes with litigant autonomy; (2) may encroach upon confidential attorney-client communications and work product; and (3) may coerce settlement in cases where a litigant otherwise may take a “no pay” or “nuisance value” settlement position.ix The district court characterized the bankruptcy court’s analysis of Wells Fargo’s conduct as impractical and unrealistic. It concluded that an inquiry into the reasons a litigant has taken a certain settlement position, in the absence of a statute or rule authorizing such an inquiry and defining a standard, goes too far.x

C. Bad Faith

Defining bad faith can be an inherently vague notion that is difficult or even impossible to reasonably and logically enforce.xi Using a common definition of bad faith may be helpful. In the litigation context, it may include unreasonable, unprofessional, or vexatious conduct.

Specific examples of “bad faith” conduct during mediation include: refusing to discuss the mediation process with the mediator and opposing counsel before the conference; unprofessional and acrimonious statements or behavior during mediation (e.g., insulting the opposing party, counsel or the mediator); placing unreasonable time limits on offers/counteroffers; unilaterally terminating or abandoning a mediation without explanation; and disrespecting the mediator or the process (e.g., interrupting, ignoring, or refusing to engage in dialogue).xii

None of this conduct should require an inquiry into a litigant’s motives. Rather, it should be evaluated against professional conduct rules, local standards for civility among members of the bar, and common sense. It also should be evaluated in the context of the entire litigation i.e., has a litigant and/or its lawyer behaved badly throughout the case.

Finally, in addition to compensatory sanctions, punitive sanctions may be appropriate in the “bad faith” context. Punitive sanctions should be crafted to both punish recent unprofessional, uncivil and vexatious conduct and to deter it in the future.

D. No Faith?

It may be fair at this point to ask: What value does mediation have if litigants only must adhere to basic, non-stringent objective good faith standards? What value does it have if there is no subjective evaluation of litigant participation? These are not questions a reviewing court or appointed neutral should answer. These are questions that in-house, transactional, and trial lawyers should be asking each time they are presented with an opportunity to mediate a dispute regardless whether it is voluntary or mandatory. The answer should not be “none.” If it were, it would reflect a lack of faith in mediation that should not govern our approach to dispute resolution.

Lawyers, therefore, must take responsibility for engaging in mediation consistent with their duty to zealously represent their client and their corresponding duties of professionalism and civility. This will facilitate adherence to both objective and subjective good faith standards, even if the latter cannot be defined precisely or enforced. It also will diminish the likelihood that litigants will engage in bad faith conduct designed to degrade the mediation process.

III. Conclusion

Lawyers should approach mediation with the intent to maximize its value regardless of the context. This takes effort and a commitment to prepare for mediation as thoroughly as one would for a hearing or argument. To maximize the value of mediation, lawyers must: know their client; know their case; know their adversary; identify their client’s objectives; value the claims rationally; set the stage for mediation with their client and their adversary; time the mediation to maximize potential outcomes; negotiate from a position of strength (if possible); and, be prepared to take the case to trial. Preparing to mediate using these guidelines will serve the client’s best interests and should demonstrate good faith participation in the process regardless of outcome and regardless whether objective or subjective criteria are used to evaluate it.

Bad Faith Claim Handling – How to Avoid it Without Simply Paying All Insurance Claims

A. David Fawal | Butler Snow | November 7, 2017

“Bad faith” – just the sound of it can bring fear to even the most experienced claim adjuster. And for good reason. In many states, an allegation of bad faith in claim handling or a claim decision can bring with it the threat of punitive or exemplary damages.  The standard by which bad faith is judged varies, with some states imposing statutory liability, while in other states it is a judicial creation. Claim handlers could be forgiven for believing the only way to avoid a bad faith lawsuit is to simply pay all claims regardless of merit, but I submit there is another way. And having a good “bedside manner” is a start.

