Great Article by Roger Hillman of Pacific ADR on Professional Malpractice Mediations

In the preparation for and participation in mediation, it is imperative that counsel, both for plaintiffs and defendants, be conscious of the critical role insurance has in resolving any liability matter. Personal (e.g. auto, homeowners) and commercial (e.g. CGL, professional liability) insurance policies impose on the insurer the “duty to defend” any suit or claim under the policy. Coextensive with this is the carrier’s right to control this defense. This includes that the decision to settle rests exclusively with the carrier.

The exceptions to this are professional liability policies (medical, legal). These policies universally include a “consent to settle” clause, which provides that the carrier will not settle any suit or claim without the consent of the insured. This often results in personal counsel for the insured participating in the mediation, even if insurance limits aren’t at play. Policies differ on the treatment of a settlement that the carrier finds reasonable and warranted but to which the insured refuses to consent. Some policies allow the carrier to settle without the insured’s consent, if it finds said consent to be “unreasonably” withheld. There are also policies that provide that, if the insured refuses to consent to a settlement acceptable to the claimant and found reasonable by the carrier, the coverage going forward shall be limited to the amount of the proposed settlement and defense expenses incurred to that date.

Settlement of a professional liability matter has consequences for the defendant well beyond the depletion of his insurance policy limits and a damaged ego. In the case of a healthcare provider, any such settlement must be reported to the National Practitioner Data Bank (NPDB). This is a Federal clearinghouse that maintains information, to a great extent negative information, on healthcare practitioners, including malpractice verdicts and settlements. The NPDB is accessed whenever a practitioner applies for employment, credentials, preferred provider status, and professional liability insurance. In addition, a report to the NPDB is, in turn, reported to the applicable state licensing authority. In many states, including Washington, this triggers, at a minimum, a disciplinary investigation. Any of these could result in a significant negative impact on the practitioner.

While the consequences of a liability settlement on other professionals (lawyers, accountants, etc.) are not as draconian as on healthcare professionals, they still may be substantial. Such settlements, whether of a suit or a claim, should (must) be disclosed to potential employers and insurers. This albatross will follow the professional throughout her/his career.

Many professional liability policies are “self-reducing”; i.e. defense costs are included in, rather than above and beyond, policy limits. Such a policy adds another wrinkle to mediation. In a high value case, in which demand is at or above policy limits, by not settling, thus requiring the defense to continue to incur legal fees and costs, plaintiff must be cognizant that the funds being spent going forward reduce the amount available for settlement. In other words, he/she is spending “his/her own money.”

Awareness and consideration of these factors going into the mediation of a professional liability claim or suit will increase the prospects for a successful resolution.