To Mediate or Not Mediate (That Is Not the Question)
Lessons learned about mandatory mediations from Superstorm Sandy
The Spanish-American philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.” With that quote in mind, let’s examine the issues and lessons learned from the mandatory mediation programs instituted by the states of New York and New Jersey in response to claims from Superstorm Sandy, which struck on Oct. 29, 2012, since it is likely that similar programs will be initiated as a result of Hurricanes Harvey and Irma.
Rules of Engagement
The purpose of these Sandy mediation programs was to develop a cost-effective solution to promptly and efficiently resolve claims. These programs provided non-binding, two-hour mediation sessions paid for by the insurers. The American Arbitration Association (AAA) administered these Sandy mediation programs, since it had prior experience administering programs in the aftermaths of Hurricanes Andrew, Katina, and Rita, among others. Based on our personal experience with the New York and New Jersey programs, and in light of our discussions with representatives of insurers and policyholders’ attorneys, these programs were viewed as effective in most regards and significantly reduced the number of lawsuits filed as a result of Sandy.
The New York State Department of Financial Services (DFS) promulgated as an emergency measure a regulation that adopted the Fifteenth Amendment to New York’s Regulation 64, on Feb. 25, 2013, mandating insurers to send notice letters to certain claimants advising them of their right to request a non-binding mediation through a mediation program. While claimants had a choice whether or not to request a mediation, insurers were required to participate and pay for the mediation if requested by claimants. This regulation applied to any claims for loss of or damage to real property or loss of or damage to personal property, other than motor vehicles, not including claims made under flood policies issued under the National Flood Insurance Program. There were questions initially as to whether claims under commercial policies were included in this program, including business interruption losses, or whether the program only applied to homeowners’ claims.
There also was some confusion as to whether notice letters needed to be sent to claimants whose claims had been denied before the effective date of the regulation. Many claims had been denied in the months following Sandy in 2012. Further, in circumstances where an insurer issued payment to a claimant before the regulation became effective and an insured seemingly accepted the payment in settlement of the claim, albeit for less than what was claimed, did this mean the claim remained “unresolved,” a term not defined by the regulation, thus requiring a notice letter to be sent?
The State of New Jersey Department of Banking and Insurance (DOBI) issued Order No. A13-106, with regard to the Sandy mediation program. The New Jersey order and bulletins were clearer with regard to the inclusion of claims against commercial policies and which claimants needed to be sent notice letters. Many insurers, third-party claims administrators, and managing general agents spent a great deal of time trying to interpret these regulations and orders to determine which claimants were required to be sent notice letters. It was apparent, by virtue of these mediation regulations and orders and required reporting to the New York DFS and New Jersey DOBI following Sandy, that future catastrophe response plans and preparation by claims departments in response to such losses required improvements in tracking and capturing claims data and information to enable insurers to efficiently report information to governmental agencies and to determine if claims are eligible for mandatory mediation programs. Many insurers spent a great deal of time going through claims files to determine if notice letters needed to be sent under tight time deadlines.
Sitting Down at the Table
In both the New York and New Jersey Sandy programs, insurance companies were required to send individuals knowledgeable of the claims with binding settlement authority to the mediation. When attendance was impossible, participation was allowed by telephone. (None of the locations we had experience with had video conferencing capabilities available.) Representatives from insurance companies also were required to appear at the mediations with copies of the policies and entire claims files. It was very rare for the mediator to request and review the claims file, but it is something to keep in mind in terms of claims handling.
In our mediations under these Sandy programs, every claimant was treated with kindness, courtesy, and respect. Based on discussions with some program mediators and others who had direct experience with these programs, the general consensus was that it reduced the number of consumer complaints following a mediation hearing and the likelihood that suit would be filed.
However, some claimants were very aggressive and upset that their claims were denied. It was a very stressful time for many claimants who suffered major damage to their homes and businesses, which led to some confrontational situations. Unlike a private mediation where you may be inclined to just get up and leave, we tried to avoid doing this in light of the mandatory nature of the programs. Initially, mediations were held at various locations, such as law schools and government buildings, but we found that conducting these mediations in a more structured location such as AAA’s offices led to more formality and eased security concerns.
Many claimants who attended the mediation hearings did not appreciate the mandatory nature of the programs with respect to requiring insurance company participation, and many did not understand the process. There was information published by the states and the AAA with regard to these programs, but many claimants did not review the available materials. Many claimants were disappointed to show up and find out that the insurance company was adhering to its coverage denials based on flood exclusions. Some claimants specifically asked, “Why did you bother to tell me I could request a mediation if you were not going to offer me any money?” Some claimants appeared at the mediation hearings and blamed their insurance brokers for not securing flood insurance on their behalves and did not understand that these programs did not involve any disputes with their insurance brokers.
Early on in these programs, some mediators said that if no money was offered by the insurer to settle the claim, then they were not acting in good faith as mandated by the programs. There was mention that this could be reported to the DFS. However, the New York regulation required that “the insurer must participate in good faith,” but noted that “an insurer that does not alter its original decision on the claim is not, on that basis alone, failing to act in good faith if it provides a reasonable explanation for this action.”
Many of the mediations pertained to claims denied on the basis that no flood coverage was afforded under the applicable policy. In many of these claims, there was no allegation by the claimant of any wind or other potentially covered damage. Many insurers questioned the purpose of a mediation in these circumstances. Much time at the mediation hearings was spent explaining the flood exclusion and anti-concurrent causation language in the policies. As time went on, many of the mediators became familiar with these coverage issues. Thus, some mediations were completed well within an hour, as the mediator would simply inquire if the insurer was willing to offer anything to settle despite the flood exclusion. If told no, then the mediation typically would be concluded within a half hour.
While we were involved in many mediations where no money was paid by the insurer, only a very small percentage of the insureds who requested and participated in the mediation programs later filed suit, even though no payment was made or money offered at mediation. It appeared that many claimants simply needed an explanation as to why coverage was denied and wanted an opportunity to be heard.
In some larger losses, claimants appeared with counsel and experts, and some gave presentations. These were not typically effective in this forum, and, in most of these claims, a lawsuit was eminent or had already been filed by the claimant. These claims were better suited for more extensive private mediations with the use of a mediator who had property coverage experience.
AAA reported at the closing of the New York State mandated program that 3,360 mediations had been filed with a settlement rate of 63 percent. In the New Jersey program, 991 mediations were filed, with a success settlement rate of 67 percent. AAA reported that the Hurricane Katrina and Rita programs in Louisiana and Mississippi had an aggregate of 17,831 cases with a 76 percent settlement rate, and the Hurricane Andrew program in Florida had a settlement rate of 92 percent for its 2,500 claims.
These programs certainly reduce the amount of lawsuits filed and are a cost-effective means to resolve many claims, but many insurers felt that it was not a good venue to resolve pure coverage disputes. The AAA and others initiated seminars following the Sandy mediation programs to discuss lessons learned from the process, which included the challenges that can be faced in these mediation programs and strategies to deal with them. Some policyholder advocates believe that many claimants came to these mediations at a disadvantage because they were required to devote considerable time and energy to educate themselves.
Some have suggested an official preparation component to future programs. Others felt that there was a power imbalance because litigation was not an economically viable option for many claimants. Those of us who defended many lawsuits from Sandy do not fully appreciate this argument, but these programs did provide claimants a cost-effective means to present their cases to a neutral mediator.