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April 2009 | Volume 1, Issue 2

How Can You Spend Less and Gain More Control?

Now is a Particularly Opportune Time to Consider Mediation for Resolving Disputes

An Interview with Peter Scarpato
by Teresa Zink

What if there were a way to significantly reduce the time and expense required to resolve conflicts with business partners, while also maintaining control of the process and outcome in a way that could actually strengthen the relationship in the long run?  There is, and insurance and reinsurance industry veteran Peter A. Scarpato urges the industry to consider mediation.

“I think this is a particularly opportune moment for our industry to take a very hard look at the different forms of dispute resolution that have traditionally been used and to make some informed choices about getting to a result that best serves their interests,” says Scarpato of Conflict Resolved, LLC in Yardley, PA.

He notes that in an environment where “you have escalating costs for legal fees, arbitration fees and all the related expenses and time that go into the traditional methods of dispute resolution…it is making people take stock and raising their interest in mediation.”

For example, he said that he and a colleague, Kathy Billingham have  co-founded “ReMedi,” the Re/Insurance Mediation Institute, to foster awareness and understanding of mediation as a cost-effective alternative to resolve insurance and reinsurance disputes.  “We have already attracted more than  15 members, including several highly experienced reinsurance mediators, major law firms and companies, who all share a vision to provide an innovative, dynamic and long-awaited answer to the current model,” he says.

Parties are beginning to understand that “maybe there is another way to achieve results and be efficient while doing that,” Scarpato says.  He explains that mediation can “not only accomplish some cost efficiencies, but perhaps even produce a result that is more predictable in the long run,” especially with certain types of cases or with certain types of relationships.

When to Consider Mediation

What kinds of cases are particularly suitable for mediation?  While there are a number of criteria that apply to the decision to mediate a dispute, Scarpato says first and foremost, parties should look at the cost versus the value of the case.  He notes that there may be an important case involving a potentially serious issue that needs to be resolved, but where the legal fees and costs to arbitrate could very well equal or exceed the amount in dispute.  In such a case, Scarpato says, the parties should consider mediation, “which would be shorter, cost a lot less,” and give the parties “direct input with the mediator to try to get a result.”

The relationship between the parties is another factor that can favor mediation, according to Scarpato.  “If the parties have an ongoing, active business relationship, mediation is a good way to avoid a ‘bunker mentality’ where you are fighting battles back and forth.”  Mediation allows the parties “to sit down in a room in a very informal context with a mediator who doesn’t have authority to make judgments but tries to get them to negotiate better,” says Scarpato.  He adds that in addition to cost savings, the option of mediation “could pay dividends in preserving the relationship.”

This is true even if there is not an active business relationship.  “If you have a relationship where one or both of the parties are in run-off, and they are dealing with something that is not a one-off dispute, but involves a recurring type of claim on long-tail business,” mediation can be a valuable option, says Scarpato.  In that kind of situation, “getting some or all of the issues resolved in a way that both parties have direct input into means they can, for example, develop a protocol for how to handle this kind of issue in the future, through a mediation which is much more conciliatory, maintains their relationship and avoids the recurring, expensive costs of fighting over and over each time it comes up.”

Mediation can also be very useful to resolve issues early in a dispute “when the swords have just started to come out of the sheaths” and the parties have not yet invested a lot of time, expense and analysis into forming positions.  It is also a good option when “the resolution you seek isn’t necessarily a financial one but involves how the parties are operating with each other,” says Scarpato.  He imagines a situation where “one party keeps asking the other the same kind of question over and over again, asking for the same kind of information or to have the information produced in a certain way.  And the other party doesn’t understand why, or doesn’t feel the need to spend the money and the effort to do that.”  These kinds of disputes are often the result of a lack of effective communication, says Scarpato.  If the other party can understand why that information is needed, from a business perspective, it can ultimately benefit both parties. “If the information that comes out benefits the party that has to produce it, because now the party that gets it can process a claim faster, pay sooner or come up with some other way to make their relationship more efficient, the process makes sense.”

What Happens in Mediation

“When parties decide to mediate a dispute, they often enter the room with their positions set out and even if they have previously discussed the problem, they haven’t really started trading ideas,” says Scarpato.  He explains that the first part of the mediation should establish the expectations and objectives of the process itself.  Scarpato says he emphasizes to the parties that they have the opportunity, through mediation, to “craft a resolution where everyone in the room has the most input into what it is, rather than laying it at the feet of some third party, like an arbitrator or judge, who then makes the decision without any real input from the parties.”

Parties have two things on their side in mediation, Scarpato says, power and opportunity.  “They have the power to influence what the result is, what the settlement is, and they have the opportunity to do that with someone helping them, not battle with each other, but be dispassionate and examine the problem on the table as if we are all trying to solve it.”  When parties embrace these goals, says Scarpato, “there is a natural tendency to allow more information to come out,” not only about the problem itself, but about the underlying business reasons why the problem arose.  “That’s what a mediator helps the parties do.  Helps them look behind the immediate issues to what might be the underlying interests they are trying to serve or protect.  Then if they work on those things, you loop back to the immediate issue later and it sort of resolves itself,” he says.

