Alternative dispute resolution: Is there a “neutral” in your future?

Alternative dispute resolution: Is there a “neutral” in your future?

Kleinman, Randall

Agents’ Legal Issues provides a brief general overview of a complex area of law, and neither the author nor Rough Notes intends it to be taken as legal advice for any specific problem. For a specific problem, consult with legal counsel that understands the law of insurance and insurance agencies and provide all details.

Judge Wapner? Judge Judy? These famous television judges have been, and will continue to be, a powerful reminder of how the traditional legal system works, in its most basic form, in simple cases. But the traditional system may not represent how the legal system for more complex disputes is now “trending” for many of us, perhaps even most of us, in an age where there are too many cases, too few judges, too lengthy a backlog in many courts, and too much expense to bring or defend a case. In our modern world, the reality of how the legal system really works has caused a boom in Alternative Dispute Resolution (“ADR”) that shows no signs of stopping.

Let’s look at a typical lawsuit first, with all its inconveniences; then we’ll look at what ADR is all about and why it will undoubtedly affect your life in the future.

The pain of litigation

A typical lawsuit starts with two potential litigants having trouble agreeing on the resolution of some sort of dispute, whether it be a contract problem, an accident of the sort that lawyers call a “tort,” or problems with a relationship such as a marriage. Lawyers are hired; nasty letters fly back and forth; and when a settlement is not forthcoming, a lawsuit is filed-breach of contract, or allegations of negligence, or complaint seeking divorce. The case is assigned to a judge, and then the lawyers begin pre-trial maneuveringmotions to dismiss, motions for injunctions, motions for this and that.

Then comes “discovery”depositions, interrogatories, requests to view evidence, etc. It all takes a very long time in many courts, and the cost of litigation mounts up. Eventually, if the parties can stand it that long, the case is set for trial; but the judge usually has other cases that have been sitting even longer on the docket waiting for trial, so there is further delay. The lawyers begin to prepare for trial, a process that usually requires three expensive days of preparation and organization for every actual expected day of trial.

The whole miserable process of going to court is frequently so expensive, so time-consuming, and so full of delay, that 98% of cases never make it to trial. Instead, they are settled in advance. And that’s not all bad. Rather than have one person win at trial, and the other lose, in situations where both parties often should share part of the blame for the failure to resolve a situation, a settlement allows both parties to salvage some self-esteem and claim they “really” got what they wanted.

But even this result is, sadly, very expensive and timeconsuming. Why not short-cut all the side issues and cut right to the chase? That’s exactly where ADR comes in. The varied forms of ADR:

ADR can take a number of different forms, along with combinations or “hybrids” of these forms. The first form is mediation. The second is arbitration. A third form is the summary trial or the mini-trial. A fourth form is the ombud (formerly “ombudsman”) feature. In most cases, nothing prevents the parties from carrying on two or more of these ADR approaches at the same time-for example, engaging in mediation attempts while an arbitration is going on. ADR has grown so much in the past decade precisely because it solves some of the big problems of the legal system. At its best, it can be quick and inexpensive and, yet, will allow the parties to get what they want-a sense of what the case is worth.

The use of ADR is quite common in a number of fields that involve a lot of cases. For example, most reinsurance contracts have for years included a paragraph requiring arbitration in lieu of using the courts. Reinsurance people believe that the technical aspects of reinsurance require the use of expert arbitrators, experienced in reinsurance, rather than the typical judge who knows little about the subject.

For years the National Association of Securities Dealers (NASD) has offered arbitration facilities that have become a standard feature of contracts between member stockbrokers and the investing public. And many private business contracts, drawn up by lawyers, include an arbitration clause, requiring the parties to resort to arbitration before bringing a lawsuit. The American Arbitration Association is often mentioned in the clause as the organization whose facilities or rules shall be used.

Divorce is an area that has seen a huge growth in mediation, with a great many courts requiring couples at least to try mediation before getting a divorce. And, with the backlog in so many courts, many now are requiring arbitration after a lawsuit is filed as a way of getting some cases resolved early and clearing the way to trial for the cases that can’t be settled.

“Non-contract ADR” (sometimes called “Submission ADR”) is a newer form of ADR that has become quite popular. Even in the absence of any law or contract requiring ADR, more and more parties are proposing to the other side that they jointly submit the case voluntarily to arbitration or mediation.

