2008 International Conference

Golden Opportunities or Fool’s Gold? • November 5-7, 2008 • San Francisco

What To Do With TheIndefensible E&O Claim

MODERATOR:

Peter J. Biging, Esq., Partner, Lewis Brisbois Bisgaard & Smith LLP

PANELISTS:

Jean Clark Bates, RN, BSN, MPPM, Vice President, Claims, Professional Risk Management Services, Inc.

Shauna Martin Ehlert, Esq., Member, Cozen O’Connor

William Jackson, MBA, JD, Senior Director, Lancer Claims Services

Devina Joiner, Esq., Vice President, Professional Liability Claims, Mutual Marine Office, Inc.

What To Do With TheIndefensible E&O Claim

Overview

• Identifying and Defining the Indefensible Claim

• Strategies to Employ in Responding

• Obstacles, Collateral Concerns, Ethical Issues

• Marrying Art and Science

• Takeaways

• Q&A

Identifying and Defining the Indefensible Claim

When is a claim “indefensible”?

How do you identify it?

What can be done to ensure that it is identified as early as possible?

Hopeless?

WILL                     (to HENSLOWE)                 We are lost.                            HENSLOWE                 No, it will turn out well.                            WILL                 How will it?                            HENSLOWE                 I don't know, it's a mystery.

Defining Features

• Clear – cut, indisputable liability on the facts and the law– There are “smoking gun” documents – The Defendant has confessed liability

• The case is theoretically defensible, but:– Defendant’s story simply does not add up– The Defendant has made prior sworn statements compromising his/her

defense position– Defendant or Defendant’s principal is thoroughly unlikable and/or lacks

personal credibility– Defendant will be unable to assist in his defense (e.g., deceased, mentally

incompetent)

Defining Features Cont’d

– The legal rationale underpinning the defense is tenuous, at best

– Although tangential to critical issues, Defendant or a critical defense witness has engaged in outrageous conduct

– The Defendant corporation’s principal is under indictment or criminal investigation and won’t attest to anything or testify under oath

Defining Features Cont’d

• Other Factors Raise Red Flags or Pose Substantial Obstacles:– The case is a high profile news story, being portrayed in the

media with extraordinary negativity

– Defendant is pressing adamantly for settlement at any cost

– Attorney’s fees are recoverable, and they could be expected to potentially dwarf any realistic exposure

– There is discoverable information with the potential to exponentially increase the exposure faced if discovery proceeds

– Your instincts just tell you this case is trouble

Strategies to Employ in Responding

• What to do?

• What are the options

• How do you take a case that walks in the door “indefensible” and deal with it intelligently, creatively, responsibly, ethically and cost-effectively?

Immediate Concerns

• Cost- if it’s a guaranteed loser, containing cost of defense is

critical

- if attorney’s fees are recoverable, this issue is doubly critical

• Size of Exposure

- exposure may exceed policy limits

- exposure may be even greater than damages sought

• Insureds/Defendant’s Interests

- concern about protecting reputation

- concern about uninsured exposure

- concern about business impact

Strategic Options

• For Insurer, Be Sure, First, to Fully Evaluate Coverage Issues

• Consider Existence of Technical Legal Defenses– Maybe there is a slick way to defend even though the facts

are awful

• Consider Options for Counter-Attack– Are there available counterclaims that can provide offset

against anticipated exposure or provide leverage in settlement discussions?

– Maybe there is no way to avoid exposure, but exposure can

minimized via offset

Strategic Options Cont’d

• Settle– Statistically proven to be best option, but may not be possible

• Plaintiff’s settlement demand bears no reasonable relationship to actual loss

• Plaintiff’s settlement demands include non-monetary relief anathema to Defendant

• Defendant obstinately will not consent to settle and/or won’t give up a counterclaim or original claims raised

• There are uncovered claims/acts and/or punitives present big part of settlement discussion

Strategic Options Cont’d

• Employ Aggressive, Creative Litigation Tactics– Maybe there are opportunities to out-maneuver the

Plaintiff to get a better than expected result

• Defend, even though it is suicide mission– Losing at trial might be less costly than meeting an

outrageous settlement demand– In pre-trial proceedings unrealistic positions of both

sides may be moderated by improved information and fatigue

Strategic Options cont’d

• Surrender– Sometimes just giving the plaintiff what they want is

the least costly option.

• Hope for a miracle – an unplanned, unexpected game changing event

Coverage

Evaluate Coverage Promptly and Carefully

• Claims made and reported issues– Demand prior to policy period?– Claim not timely reported?

• Fraud in policy application?– Material misrepresentation or omission– May be able to rescind

• Claim reported under prior policy or expected before policy inception?

• Within professional services definition?

