Mediation Minute

Special Problems in Settling Professional Liability Claims

October 26, 2021

In the context of mediation and settlement, professional liability claims present some challenges that warrant special consideration. Most professional liability policies contain settlement control clauses. Such clauses require the consent of the insured to settle, and if consent is withheld there are potential costs and exposures presented to the insured for failing to accept a settlement which the carrier believes to be prudent.

The consent issue is not usually difficult to navigate when the insured is an individual or closely held business with clear lines of responsibility and decision-making, but when the insured is an association or operates with a board of decision-makers the question of consent can become thorny.

With many charities, homeowner’s associations, condominiums, and not-for-profits the litigation and settlement decisions must be approved by the governing board. Here the question of settlement can become problematic. There may be real or unknown schisms or factions in the board that are not clearly evident or unresolved. Some of the board members may be new to the board and not understand the history of the litigation. Other times, board members may be sympathetic to the Plaintiff or afraid to reverse course having made a poor decision to litigate.

There may be vigorous differences of opinion on the merits of settlement and opposition to settlement even when available at nominal expense. This is particularly common in settlements that may involve more than simply the payment of monies from an insurance carrier. Some negotiations and contemplated settlements involve a discussion of non-economic terms including, for example, written apologies, changes in HOA bylaws, modifying trademarks, changing policies, or modifying websites. There is a limitless potential of non-economic terms that might part of a global settlement that will require board’s consent to implement.

Here, the involvement of a trained mediator is particular helpful when the lawyer defending the board or organization finds him or herself with bickering factions; the mediator can navigate the conflicts without harming the lawyer’s reputation with the client. Sometimes, the insurance carrier may be precluded from effectuating an economically sound settlement by a deadlock within the board over non-economic deal terms that are reasonable, but which create rancor between board members during a mediation.

The solutions are usually implemented by careful planning over time:

  • Involve the mediator well before any formal settlement conference or mediation and early in the process to flush out those members who may be resistant to any hypothetical settlement.
  • Work early in the case as counsel to manage expectations but making clear to the board that settlements are common.
  • Explain to board members that achieving a cost-effective settlement is consistent with the fiduciary duty owed to the organization and that exposing the organization to risk contrary to the advice of counsel may be a breach of that duty.

It is important to let the board know that less than 2% of filed cases go to trial and that at some point a settlement offer is likely to come under consideration. Many board members may think that trial is inevitable when we know it is not. Other board members may have personal vendettas or opinions that are formed from misunderstandings or unsubstantiated concerns over the effect of a settlement. Reminding a charity that protracted litigation may chill donations can have a sobering effect. Irrational actors need to be identified early.

Another good tactic is to reach out to opposing counsel early to determine if non-monetary considerations are likely to be a part of the negotiations. Additionally, in rare cases, we have come to learn from premediation communication that certain board members may be sympathetic to the Plaintiff’s position. In those situations, special care must be taken to limit settlement related communication to a designated litigation subcommittee comprised of less than the entire board. Typically, counsel should ask the organization to pass a resolution creating a litigation committee or working group to whom the attorney reports.

One should not cavalierly assume that a governing board will accede to the settlement recommendation of defense counsel and insurers. Where settlement control clauses are in play, early and in-person communication with the board is strongly advised in order to flush out internal divisions, potential opponents, and impediments to achieving a global settlement.