Having defended hundreds of bad faith lawsuits over the years, I have noted a common theme. I call it “bedside manner”, similar to what you expect from your doctor.  In the vast majority of bad faith lawsuits I have seen, there is almost always some communication failure between the claim handler and the insured, with the insured coming away feeling as if the adjustor is ignoring the insured, or worse, doesn’t care. Keeping the insured informed through every step of the process is a good practice to follow. While it is true that denying an insured’s claim is never good news for an insured, responsiveness, compassion and understanding by the adjuster toward the insured can go a long way to alleviating the ill will that sometimes leads to a bad faith claim.

Practicing good customer relations is not the only way to avoid bad faith. Another pointer is to be sure to know the applicable insurance policy inside and out. Lack of familiarity with the insuring agreement, conditions or exclusions tends to manifest itself in confusion and frustration on the part of the adjuster and the insured, sometimes leading the insured to lack confidence in any claim decision being explained.

While bad faith is most typically associated with claim denials, many states also recognize bad faith investigation. It goes without saying (but I’ll say it anyway), that the best way to avoid a claim of bad faith investigation is to …. you guessed it …. investigate. If the claim file does not contain the factual basis to support the claim decision, chances are an adequate investigation has not been conducted, or if conducted, has not been documented. But it is not enough to simply conduct an investigation into the claim – there should also be a review and evaluation of that investigation before a decision is made, and the claim file should reflect that review and evaluation.

Which brings us to another tip for avoiding bad faith – documenting the file.  There is an old mantra that says “if it isn’t noted in the claim logs, it didn’t happen.” That is a good mantra to keep in mind.  Claim activity should be noted in the file, to support the decision made and the basis for it. It is much easier to point to notes in the file showing what was done than to try and recall things that are not documented and try to explain years later that certain things were actually done during the investigation, but not noted in the file. Of course, when entering claim notes, assume that everything in the claim file will be revealed for courtroom scrutiny. Use detailed, accurate and courteous entries in the daily log and in all reports and avoid unnecessary editorial, careless or harsh comments.

Paying claims regardless of merit is not the solution. In the end, prompt, courteous and accurate communications with the insured are paramount. It may not be possible to always avoid a bad faith claim, but remembering a few of these pointers could go a long way in that direction.

 

What Unreasonable Behavior of the Insurer Gives Rise to Bad Faith in California?

Denise Sze | Property Insurance Coverage Law Blog | October 6, 2017

In a past blog, I explored how the interpretation of California Civil Instruction (CACI) 2334 is impacting the law. This week, we look at the CACI instruction to analyze how an insurer’s “unreasonable” behavior is deciphered to potentially give rise to a bad faith verdict in California.

CACI 2330 states:

In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement.

To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests.

To breach the implied obligation of good faith and fair dealing, an insurance company must, unreasonably or without proper cause, act or fail to act in a manner that deprives the insured of the benefits of the policy. It is not a mere failure to exercise reasonable care. However, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy.

The jury instruction comes up for interpretation. In order to find bad faith, the insurance company must act “unreasonably.” Yet, mere failure to exercise “reasonable” care is not bad faith. Therefore, the interpretation of what is unreasonable or reasonable behavior of the insurer is the key to interpreting whether an insurer has breached the implied good faith and fair dealing, and committed bad faith. In Bernstein v. Travelers Insurance Company,1 “unreasonable” in concept is a self-conscious disconnect (a large, unabridged gap) between, on the one hand, what the insurer is communicating to, demanding of, and paying its insured and, on the other hand, what the insurer thought it owed and would owe under the claim.

In Chateau Chamberay Homeowners Association v. Associated International Insurance Company,2 the court held an insurer’s conduct is “unreasonable” when a refusal to discharge a contractual responsibility is prompted by a conscious and deliberate act which unfairly frustrates the agreed common purpose and disappoints the reasonable expectation of the other party depriving the party of the benefits of the agreement. The analysis of an insurer’s reasonable or unreasonable performance, depends on whether claims were handled per the Insurance Code, abided by an insurer’s own claims handling practice guides, or if the insurer had self-interest over the interests of the client/customer.

Unreasonableness or reasonableness is largely a subjective standard but CACI 2330 is clear in stating bad faith is not a “mere failure to exercise reasonable care,” which tells us that inadvertent errors or some passage of time by itself may not be a breach rising to bad faith.

