MEDIATION TIP #8 – WHO SHOULD PAY MEDIATION COSTS?
October 8, 2015 by Glenn Loewenthal
Maybe as a neutral I am overstepping my bounds a little here, but my intentions are in the right place. I see a trend in mediation that I think is leading to fewer settlements and that I think can be fixed or reversed. However, I think there is an easy fix to reverse that trend.
First and foremost, let me say that nobody should ever expect the other side to pay mediation costs. Whether the mediation is court ordered, suggested by the plaintiff or suggested by the defense or insurer, there is no built in expectation that any party will pay the other’s mediation costs. Some plaintiffs will come into a mediation with the expectation that because the defense suggested the mediation, and even picked the time, place and mediator, that they will or should pick up the plaintiff’s mediation costs. Again, no party should have this expectation, as such an expectation only leads to disappointment when they find out that is not the case. And disappointment can lead to other bad feelings that result in a failed mediation.
I do think it is a good idea for parties to address the issue of mediation costs when they agree to mediation. For example, if the defense knows at the outset that no matter the outcome of the mediation, that they know they will not pay the other party’s mediation costs, that information should be shared with opposing counsel so that they will not have any expectation coming into the mediation and can plan their strategy accordingly. Likewise, the economics of some cases may be so small and tight that a plaintiff will only want to mediate a case knowing that if the case settles that the mediation costs will be paid. So it is a good idea for counsel to address this topic when the mediation is first discussed and scheduled.
Now, for my thoughts on who should pay the mediation costs, when they should be paid and why. It is really the when part of the equation where I think reality it completely backwards from where it should be. What I see happening in reality is that in most cases that settled for $100K or more, the defense/insurer picks up all the mediation costs without a second thought. In cases that settle between $50K and $100K, the defense/insurer is picking up the mediation costs about half the time, and in cases that settle for under $50K, the defense picks up the mediation costs about 25% of the time. I think this is a flawed equation, and if reversed, would lead to many more settlements. Here is why.
Mediation costs, unlike the settlement amount, in most cases, is a direct cost to the plaintiff. In other words, it comes directly out of or into the plaintiff’s pocket, whereas settlement funds are usually split between the plaintiff, the attorney and any lien holders. In cases that settle for over $100K, the plaintiff is going to settle the case regardless of whether the defense/insurer picks up their mediation costs. However, for cases under $50K, and in particular cases under $25K, I have seen cases not settle solely because the mediation costs were not paid by the insurer. In these smaller cases, every penny makes a difference to the plaintiff, and because it is a direct cost to the plaintiff, that last thousand dollars is more important in mediation costs than it is in a settlement offer, which is split money. If I have seen this happen, and I am only one of thousands of mediators across the country, it is certainly happening on a daily basis. The defense/insurer is missing out on a great opportunity to settle more cases.
So I say to you insurers (because surely they will read this and listen to me) if you are paying mediation costs in larger cases and not smaller cases, stop it. Reverse that strategy. Stop paying on the larger cases and pay on the smaller cases. I guarantee you will settle more cases, and isn’t that the reason you want to mediate these smaller cases in the first place. Small cases are not economically smart cases to try for either party. However, the insurer is in a greater position to absorb this cost of litigation. Not only will you settle more cases, but the person you settle with may be your past, present or future insured, and the goodwill you buy will pay off tenfold. I can’t tell you how many times, in UM cases, the plaintiff leaves the room having decided to change insurers solely based on the mediation and the perception of how they felt they were treated. So especially in UM cases, I would encourage insurers to offer to pay the mediation costs, even in cases that don’t settle. The goodwill you buy is worth it. In college at UGA I majored in Risk Management and Insurance. We learned a lot about doing cost/benefit analysis. If insurers look at mediation costs using a cost/benefit analysis, their strategy would change, and they would start paying more mediation costs in small cases and less in large cases. In the end, the insurer would save more money, not only based on the analysis from above, but also because small cases are usually shorter and less expensive than larger cases. If you are a defense counsel reading this, I hope you will pass it on to your adjusters and managers for consideration.