What should you tell your mediator before the mediation?

You agreed to mediate the case, selected an experienced mediator, submitted and exchanged mediation statements, and started the day with a demand from the plaintiff. Early negotiations led to cautious optimism. But negotiations have stalled, both sides getting frustrated with the other's moves. And then the reason things have slowed becomes apparent. Surprising both the mediator and the other participants, one party reveals for the first time a significant impediment to settlement. You can avoid this kind of mid-mediation curveball by signaling to your mediator, in advance, that it is coming.

Mediators have a duty of confidentiality to mediation participants. See Cal. R. Ct., rule 3.854(c) ("a mediator must not disclose information revealed in confidence during ... separate communications unless authorized to do so by the participant or participants who revealed the information"); see also ABA Model Standards of Conduct for Mediators, Standard V, § A ("A mediator shall maintain the confidentiality of all information obtained by the mediator in mediation, unless otherwise agreed to by the parties or required by applicable law."). A good mediator is keenly aware of this obligation and will provide a means for you to disclose information confidentially, whether in a pre-mediation call or through a "mediator's eyes only" submission.

When the following types of information are not already "on the table," with the participants expecting them to affect negotiations, you should consider sharing this information with the mediator in advance--confidentially if necessary--to keep negotiations on track and headed toward resolution.

Tell your mediator about litigation funding

Much like a contingency fee arrangement, the mechanisms of litigation funding can dramatically affect the net amount a plaintiff will receive. Although the arrangements vary, litigation funding generally is the payment of money to a plaintiff or plaintiff's counsel by a third party in exchange for a portion of the recovery, whether through litigation or settlement. Funds may be provided in tranches, over a preset schedule; the portion of any recovery to which the funder is entitled may increase over time. And in some cases, the funder may have some input into settlement approval, if not the right to approve settlement.

Tell your mediator about insurance coverage issues

Insurance coverage questions can affect how a settlement is funded in several ways. And depending on the issues, they may affect how the mediation is structured.

Apportioning settlement payment between a policyholder and an insurer: An insurer may refuse to pay the full amount of a settlement, expecting the policyholder to fund some portion of the payment. For instance, an insurance company may agree to defend a suit alleging both covered and uncovered claims but reserve its rights, including the right to recover defense costs that are allocable to uncovered claims. E.g., Buss v. Superior Court, 16 Cal.4th 35 (1997). Similarly, an insurer may point to policy language requiring an allocation based upon the "relative legal exposures of the parties." See, e.g., Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir.1995) (analyzing the "larger settlement rule" in a coverage dispute relating to allocation of covered and uncovered claims). In these cases, the insurer may offer to fund only a portion of the settlement amount, expecting the policyholder to pay the balance. Or an insurer may suggest that it will fund the entire settlement while expressly reserving the right to recoup all or a portion of it later.

Apportioning settlement payments among insurers: When multiple insurers are involved, allocating payments among policies can be complex. A litigated outcome will be dependent on the facts of the loss, the types of policies and their language, and the state law that applies. A settlement outcome could be as simple as apportioning the settlement payment per capita among the insurers, pro rata among policies, or weighted because of time on the risk and policy limits. Or it might involve a far more intricate analysis, implicating, for instance, (i) policy provisions like known loss, other insurance, non-cumulation, and exclusions, and (ii) the facts giving rise to the claim(s), including where relevant facts appear on the timeline.

Involving coverage counsel: Defendants who have insurance coverage issues often have consulted with or engaged insurance coverage counsel. When the mediator is aware of coverage issues and the presence of insurance coverage counsel, they can organize the mediation to make sure that coverage counsel on both sides can effectively advocate for and advise their clients concerning the role that insurance will play in resolving the case.

In short, where there will be questions concerning one or more insurers' exposure and the amount of their contribution(s) to a settlement, if any, you should let the mediator know about these coverage issues and the anticipated involvement of coverage professionals before the mediation.

Where there are multiple defendants, tell your mediator about indemnity, potential cross-claims, and other issues affecting allocation of settlement payments

Whenever there are multiple named defendants, some allocation of any settlement payment among them necessarily is required--whether one defendant pays all of a settlement amount, all defendants pay an equal, per capita amount, or there is some other combination of separate payments. The defendants may begin a mediation with an understanding of who will pay and in what proportion, or the amount each will pay may be left to be decided in the mediation. An experienced mediator will be aware of dispute-driven exposures and work with the defendants, at an appropriate time, to reach agreement on allocation. This may take place later in the negotiations, as it is often more efficient to negotiate the allocation of a sum certain, or even the allocation of an amount within a range, rather than expecting to reach agreement allocating a "blank check" amount.

In addition to these dispute-related allocation issues, tell the mediator about any ongoing business relationships that need to be respected and preserved during the mediation. Often, regardless of who bears responsibility for defending and settling the lawsuit, a vendor may be willing to pay more than its share to maintain a valuable customer relationship. One example might be a retailer who is owed defense and indemnity from a product supplier in the event the retailer is accused of infringing intellectual property rights. Another might be a staffing company that provides temporary workers to clients, together with a promise to indemnify the clients against discrimination claims.

Tell your mediator about inability to pay or possible bankruptcy

If you are a defendant with limited financial resources to fund a settlement, need to make payments over time, or are at risk of having to close your business if a settlement can't be reached with available sums, enlist the mediator to help you include this information in your negotiating strategy. If you bring up this issue after the negotiation has significantly progressed, it can cost you credibility and might be dismissed as a mere bargaining ploy. Importantly, raising an inability to pay usually works only if it is real. Plaintiffs rarely reduce a settlement demand merely because a defendant tells them it doesn't have the money. Instead, they are likely to ask for audited or verified financial statements to consider a defendant's claim of poverty. For settlement payments over time, they are likely to look for some security or other protection against default. And if a defendant threatens bankruptcy during a mediation that does not result in a settlement, the defendant's failure to follow through and seek bankruptcy protection after the mediation can cause demand inflation.

In sum, you should enlist your mediator as an ally by giving them advance notice--confidentially, if necessary--of structural or financial constraints that may affect settlement. By doing so, you can help the mediator manage expectations, preserve your credibility and guide the process toward resolution without risking a mid-mediation surprise that might interrupt or sideline productive negotiations.

Disclaimer: This content is intended for general informational purposes only and should not be construed as legal advice. If you require legal or professional advice, please contact an attorney.

Philip E. Cook is a mediator and arbitrator at JAMS, with over three decades of trial and dispute resolution experience.