Evaluate Coverage Promptly and Carefully

• Prior acts coverage issues– Wrongful act prior to fixed retroactive date?

– Proof of prior continuous coverage required?

• Insured definition– Claim against named insured’s employees, partners, business

entity – are they insureds?

• Applicable exclusions– Can’t assume allegations are true if denied by insured – e.g.

fraud

– May not make a difference whether allegations are true or false –e.g. bodily injury exclusion

Evaluate Coverage Promptly and Carefully

• Cooperation issues– Insured refuses to cooperate in investigation or give

testimony because he is under criminal indictment

– Insured admits liability, agrees to unauthorized settlement

• Must act promptly on coverage issues– Assuming control of the defense before asserting coverage

defenses may be a waiver

• Obtaining opinion of coverage counsel may be a good defense against bad faith– But ignoring a coverage opinion you don’t like is dangerous

• Consider declaratory relief action

Technical Legal Defenses

Technical Legal Defenses

• Jurisdiction– Does insured have sufficient contacts with forum state?

– Where statute of limitations is also an issue, was service proper?

• Proper Parties?– Standing to sue?

• Claim by trust must be brought by trustee, not beneficiaries

• Claim of decedent must be brought by executor or administrator of estate, not heirs

• Claim by party absolved of liabilities through bankruptcy may belong to trustee in bankruptcy

• Claims of children are assertable by their legal guardian, not simply any family member

Technical Legal Defenses Cont’d

• Corporate entities generally must be in good standing to enjoy privilege of utilizing state courts (i.e., be up-to-date with corporate tax obligations)

– Failure to join indispensible parties?• E.g., others who have a claim to assets in dispute

– Plaintiff incompetent?• May need to have court appoint guardian ad litem

Technical Legal Defenses Cont’d

• Statute of limitations– Generally run from date claim should have been discovered,

not date of wrongful act• When claim should have been discovered may be a triable issue of

fact

• Look for evidence of early discovery – e.g., complaint letter

• NOTE: Depending on jurisdiction and type of claim, statute may begin running from date of negligent act giving rise to claim, regardless of when injury discovered

– Some claims are subject to an absolute time limit from the date of the transaction regardless of discovery

• Statutory claims

• FINRA arbitration claims

Technical Legal Defenses Cont’d

• Causation– Some claims essentially require “but for” causation,

which may allow for absolute defense even in cases of clear negligence

• E.g., insurance broker fails to place requested coverage, but uncovered claim would have

fallen outside claims made policy period• E.g., lawyer missed statute of limitations on

filing of legally deficient claim

Technical Legal Defenses Cont’d

• Ratification– E.g., stockbroker places unauthorized trade. Customer sees

on statement but says nothing because stock is up. Later stock goes down and customer complains purchase was not authorized. Customer has ratified the transaction

• Unclean hands– E.g., customer and insurance agent conspire to submit

fraudulent insurance application. Insurer discovers fraud, refuses to pay loss. Customer can’t sue the agent because their fraudulent scheme did not succeed.

Technical Legal Defenses Cont’d

• Failure to comply with pre-suit requirements– Claims under consumer protection statutes may

require pre-suit demand letter (e.g. Texas DTPA, Massachusetts Chapter 93A)

– In some states a plaintiff must obtain a certificate of merit from a qualified expert prior to bringing an action for professional malpractice

– Some statutes require report to governmental enforcement agency before bringing private action (e.g. employment discrimination, elder abuse)

Attacking Damages

• Invest in a good damages expert early on

• Look to parse concrete from speculative damages– Identify, target and highlight uncertainties, variables,

contingencies

• Identify mitigating factors– E.g., costs, expenses, taxes that would otherwise

have been incurred

Counter-Attacking

• Are there opportunities to assert counterclaims?

– May provide basis for offsetting liability, and thereby reducing overall exposure

– May provide fulcrum to bring plaintiff otherwise expressing little interest in settlement to negotiating table

– But Note: If counterclaims are available, question of how to address funding of counterclaims must be considered and resolved early on

• Insurer will not want to fund commercial counterclaim costing 3 times as much to litigate as defense

Settlement

70

28

2

53

18

29

0

10

20

30

40

50

60

70

80

90

100

Court Arbitration

Disposition Type by Percentage

Decided

Dismissed/Withdrawn

Settled

Most Cases are Settled

Plaintiff “Win” Rates at Trial

• Plaintiff “win” rates vary by case type– Contract: 62.6%– Fraud 61.4%– Personal injury: 60.9%– Employment 51.1.%– Negligence (non-PI): 42.6%– Products liability: 30.2%– Medical malpractice: 19.5%