Some of the companies that provide arbitrators or mediators to handle the ADR have grown quite quickly in the last decade. JAMS/Endispute, created in a merger between two leading companies in the field, is one of these. These firms usually have plenty of former judges or other trained dispute-resolution professionals on hand; such persons are called “neutrals,” because they do not take sides.

The ins and outs of arbitration Arbitration, which usually looks a lot like a court trial, comes in various forms. It can be “binding,” which means that both parties are required to live by the decision of the arbitrator and not take the case to a court. Or, it can be “non-binding,” which means that the decision of the arbitrator is merely informative and not binding. While non-binding arbitration may seem like a waste of time, in that it can be rejected, it turns out that very high percentages of cases settle soon after non-binding arbitration. Many parties, it turns out, merely want their day in “court,” whether it be before a judge or before an arbitrator; and hearing the neutral render an opinion and stick a dollar amount on the size of the case, goes a long way toward closing up the dispute.

Arbitration also can be done on an all-or-nothing basis. One variation of that is in baseball arbitrations, where the arrangement is usually that the parties will let the arbitrator decide on a dollar amount for the baseball player. Whichever “last offer” of the parties falls closest to that amount becomes the player’s salary for the next year. “High-low” arbitrations also exist, where the parties agree that no matter what the arbitrator decides, they will pay no more than, and no less than, certain figures. That gives each party a chance to go to arbitration on the disputed range of figures, without totally risking the previously-negotiated numbers.

Arbitration can be by one person or by several. Most arbitrations involve three arbitrators, with each party picking one arbitrator, and with the two arbitrators picking a third. However, this format is not necessarily required.

Although arbitration has recently become a big growth area, it has been around for many years. The Federal Arbitration Act also has been around for many years, and the Uniform Arbitration Act has been adopted by many state legislatures. In addition, it is not unusual for organizations to have arbitration provisions in their by-laws or other rules. For example, many years ago the Illinois Insurance Exchange enacted a rule providing for arbitration of disputes between member syndicates.

The content of arbitration by-laws or contract clauses is not standard. Options from which to choose are:

Who can demand ADR?

What forms of ADR are permissible?

What issues are arbitrable?

Are punitive awards or injunctions available?

Where will the arbitration hearing take place?

How fast will ADR proceed?

How will the neutral be chosen?

How will such matters as cost, procedure, enforcement, and discovery be handled?

Even arbitrations can end up in court These issues are sometimes the subject of litigation. For example, in Universal Reinsurance Corporation tn. Allstate Insurance Company (7th Circuit Federal Court of Appeals, 1993) 16 F3d 125, the dispute was about whether Universal could name an arbitrator three business days after the time permitted by the reinsurance agreement. Allstate had noted that Universal was late (Universal said in court that a secretary had mis-typed the deadline when transcribing it), and Allstate had chosen an arbitrator on Universal’s behalf. The case was argued at the trial level (before Judge Grady) and at the appellate level, and the reported decision was rendered after a re-hearing on the appellate level. Although the trial judge and appellate court had previously found on behalf of Universal, the reported decision after re-hearing went the other way in favor of Allstate:

“To substitute our own notion of fairness in place of the explicit terms of their agreement would deprive them of the benefit of their bargain just as surely as if we refused to enforce their decision to arbitrate.” One judge, in a concurring opinion, noted:

“This is not to say, however, that I find Judge Grady’s concerns in coming to the opposite conclusion less than weighty. I think I agree with Judge Grady that ‘[no] one in his right mind would agree to have a matter decided by umpires selected entirely by one’s adversary’… It is, however, clear that two sophisticated parties entered into this agreement of their own accord, and this may be all that counts. Only time will tell.”

In another case, Safeway Insurance Company u. American Arbitration Association (Illinois, 1994) 247 Ill App.3d 355, Safeway went to the courts to try to overturn an arbitration award involving uninsured motorist coverage. Safeway argued that the arbitrator exceeded his powers; that the AAA did not follow its own custom and practice; that the award was procured by undue means; and that the arbitration was not required before the insured submitted a sworn statement. While Safeway did not succeed on the appeal, the case is interesting in that it shows various arguments that might be used to overturn an arbitration decision.

One last note about arbitration: Some people hesitate to go to arbitration because they feel they would win completely in the courts, and they fear that arbitrators are likely to “split the baby.” While that is a possibility, there is some statistical evidence that most arbitrators do not in fact do this.

