Advocate Magazine: Mise-En-Place: Preparing for mediation in disability insurance bad-faith cases
Written by Frank N. Darras and Susan Grabarsky; contributed to and published in Advocate Magazine.
Mise-en-place is a French phrase (literally “put in place”) and culinary concept that means to gather all the tools and prepare all the ingredients required before one starts cooking. If you pre-measure, pre-cut, and line up all the materials needed, in the order they will be used, not only will the food come out better – you may even enjoy the process. The same concept applies to mediating a disability insurance bad-faith case. Like putting together a fancy meal, mediation is an expensive and time-consuming process that will fail without adequate preparation.
This article will outline some of the things plaintiff’s counsel can do in advance to increase the likelihood of a successful mediation. In addition to the traditional preparation and marshaling of the evidence, we recommend some less traditional approaches. These include sharing your best arguments with opposing counsel as early as possible in the case; discussing damages well in advance of mediation and, if appropriate, engaging in pre-mediation settlement negotiations; sharing your mediation brief, even if the defendant refuses to share its brief; preparing not just your disabled client, but also any companion or caretaker attending the mediation; and agreeing upon release terms in advance.
Three levels of analysis
Disability insurance bad-faith cases tend to involve complex medical, vocational, financial, and legal issues. There are three levels of analysis. First, to recover damages for breach of the insurance contract, you must prove the insurance company wrongfully denied the disability claim, based on how disability is defined in the policy and under California law. Second, to recover extra-contractual damages in tort, such as emotional-distress damages and consequential damages, you must prove the insurance company acted unreasonably and therefore in bad faith. (Egan v. Mutual of Omaha (1979) 24 Cal.3d 809, 818.) Third, to obtain punitive damages, you must show by clear and convincing evidence that the insurer acted oppressively, fraudulently, or maliciously in denying the claim. (Civ. Code, § 3294.).
The foundational issue is whether the plaintiff is disabled, as that term is defined in the policy. Is disability based on the policyholder’s own occupation, or must she be unable to perform any occupation? If it is her own occupation, is that defined as her medical or dental specialty? Is a loss of earnings required to claim disability; if so, what percentage of loss is required? How are pre-disability and post-disability earnings defined, especially for policyholders who still own their businesses though they can no longer work? Must the disability be caused by an accident or sickness in order to be covered? Are there exclusions or limitations on coverage for certain types of disabilities, like mental illness or substance abuse? If so, how are those disabling conditions defined?
Regardless of how the policy defines “total disability,” the California Supreme Court set higher standards by which insurers must abide in Erreca v. Western States Life Ins. Co. (1942) 19 Cal.2d 388, 396:
“Total Disability” does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way. Recovery is not precluded…because the insured is able to perform sporadic tasks, or give attention to simple or inconsequential details incident to the conduct of the business.
In Moore v. American United Life Insurance Co. (1984) 150 Cal.App.3d 610, 632, the court further explained how the concept of “total disability” is to be interpreted in California:
The term “total disability,” as applicable to the insurance policy involved in this case, is defined as a disability that renders one unable to perform with reasonable continuity the substantial material acts necessary to pursue his usual occupation in the usual and customary way….
The test of “total disability” set forth in Erreca is still black-letter law. “California law requires courts to deviate from the explicit policy definition of ‘total disability’ in the occupational policy context.” (Hangarter v. Provident Life and Accident Ins. Co. (9th Cir. 2004) 373 F.3d 998, 1006.)
Based on the definition of disability in the policy and California law, marshal the medical, vocational, financial, and other evidence necessary to prove all three types of damages.
Share your strongest arguments
Your best arguments should not be saved for the mediation brief. As a strategic matter, some evidence should not be shared before trial, or even before mediation day. Decide what information you can share with the defense before mediation, then send it to opposing counsel as soon as possible. A bullet-point summary of your arguments will usually suffice, but the timing of this information is the key.
Defense lawyers typically prepare a formal case evaluation report, outlining strengths and weaknesses, months prior to mediation. Make it easier for defense counsel to educate the insurance company about your case by laying it out in a clear fashion. Provide updated medical records and expert opinions to support your argument that the plaintiff remains disabled. If the medical records are handwritten or voluminous, provide a summary and point out which parts are most relevant to your case. Submit pictures and video showing the extent of your client’s disability, especially if the insurer’s surveillance allegedly shows your client is not disabled. Ask your client’s doctors to review the insurance company’s surveillance and opine thereon. Attach the curriculum vitae of your client’s doctors. If social media posts were part of the reason your client’s claim was denied, submit declarations from the plaintiff and family members to rebut the incorrect assumptions made by the insurance company about the content of those social
Picture yourself in opposing counsel’s seat: what would she need to inform her client about the risks it faces in your case? It is in your best interest to give defense counsel all the information necessary to make a fair evaluation that will lead to reasonable negotiation.
