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Does What Happens in Mediation Stay in Mediation?

8/14/20

By: Barry Miller

Insurers: Time to review your mediation practices.

As COVID-19 travel restrictions force most mediations online, often with participants in more than one state, insurance carriers must re-examine their assumptions about the process. They need assurance that what happens in mediation stays in mediation and does not become the foundation for a bad faith case. They may even be surprised to find that whether that assurance exists might vary from jurisdiction to jurisdiction.

Standard I of the Model Standards of Conduct for Mediators (published by the American Bar Association with the American Arbitration Association, and the Association for Conflict Resolution) upholds this idea. “Parties may exercise self-determination at any stage of a mediation, including mediator selection, process design, participation in or withdrawal from the process, and outcomes.” (Model Standard I).

And how a carrier exercises that right to determination is also protected by the principle of confidentiality. At least that’s the assumption many carriers make.

It is time to reconsider that belief and the boundaries of confidentiality.

Which law governs confidentiality?

Mediating across state lines is not a new thing. Before COVID-19 mediations sometimes included out-of-state participants by telephone. But what used to be an exception is now becoming the norm. The preference of most courts and mediators to have the parties and representatives in the same location had to change in 2020, if COVID-19 was not to halt mediations altogether. As the number of interstate mediations increases, questions about conflicts of law will arise more often.

There is no uniform mediation privilege applied by the courts of the 50 states. In fact, at least one federal court has found that South Carolina, where it sits, recognizes no such privilege. Other federal courts (such as this one sitting in Pennsylvania) recognize that the privilege exists, but still find that some material disclosed in mediation was discoverable.

In federal courts, the Sixth Circuit recognized a settlement privilege in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976 (6th Cir. 2003). But a number of federal courts reject the idea of a federal settlement privilege, holding that Federal Rule of Evidence 408 marks the full extent of protection for communications during negotiations.

Who owes the duty of confidentiality?

Is it the mediator who must maintain confidentiality? Or the parties? Ideally it should be both.

ABA

Model Standard V.A. requires the mediator to maintain the confidentiality of all information obtained in the mediation, unless otherwise agreed to by the parties or required by law.

But the Model Standards only pertain to the mediator. Confidentiality between parties remains a matter of law or agreement.

So the assumption that what happens at mediation stays at mediation can be dangerous for carriers, especially were a bad faith claim has been made. Like malpractice cases, bad faith claims are examples of “a case about case.” While bad faith claims usually are bifurcated for  trial and discovery purposes, the underlying and bad faith claims often are mediated together. If the bad faith claim does not settle, the question can evidence from mediation can be used in the bad faith claim.

Last year, In Mosley v. Arch Specialty Fire Insurance, The Court of Appeals of Kentucky held that it cannot. The underlying plaintiff alleged that two insurers acted in bad faith because they used the same defense counsel to represent them both at mediation, and also complained that counsel made global offers of settlement. Upholding summary judgment on the bad faith claim, the Court noted that allowing mediation conduct to serve as the basis for a new claim would chill settlement negotiations. Kentucky Rule of Evidence 408 (which mirrors the federal rule) was written to prevent this from happening. In addition, Kentucky’s Model Mediation Rule 12 recognizes that mediation conduct is covered by KRE 408. Because the plaintiff’s sole evidence for bad faith was mediation conduct, the Court of Appeals found that summary judgment was proper, since that evidence was not admissible. The Supreme Court of Kentucky has accepted discretionary review in Mosley; it remains to be seen whether that Court will give mediation the same protection.

How important is confidentiality?

One opinion states the view that most carriers would agree with, when it was asked to set aside a mediated settlement agreement. The  court declined to give that relief that it could only give by concluding that one litigant was unreasonable when it refused to accept an offer to settle. “It would be hard to imagine a procedure better designed to destroy the motivation parties have to engage in the mediation process than to have a judicial office determine how reasonable or unreasonable they were during their mediation and predicate a decision on that determination…. [I]t files in the face of the central judicial policy that settlement discussions be deemed confidential to encourage parties to engage in them.”

But expecting that all courts automatically have and apply this preference would be a mistake. And it is easier to make this mistake to make in a time when most mediations are conducted online.

Participate in Drafting the Mediation Agreement.

Carriers might seek the advice of counsel on conflicts of law issues before engaging in mediation, but it is unlikely that an attorney can give a definitive opinion where so many variables exist: the location of the parties, whether each of those jurisdictions recognizes a mediation privilege, and what the choice of law rules are in each jurisdiction.

The better practice is to control those variables as much as possible by agreement. The first principle of the ABA’s Model Standards is “Self-Determination.” Standard I.A. notes that parties “may exercise self-determination at any state of a mediation, including mediator selection, process design, participation in or withdrawal from the process, and outcomes.” Carriers can use their self-determination to ensure that the mediation properly addresses the use of mediation conduct to preserve their motivation to negotiate by:

• Determining which of the states who might have an interest recognize a mediation privilege
• Making sure the mediation agreement includes a choice-of-law provision stating that it will be applied pursuant to the law of one of those states
• Making sure the mediation agreement imposes upon the parties the contractual obligation to preserve confidentiality.

This will require carriers to obtain the mediator’s standard agreement before the day of mediation so that it can request the insertion of the proper language.

That is an extra step that most carriers and attorneys have not felt the need to take, before now. But it has become a necessary step.

If you have questions or would like more information, please contact Barry Miller at bmiller@fmglaw.com.