Settlement Decision Errors

• Plaintiff turns down a settlement offer, wins less at trial – Happens in 61.2% of cases– Average cost of error: $43k

• Defendant rejects settlement demand, loses more at trial– Happens in 24.3% of cases– Average cost of error: $1.1 million

Source: Journal of Empirical Legal Studies, Sept. 2008

Implications for the Indefensible Case

• You would like to settle, but you think the demand is unreasonable– Your evaluation of the exposure is probably more

accurate than the plaintiff's– If you lose at trial but for less than the settlement

demand, you can claim victory– But if you are wrong, the consequences could be

painful

• You need to make an extra effort to achieve a reasonable settlement – consider mediation

It’s never too late to negotiate

• Negotiations can continue during trial– Developments at trial may influence the parties to renew

settlement negotiations

– During a jury trial, the judge may call the parties into chambers and pressure them to resume settlement negotiations

• Negotiations can continue after trial– Losing side may file a motion for new trial or an appeal, so

the game is not over

– Many “run-away” jury are compromised significantly while post-trial motions or appeals are pending.

Dealing with Exigencies, Obstacles, Collateral Concerns, and Related

Ethical Issues

• Even limited discovery will reveal disastrous information

• Clearly fraudulent and/or criminal behavior is apparently involved.

• Exposure goes even beyond plaintiff’s perception in size and/or scope

• Case needs to be resolved before class may be certified

Exigencies

Obstacles

• Settlement demand bears no reasonable relation to value of claims; Plaintiff’s counsel views case as career-maker

• Non-monetary relief is sought, which is anathema to the defendant/insured

• Negotiations need time, but court is placing case on rocket trajectory

• There is interest in settlement but the co-defendant is being uncooperative

• The claims involve uncovered acts with a defense obligation

• Plaintiff’s counsel views case as career maker

Ethical Concerns

• What information or documents can ethically be withheld while settlement is being negotiated?

• When do you pass the point of aggressively advocating for your client/insured and begin to invoke concerns about acting deceptively or deceitfully?

• What can and can’t you use as leverage?

• Where fraudulent or criminal conduct has been identified, what moral and/or ethical duties are implicated? What duties may exist with regard to alerting the defendant’s/insured’s clients and/or regulatory authorities?

• What are the duties of defense counsel in reporting to the insured E & O carrier regarding perceived evidence of conduct that may impact coverage?

Mediation

Mediation as Enhanced Negotiation

• Mediation is non-binding negotiation assisted by a neutral third party.

• Mediation is remarkably effective– 80%-90% of cases submitted to mediation will settle

• Critical, however, to think carefully about what kind of mediator you want– Judge, practicing attorney, non-attorney mediator

– Judgmental style vs. facilitative style

• Negotiation skills truly make a difference in outcomes– Understanding the mediation process and knowing how to

manage it will pay off in better results.

Reluctance to Mediate

• Is proposing mediation a sign of weakness?– No; it is a sign you want to settle– It is also a signal you think the plaintiff is over-valuing the

case• Plaintiff attorneys sometimes resist

– Fear mediator will talk clients into being reasonable when their attorney wants to play hardball

– Fear direct communications with their client, exposing client to unfiltered discussion of downside risk

• How to get them to the table– In some jurisdictions, the court can order the parties to

mediate– In some forums (e.g. FINRA) a mediation service will

attempt to persuade the parties to mediate

Other ADR Techniques

• Mock trial

• Focus group

• Neutral evaluation

• Informal sit-down– Invite opposing counsel to lunch to just discuss the

case generally • Where is this going?

• How are we going to get this resolved?

More on Resolution Strategies

Relations Between Counsel

• Defense counsel should maintain a cordial relationship with plaintiff’s counsel

– You know you will want to talk settlement at some point and you want that discussion to be collegial

– Lawyers are competitive. If the relationship between opposing counsel is acrimonious, the desire of each to humiliate the other may eclipse serving their clients’ interests

Unconventional Settlements

• Structured settlement– Lifetime annuity rather than lump sum– Protects unsophisticated plaintiff from financial

exploitation by friends and family– Can save you a ton of money if plaintiff is in poor

health and you can get a rated policy• Non-monetary sweeteners

– Apology, walk in the woods, repaired personal relationship

– Return of family heirlooms, love letters, other items of symbolic value.

Deception – How Far Can You Go?

Deception – Permissible Puffing

• Okay to say the following even if not true:– “We think this case is defensible”– “We are looking forward to taking this case to trial”– “We don’t care how much it will cost or how long it

will take to beat you”

• No obligation to disclose damaging evidence not yet required to be produced.

• No obligation to educate incompetent plaintiff’s counsel who under-values case.

