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Settling Insurance Bad Faith

April 1, 2013

This article was originally published in The Caucus, a publication by the Florida Academy of Professional Mediators, Inc., Spring, 2013. © Copyright 2013 by FAPM. All rights reserved. Republished by Butler with permission from FAPM.

Parties to litigation naturally act in their own self-interest. With allegations of insurer “bad faith,” this is especially so. The parties are initially polarized. The claimant wants compensation beyond policy limits. The insurer wants to avert extra-contractual exposure. However, self-interested parties will settle if a negotiated resolution is their best option. Mediation is perhaps the most efficient and effective way to resolve insurance bad faith actions. The key is to illuminate both sides about the alternatives to settlement, and the benefits of a mediated resolution.

The Mediator

Natural talent and superior interpersonal skills are the hallmarks of any gifted mediator. However, an insurance bad faith mediator should be intricately familiar with this field of law to identify the strengths and weaknesses of the parties’ positions and to communicate effectively with the parties and their legal counsel.

The Process

Meaningful discovery is usually a necessary predecessor to successful bad faith mediations. The parties need to be fully prepared to address both liability and the recoverable damages. Early “preemptive” mediation is only beneficial when liability and damages are known from the outset. A mediation attempted too early may be a lesson in futility.

Open Session and Caucuses
Open discussions may build relations and encourage cooperation. However, in a bad-faith lawsuit, protracted open discussions are usually inadvisable because trust between the parties is lacking. Private caucuses are generally more productive.  The mediator should use the time with each party to identify common ground, pressure points, and tolerances. The experienced “bad faith” mediator will obtain valuable information from each party and use it to coerce the other side into concessions.

Settling or Impasse
The mediation conference is not the last opportunity to settle. Insurance company representatives who attend mediation will report back to management and confer about whether to continue negotiations or proceed with litigation. Further discussions by telephone, or even a second mediation conference, could produce a settlement.

The Risk Of Not Settling

For the insurer, bad faith claims mean extra-contractual exposure, litigation costs, distraction of company employees – and perhaps negative publicity or regulatory scrutiny. The insurer’s best alternative to settlement is to be vindicated of wrongdoing, but still, incur legal expenses which may not be recoverable and endure the distraction of years of litigation. This “win/lose” scenario often results in a less favorable outcome than settlement.

For the insured or third-party claimant, the unknown outcome of litigation may significantly impact his or her life thereafter. Moreover, rehashing a traumatic life event through litigation can be overwhelming. The best alternative to a negotiated settlement is to win both the underlying liability trial and the bad faith case, but suffer years of litigation and the lingering fear of the unknown outcome to follow. This “win/lose” scenario also results in a less favorable outcome than settlement.


Settling extra-contractual claims through mediation requires a mediator with insurance bad faith expertise, savvy negotiation technique, and enlightenment of the parties to the reality that settlement is in their best self-interest.