Often my clients ask whether their cases and situations surrounding the handling of their claims rise to bad faith. Because the standard is subjective—and almost one of a sliding scale of how egregious or unreasonable an act or failure to act may be—it’s often safe to say that jurors are reluctant to find bad faith until there is a clear bright-line showing that the insurer acted in an inexcusable manner that puts the insured into a position of disadvantage.
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1 Bernstein v. Travelers Ins. Co., (N.D. Cal., 2006) 447 F.Supp.2d 1100, 1108.
2 Chateau Chamberay Homeowners v. Associated Inter. Ins. Co., (2001) 90 Cal.App.4th 335, 346.

Colorado Allows Contractors to Bring Statutory Bad Faith Claim as First-Party Claimant

Jonathan Bukowski | Property Insurance Coverage Law Blog | October 4, 2017

With its 2008 enactment of Colorado Revised Statute § 10-3-1115 and § 10-3-1116, Colorado has created one of the country’s strongest statutory bad faith causes of action. What makes Colorado’s bad faith statute even more exceptional is that it allows a repair vendor, such as a roofer or restoration contractor, to assert a claim for unreasonable delay or denial on behalf of an insured.

Colorado Revised Statute § 10-3-1115 provides that an insurance carrier shall not unreasonably delay or deny payment of a claim for benefits owed to or behalf of any first-party claimant. The statute defines a “first-party claimant” as an:

[I]ndividual, corporation, association, partnership, or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.

In the 2012 case of Kyle W. Larson Enterprises, Inc. v. Allstate, the Colorado Court of Appeals further clarified that a “first-party claimant” unambiguously includes a repair vendor, such as a roofer or contractor, that brings a claim against an insurer on behalf of its insured.1 The appeals court explained that it is in keeping with the legislative objective (preventing unfair and deceptive practices by insurance companies) to allow a repair vendor acting on behalf of the insured homeowner, to assert a claim for relief under Colorado Revised Statute § 10-3-1115 and Colorado Revised Statute § 10-3-1116.

More recently, Magistrate Judge Watanabe of the United States District Court of Colorado and Judge Russel of First Judicial District of Colorado cited Larson in denying insurance carriers motions to dismiss statutory bad faith claims of contractors pursuing benefits owed on behalf of an insured under an insurance policy.2

By defining a “first-party claimant” as a person or entity that asserts a claim on “behalf of” an insured, the Colorado legislature deliberately chose to expand the class of plaintiffs that may pursue a statutory bad faith claim. Colorado state and federal decisions have made it clear that the term “first-party claimant” unambiguously permits parties other than the insured, such as roofers and restoration contractors, to bring statutory bad faith claims on behalf of an insured. Repair vendors who have suffered through the consequences of an insurance company’s delay or denial now have the ability to assert a claim for statutory bad faith on behalf of the policyholder.
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1 Kyle W. Larson Enterprises, Inc. v. Allstate Ins. Co., 305 P.3d 409, 411 (Colo. App. 2012).
2 Sable Cove Condominium Ass’n. and Edge Construction, LLC v. Owners Ins. Co., No. 14-cv-00912, 2014 WL 4398668 (D. Colo. Sept. 5, 2014); Ecoblast, LLC v. Country Mut. Ins. Co., 2016 WL 8938412 (Colo.Dist.Ct. Oct. 18, 2016).

Fourth Circuit Finds No Bad Faith for Delay in Investigating Construction Defect Claim

James W. Bryan | Nexsen Pruet | September 12, 2017

Construction defect claims often include coverage disputes spiced with allegations of bad faith designed to turn up the heat on the insurer. The Fourth Circuit, in its review of one such recent North Carolina case, held while the insured prevailed on its contract claim, there was no bad faith. Delay, without other, aggravating factors is not enough to establish the malice or reckless indifference to consequences necessary to reach the level of bad faith. Westchester Surplus Lines Ins. Co. v. Clancy & Theys Construction Co., 683 Fed.Appx. 259 (4th Cir. 2017).

