What To Do With The Indefensible EO Claim

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					      2008 International
         Conference

 What To Do With The
Indefensible E&O Claim




       Golden Opportunities or Fool’s Gold? • November 5-7, 2008 • San Francisco
                          What To Do With The
                        Indefensible 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.
                    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
      Most Cases are Settled
                Disposition Type by Percentage


            2
100

 90        28                       29

 80

 70
                                    18
 60                                              Decided
 50                                              Dismissed/Withdrawn
                                                 Settled
 40        70

 30                                 53

 20

 10

  0
        Court                Arbitration
        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
                  Exigencies

• 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
                    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
             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.