Mediation: Let’s bury the hatchet Mediation, unlike arbitration, does not look like a trial. The neutral may well be a retired judge; however, the setting is usually more informal, more comfortable, than a courtroom setting; and the neutral’s job is simply to help the parties find a settlement they can live with. Although a mediator may be a highlyrespected, experienced expert in a particular field, the mediator has no authority to render a judgment or issue orders; he or she simply tries to serve as the oil or the grease to minimize the friction between the two parties.

Mediation often is tried because it is less adversarial than arbitration and requires less preparation on the part of the lawyers and parties. Statistics show that if mediation fails, it is usually because of one of several circumstances:

lack of settlement authority on the part of a person attending on behalf of a party

lack of preparation on the part of a lawyer or party, leading to incomplete information about whether a settlement possibility is favorable

hostile attorneys, creating a negative atmosphere defendant has insufficient money to pay a fair settlement one side is engaging in mediation only as part of a calculated scheme of trying to bleed the other side dry with excessive expenses

occasionally, one side is intellectually unable to understand the true value of its position

Unlike arbitrations, which are conducted much like court procedures (but usually with some short-cuts to save time), mediations are much different. A sample set of rules for a mediation might involve requirements that each side will get its say without interruption; that no one will assign blame or attack the other side; that each side will endeavor to understand the other side’s strong points; and that both parties will not focus on the harm done in the past, but rather on the possibility of creating an acceptable future. If these seem a bit “touchyfeely,” that’s intentional. The point of mediation is to get people to come to an agreement in order to put their troubles behind them.

A mediation agreement is a legal document that may contain a number of provisions. It usually will specify that the parties tell the neutral what issues are to be resolved. It almost always will say that mediation is voluntary and can be stopped at any time. It usually should say that the meetings are confidential and that discussions are not to be introduced in court later on behalf of one of the parties. It sets out the role of the mediator and provision for his or her payment.

Which cases are good for mediation? Ones where the court system requires ADR, but you’d rather pick your own mediator and go faster. Ones where the other side seems to be unsure of where it is going. Ones where an outside, impartial, and friendly neutral may be able to bring hostile parties together. Ones where the plaintiff is emotional. Ones where the cost of litigation would be higher than any settlement. Ones where expensive discovery is about to start. Ones where the client and the client’s own lawyer disagree on the value of the case. Ones where a well-known celebrity seeks the confidentiality that a mediated settlement could bring. Ones where the two parties don’t want an on-going business relationship to fall apart.

Abbreviated trials and ombuds Summary trials and mini-trials are a way of carrying on a real trial but cutting out some of the expense and complications. These methods, which are not standardized, usually involve hiring a private “judge” (either a retired judge or an experienced neutral), and either submitting the whole case to the judge in writing rather than in oral testimony, or having a much reduced time for testimony. Experience shows that while the concept seems attractive at first, it can take a lot of time and trouble to prepare a pared-down case; and that the time needed to organize such a case and emphasize the key points very briefly, in many instances, comes close to the time needed to present a full-blown case.

Ombuds are usually people who work in large organizations, and whose role is to guide employee or customer problems through the organization, and maybe even champion their cause. The ombud system is a way that a large company can set up a person whose job it is to act as a neutral of sorts, in order to avoid having problems become larger than they need to be.

A caveat

One last point about ADR should be mentioned. The paucity of women neutrals in the field has been noted. In fact, an article entitled “Why Are So Few Women in the ADR Field?” appeared in 1993 in a professional journal. The profession of “neutral” tends to be dominated by older, statesman-like, white males, who sometimes may bring with them certain viewpoints. You may or may not want to choose such a person to act as a neutral in your case, but be aware that such persons are the typical people available to act as neutrals.


At the beginning of this article we mentioned Judge Wapner and Judge Judy. Although these judges and their shows may portray what the judicial system is like, even some television litigants engage in ADR because a show’s producers may have required the litigants to sign an agreement that takes the case out of the court system and puts it before the television judge (in cases where the television judge is acting as a private judge rather than as a government employee).

The growth of ADR is not going to slow down. It is cheaper; it is more convenient; and it helps keep down the taxes that would be needed to support the judicial system. You are more likely to appear before a neutral these days than to appear before a judge in the trial of a civil dispute. It helps to know what you’re getting into!

Randall Kleinman, JD, CPCU, CLU, has written the Agents’ Legal Issues Column since 1994. After practicing law for many years, he founded Oospensky Communications, Inc., of Wilmette, Illinois, which publishes Insurance Magic, an unconventional newsletter.

Copyright Rough Notes Co., Inc. Jan 1998

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