Scarpato cautions that mediation skills are very different from arbitration skills.  As a lawyer and trained arbitrator, he says “I thought I knew what mediation was until I took the training.  It is really a subtle art.  There are a lot of things about being a mediator that are counterintuitive to being a problem solver.”

For example, he said, mediators have to learn that by relinquishing control, the mediator gains more control of the process.  “By that I mean the more the parties dictate how they want their process to go, the more they start to buy in that this is their process and the less likely they are to walk away,” he says.  “I have a phrase I always use in mediation and it really clicks with parties.  Someone once said that ‘the art of diplomacy is letting the other side have it your way.’  That’s really what it is about.  It’s about coming up with something you can live with that the other side can sell.  If the parties focus on and make each other understand what they truly need, not what they want, to resolve their dispute, that increases the possibility that they will accept each other’s terms.”

He says mediators are trained to ask open questions to get precise answers, and get a full understanding of the problem.  Related to that is the concept of deceleration.  “Timing is everything.  You can’t sit down with parties, get them to start talking and opening up, then say after a half an hour, ‘OK, how much do you want?’  You have to learn how to get the parties to the point where they are ready for that type of discussion.”

Not to say that mediation is all smooth sailing.  Once communication and trust have been established between the parties, he said, the true negotiation starts when you find a point of impasse.  That reveals the real issue you must help the parties resolve.  And if you can’t get it resolved then, it makes sense to back up, mediate other issues, make progress and work your way back to the area of impasse.

Getting Mediation Started

So you have a dispute that would likely benefit from a mediated resolution, how do you get the process started?  In a perfect world, says Scarpato, the parties would include a clause in their agreements calling for mediation of disputes before arbitration.  “The obvious benefit in doing that is that at the point when the parties are creating their contractual relationship they’re the most agreeable and there are likely to be few if any disputes.”

Realistically, however, reinsurers and their attorneys should look for opportunities to head off disputes and use mediation at an early stage.  “If it looks like you are heading toward something that might turn into a dispute, you say to each other, ‘it sounds like we are starting to agree to disagree more, and maybe if we really want to resolve this, it isn’t a big matter and it could really help us go forward, why don’t we consider a mediator?”

If the dispute is further along, counsel has been hired and positions are starting to harden, Scarpato says savvy attorneys might bring up the idea of mediation to their clients.  “One thing lawyers should understand is that even if mediation doesn’t result in a settlement there are benefits to mediating that apply to the client and the lawyer as well,” says Scarpato.  “You sit at the table with the people closest to the dispute on the other side, you get to hear more about why there is a dispute, you get to actually see the person you are going to depose or cross examine.  You may learn more about your case that helps you decide if you want to arbitrate or not.  And you open a door that later on, if you don’t settle, you can again reopen without losing face.”  He says that sometimes parties can eliminate many of the issues through mediation, then only arbitrate the ones that really need to be arbitrated, which can also result in efficiencies and costs savings.

When Should Arbitration be Used?

Scarpato notes that certain cases are still best resolved through arbitration.  These include disputes over a matter of principle or a “bet the company” kind of case.  Sometimes, Scarpato says, a dispute simply requires a bright line finding and a reasoned result.  Maybe the parties feel there is no room for compromise, the dispute involves a core company value, the parties need “a very specific interpretation of an important contractual term,” or the parties need the panel’s subpoena power to get all the necessary parties involved, these are situations where arbitration might be more appropriate.

Mediators can also be brought in to counsel the parties on the benefits of mediation in the first place, he notes.  “Even if the parties are in a serious dispute and are fighting more than they are agreeing, one party can go to a mediator and say, ‘Look, I don’t want to talk about substance, I don’t want to talk about all the details, but my client is on one side of this dispute, this is the company on the other side, we would like to explore the concept of mediation with them but we don’t think they will take it seriously if it comes from us.  We would like you to talk with them, just to see if they would even agree to consider mediating this dispute.’”  In this role, the mediator actually helps the parties to evaluate whether, for them and their dispute, mediation makes sense, even before considering the substantive issues.  And if this process results in their agreement to mediate, they have created positive momentum towards the possible resolution of other issues.

He notes that there are also hybrid forms of mediation, where the parties can have a mediator switch hats and become an arbitrator if the parties can’t agree on certain things.  Another option is where the mediator first hears the parties’ arguments, makes a decision as an arbitrator and seals it in an envelope, then mediates with the parties.  If no settlement can be reached, the mediator opens the envelope and reads the binding award.

Bottom line, Scarpato says, even in a situation like reinsurance, where there are very sophisticated parties on both sides of the dispute, “until you have somebody to help the parties ‘peel away the onion’ and get down to what really underlies the reason they have a problem, any negotiation is really still a win-lose process, with one party trying to convince the other that they’re wrong.”  The mediator helps the parties look at the problem more objectively and get them working together for a resolution that ideally benefits both.

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Peter A. Scarpato is president of Conflict Resolved, LLC and a mediator, arbitrator and attorney with more than 25 years experience in the insurance and reinsurance industry. Mr. Scarpato has arbitrated and mediated hundreds of insurance, reinsurance and commercial disputes.   He is speaking on Run-Off Market Solutions at HB Litigation Conferences’ 16th Annual Insurance Insolvency & Reinsurance Roundtable being held April 22 to 25 in Scottsdale, Arizona.