Discuss damages with defense counsel
Contractual benefits under a disability insurance policy can be calculated with certainty. These should be discussed with defense counsel as early as possible. If you can agree on the value of the contract in advance, then you can focus on the merits of the case on the day of mediation. After all, the mediator’s time is expensive. Mediation is no time to be solving math problems.
If it is not possible to agree on the contractual damages, consider preparing several different versions of your damages based on the issues in dispute. The important part is that the parties identify the reasons their numbers differ. These should be brought to the mediator’s attention in the briefs, so that they can be addressed early on the day of mediation.
The most common points of disagreement, with respect to calculating contractual damages, are:
- The discount rate for calculating the net present value of future benefits.
- Additional mortality rating applied by the defendant (“First you say plaintiff is not disabled; now you say he’s going to die next week…”).
- The benefit end date. It is easiest when the policy specifies an age – usually 65 or 67, but check if it is actually the policy anniversary date after such age is reached. Some policies end benefits at Social Security “Normal Retirement Age,” which depends on the policyholder’s year of birth. If the policy provides for “lifetime” benefits, discuss life expectancy before factoring any additional mortality rating. If the policy limits benefits for certain types of disabilities, discuss whether those benefit caps apply in your case.
- The offsets, if any under the policy.
If the benefit is offset by Social Security Disability Income (“SSDI”), does the policy allow the insurance company to offset an estimated amount for SSDI before it is actually received? If so, agree on the estimated SSDI offset amount based on a figure obtained from the Social Security Administration. When should the estimated offset start? What if the plaintiff never receives SSDI – does this contradict her claim for disability under the policy? Compare and contrast the definitions of disability, taking into account how California law affects the policy definition.
Are dependent SSDI benefits also an offset? If so, agree on when the dependent’s SSDI offset will end under the policy – usually the child’s 18th birthday or upon graduation from high school. What if the child is not in the insured’s custody? What if the child is already receiving benefits under his other parent’s Social Security record? Check to see whether the policy still allows the offset under these circumstances.
Other offsets that sometimes appear in disability insurance policies include workers’ compensation benefits, disability retirement or pension benefits, and amounts recovered from third parties for personal injury causing the disability.
One of the biggest issues, when calculating contractual benefits, arises if there is a change in the definition of disability at some point in the future. Another is the limitation of benefits for certain types of disabilities, like substance abuse or mental illness, in some policies. In such cases the defendant may take the position that, even if plaintiff prevails, the benefits would cease after 24 months because of a mental-illness limitation or because the definition of disability shifts from own occupation to any occupation. This is when discussing damages in advance is most helpful. It sometimes provides insight in to future benefit denial arguments and the opportunity to rebut them.
If the insurance company sees your case as one of limited contract value because of a specific policy term, you must counter that argument as far in advance as possible. Do not wait for the mediator to handle the issue. Otherwise, the defendant may show up at mediation with inadequate authority to settle. If the insurance company undervalues the contractual damages, they will certainly also undervalue the rest of your case.
Pre-mediation settlement discussions
Often, in the course of discussing damages, the parties segue into informal settlement discussions. This can sometimes backfire, so proceed with caution. If you decide to make an early demand, provide an expiration date so that your early demand does not set the ceiling for future negotiations. Agree that any demands and offers made prior to mediation expire on the mediation cancellation deadline. If you are still negotiating beyond the cancellation deadline, it should only be because the parties are fairly close to resolving the dispute. Consider asking for the mediator’s assistance. Most mediators would be happy to help settle the case early.
If informal negotiations fail and the case proceeds to mediation, inform the mediator of all past negotiations. Be advised that, despite the parties’ agreement to wipe the slate clean if the case does not settle pre-mediation, previous settlement offers and demands may still affect the outcome of the mediation. A good mediator will help you overcome this.
Carefully consider the timing of mediation
Early mediation is in the financially distressed plaintiff’s best interest, especially if reinstatement of monthly benefits is a possibility. Disability insurance policies are designed to protect the hardworking professional’s most valuable asset: the ability to earn a living. People rely on these policies to replace lost income when they are too sick to work. The benefits allow them to continue paying their mortgages and provide for their families, despite being disabled. When an insurance company denies a disability claim, the effect on the disabled individual and her family can be devastating. The negative repercussions of the denial can be mitigated, to a certain extent, by early resolution of the case. Early mediation also minimizes the costs of litigation. Even if mediation fails, the issues will have been narrowed.