Westchester involved a dispute over insurance coverage for a general contractor’s liability for defective design of a building foundation. A joint venture, in which Clancy was a partner, was hired to construct a mid-rise student housing building in Raleigh, North Carolina. In September 2011, after construction was well under way, a portion of the building began to lean, damaging other portions of the building. The owner demanded a remedy that would result in no risk to it, or its lender. Following agreement on a repair plan, the joint venture initiated a mediation process with potentially responsible subcontractors seeking allocation of the $14.4 million repair costs. This resulted in agreement that 10.5 million would be paid on behalf of subcontractors, leaving the remaining damages to be absorbed by the joint venture. Clancy sought reimbursement of its share from Westchester under general and professional liability policies.

Upon receiving the owner’s demand for repair in September 2011, Clancy notified Westchester of the potential claim. Clancy was unable to contact the Westchester representative assigned to the claim who, unbeknownst to Clancy, had left the employ of Westchester. After about a month, Clancy established contact with another Westchester employee assigned to the claim. After providing all of the communications between Clancy and the owner, Westchester was silent for another two months. As Clancy pressed for a coverage determination, Westchester requested an accounting of costs and a copy of the joint venture agreement, all of which Clancy provided. Eventually, in May 2012, Westchester informed Clancy it believed its policy did not cover Clancy’s obligations for the construction damages but it was not issuing a formal denial of coverage. Indeed, three months later, Westchester stated it was still investigating the coverage issue. In September, 2012, Clancy complained of Westchester’s year long delay and threatened suit. In response, Westchester filed its action for a declaratory judgment that its policy afforded no coverage. Clancy counterclaimed alleging Westchester’s breach of contract and tortious breach of contract based upon Westchester’s failure to timely investigate, failure to timely issue a coverage opinion, failure to properly defend, failure to assist in mitigating damages, and failure to indemnify for covered losses. Clancy also alleged Westchester acted in willful, wanton disregard of its duty to defend and indemnify, entitling Clancy to extra-contractual damages.

In May 2014, the district court denied summary judgment for either party on the contract dispute but entered summary judgment for Westchester on Clancy’s claim for bad faith tortious breach of contract, finding “in order to recover for tortious breach of an insurance contract, an insured must show that the refusal to pay on the insurance contract was based not on honest disagreement or innocent mistake, but rather on ‘malice, oppression, willfulness and reckless indifference to consequences.’”

The district court concluded

Though there is much dispute present in the record regarding when and whether Clancy notified Westchester of a claim against it, the record does not support that Westchester acted with malice, oppression, or a reckless indifference to consequences. Where courts have found that a refusal to settle an insurance claim was an act of bad faith there has been ample evidence to show not only delay in investigation but also other aggravating factors such as the offer of a woefully low settlement amount, reliance on estimation of damage and repairs submitted by a clearly unqualified professional, and evidence that the insurance company “stirred up hate and discontent” against its insured by making false accusations regarding the insured’s participation in the loss…While the record certainly reflects that Westchester does not think Clancy is entitled to indemnity and defense, Clancy has not demonstrated the presence of sufficient aggravating factors, nor an opinion that Westchester’s actions were not reasonable or appropriate within industry practices, and summary judgment in favor of Westchester is appropriate on Clancy’s tortious breach of contract claim.

A year later, in a bench trial as to the remaining issues, the district court found Westchester owed Clancy coverage for its portion of the loss, less its deductible, plus applicable interest. Westchester appealed and Clancy cross- appealed. The Fourth Circuit affirmed the bench trial judgment on the contract claim, rejecting Westchester’s argument that the joint venture’s liability was separate and distinct from the liability of each of its members. As to the bad faith claim based upon delays in Westchester’s investigation, the Fourth Circuit concluded summary judgment in favor of Westchester was proper, relying on North Carolina law requiring, “malice, oppression, willfulness [or] reckless indifference to consequences” in order to establish tortious breach of contract.

Though an unpublished decision, Westchester reflects a North Carolina trend; delay-based extra-contractual claims in construction defect cases do not end well for the insured. The procedural history of Westchester demonstrates a common pattern and the court’s opinion demonstrates a frequent result.

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