Deception – Over the Line

• Destruction of evidence

• Perjured testimony

• Withholding “smoking gun” document you should have produced

• Factual misrepresentation of evidence you claim to possess

• Dangers: sanctions, settlement may be set aside for fraud

Employing Aggressive, Creative Litigation Tactics

Make Plaintiff Uncomfortable

• Within reasonable limits, it is okay to use discovery and investigation to make the plaintiff uncomfortable with continuing to pursue the case.

– Plaintiffs are often reluctant to have to disclose psychiatric records, tax records, bank records, credit card records, phone records and other personal information.

– Public record searches, investigation and surveillance may lead to information which will discredit the plaintiff.

– Ex-employees and ex-spouses are often a goldmine for information which will make the plaintiff squirm.

More on Discomfort

• Make use of Freedom of Information laws– There can often be powerful stuff there that plaintiff

doesn’t want re-hashed

More On Discomfort

• Institutional plaintiffs (large business corporations, civic organizations, governmental entities) have a special vulnerability:– Decisions are made by officers, directors and executives who

live in fear of embarrassment and loss of position.– Notice the depositions of the highest officials you can and

indicate you will question them about how carefully they reviewed this transaction.

– Pompous executives will often direct the abandonment of a meritorious claim simply to spare themselves from the risk of personal embarrassment.

– Where there is a credible threat of dragging an important client involved in the dispute into the fray, this may spur more reasonable settlement discussions.

Pre-trial Actions to Limit Exposure

• Statutory offer of judgment (if available in your jurisdiction).

– If plaintiff fails to do better at trial, you may recover significant costs

• Unilateral and unconditional payment of some items of damage prior to trial

– Can defuse emotional appeal – e.g. all the medical expenses have been paid – the plaintiff is just going after punitives as the icing on the cake

Focus on Causation/Damages at Trial

• If your factual defense is far-fetched, don’t insult the intelligence of jurors by aggressively pushing an improbable story

• Where negligent conduct can’t be reasonably debated, focus on whether and to what extent your defendant’s conduct caused or contributed to Plaintiff’s injuries, in relation to that of conduct of others

• Present evidence and argument that the plaintiff’s damages are either speculative, indefinite, or otherwise far less than claimed

Miracles

Miracles

• Death, disappearance or disability of– Plaintiff– Plaintiff’s attorney– Plaintiff’s key witness

• Unexpected abandonment of claim or settlement demand drops like a rock– Plaintiff can’t handle emotional or financial stress– Plaintiff has falling out with his lawyer– Plaintiff fears revelation of dirty linen

Miracles

• Change in law cripples key element of plaintiff’s theory of recovery– New legislation– New decision of appellate court

• Obnoxious behavior by plaintiff or attorney at trial offends jury results in unexpected and perhaps undeserved defense verdict

Surrender

Pay the Two Dollars

• Rolling over and paying an exorbitant settlement– It may be the cheapest solution in a case where you can

expect that defense costs will be very high

– It may be justified by the desire to avoid collateral consequences

• An adverse trial result which gets reported in the news media may affect reputation and business relationships and attract regulatory attention, as well as additional claims by others

• Even an adverse trial result which does not get publicity may have collateral estoppel effect in other cases

Marrying Art and Science

• Considering the Realistic and Practical Concerns of the Claims Handler

• Considering the Realistic, Unrealistic, Practical and Impractical Concerns of the Defendant/Insured

• Factoring In and Reining In the Strategy and Tactics Proposed by Defense Counsel

V. TAKEAWAYS

• It is Critical to Identify the Indefensible Case Early On; Make Sure that the Necessary Investigation and Evaluation is Being Done

• Carefully and Exhaustively Evaluate Coverage

• Invest in High Caliber Experts

• Consider Available Means of Collateral Attack and Opportunities for Counter-Attack

Takeaways Cont’d

• Be Aggressive in Defense, But Stay Within Bounds, and Don’t Let Aggressiveness Poison Atmosphere so That Productive Settlement Talks Are Precluded

• Absent Early Disposition on Technical Grounds,

Settlement Should Always Be the Number One Option• Mediation is a Tremendous, Valuable Tool• Where Reasonable Settlement Can’t Be Achieved Early

On, Remember the Game is Played Over 9 Full Innings• Attack Damages, and Otherwise Pursue Opportunities

to Limit or Cap Exposure

Takeaways Cont’d

• Don’t Count on it, But Miracles Do Sometimes Happen

• Sometimes, Surrender is the Only Realistic Course

• Creativity and Thoroughness Must Be the Mantra From Start to Finish

Q & A

Many Thanks to

• Peter Biging, Esq.

• Jean Bates

• William Jackson

• Devina Joiner

• Shauna Martin Ehlert, Esq.