Notwithstanding, some plaintiffs need the “therapy” of the litigation process. This is an important factor to consider when scheduling mediation. If it is important to your client that she be provided an opportunity to tell her side of the story, determine whether the mediator will be enough of an audience.
Most disability insurance bad-faith cases are mediated after written discovery has been conducted and depositions have been taken. This gives the parties enough time and information to assess the strengths and weaknesses of their respective cases. Discovery may also yield information helpful to other claimants, not just the plaintiff in this case, though settlement terms may prohibit disclosure of that information to others. Indeed, the insurance company’s desire to prohibit that disclosure may improve settlement prospects.
If punitive damages are a strong possibility, the parties usually schedule mediation after defendant’s summary adjudication motion and plaintiff’s opposition to the motion have been filed, before the court has ruled. Of course, mediating after the defendant’s motion has been denied would be even better for the plaintiff, given the likelihood that the issue of punitive damages will be tried. But the uncertainty of how the court will rule promotes settlement at this point in litigation.
Exchange mediation briefs
Exchanging mediation briefs is always a good idea. It gives the parties an opportunity to prepare in advance for the arguments most likely to be brought up at mediation. But even if the insurance company refuses to share its brief, plaintiffs should share theirs. The mediation brief serves to educate the insurance company about the strengths of the plaintiff’s case. It presents the medical and vocational support for disability, lays out the financial calculations, identifies the bases for extra‐contractual and punitive damages, and marries these facts with relevant case law. If provided early enough, the mediation brief helps ensure defense counsel is prepared for mediation with appropriate level of settlement authority.
Prepare your client and all companions for the process
Insurance bad-faith cases involve allegations the insurer acted unreasonably, maliciously, fraudulently, or oppressively, and cared more about its own bottom line than its disabled policyholder’s dignity. Plaintiffs who are living with the consequences of a bad-faith insurance denial are often distraught. But spouses and family members accompanying the disabled plaintiff to mediation are sometimes even angrier and more frustrated than the client. This is understandable if they have found themselves in a caretaker role since the onset of the client’s disability, especially if they have been saddled with greater financial responsibilities since the denial of the client’s claim. Emotions can run high. It is imperative that you prepare the client and all companions for the process, to keep the mediation from devolving into a three-ring circus.
Meet in advance with your client and anyone accompanying her to the mediation. Remind them that appearances matter. This includes attire, speech, body language, and social media. Counsel your client and the companion to be respectful and dignified at all times, no matter how badly they feel they have been treated by the other side. Discuss damages realistically and manage settlement expectations. Advise your client to consult a tax professional regarding potential tax consequences of a settlement. Discuss the terms most likely to be included in the settlement agreement. Ask about any other insurance policies issued by the same company or related insurance companies, any other claims or lawsuits – whether filed or still being contemplated, and anything else that must be carved out of the settlement agreement. Most importantly, explain confidentiality to everyone who will be attending the mediation.
Agree upon release terms in advance
Never wait until your client has agreed to settle for a certain amount before negotiating the release terms with defense counsel. It is difficult for the financially-distressed client to put the brakes on a settlement, no matter how unfair the terms are. The best practice is to negotiate the terms of the release in advance.
If you have settled previous cases with the same insurance company or defense counsel, start by looking at prior releases. Chances are, you negotiated the terms of those releases that also apply in your current case. Agree in advance to use the same language, with case-specific modifications, if the upcoming mediation is successful.
Release issues to discuss with defense counsel include:
- The scope of confidentiality and non‐disparagement clauses, and liquidated damages for any violation thereof.
- The scope of claims released, explicitly carving out any claims not released.
- Future coverage provisions, which must identify all past and present affiliated insurance companies included in the release.
- How the settlement will be reported, if at all, for tax purposes.
- Structured settlements or any other special financial arrangements required.
Ultimately, the most persuasive reason to hammer out the terms of the release in advance is time. At the end of a long day of mediation, when the carrier’s representative needs to catch a flight home, and your client is physically exhausted, the last thing either party wants to do is negotiate over the fine print in the release.
Many professional chefs tout mise-en-place as the only way to put together a complex meal. Without advanced preparation, errors are more likely to occur, important ingredients may be left out, and disappointment ensues. The same can happen while mediating an insurance bad-faith case. No one wants to waste thousands of dollars and countless hours on fruitless negotiations. Advance preparation is the key to an efficient, productive, and satisfying result at mediation.