Suing an insurance carrier used to require simply the filing of a complaint. No more; times have changed. One of the most vexing problems facing today's insureds is alternative dispute resolution provisions in their insurance policies, which affect substantive and procedural aspects of their actions.
Although many common coverage forms (like comprehensive general liability insurance) don't have ADR provisions, plenty of others do. Moreover, the complexity of insurers' ADR provisions mandates that individuals understand and carefully satisfy the conditions as a prelude to suit. Doing so is critical. Violation of a policy's ADR provisions might well get you bounced out of court or unwittingly bound to arbitration in a faraway land.

More Provisions

Once the sole province of directors' and officers' policies, insurers' ADR provisions are increasing. Indeed, they're fast becoming a mainstay of professional liability policies, employment practices liability insurance, employee plan fiduciary liability insurance policies, and Internet/multimedia policies.

The reason for their increase is twofold: They're not material to the purchase. When buying insurance, the primary focus is on coverage, not the mechanisms for resolving disputes.

They're incredibly valuable to insurers who, based on the procedures outlined, can control important aspects of insureds' right to redress.

Understanding Clauses

Although the precise language of ADR clauses varies from policy to policy, similarities do exist across coverage forms. For example, the clauses typically limit ADR choices to either (nonbinding) mediation or (binding) arbitration. Irrespective of the procedure chosen, the clauses often restrict the place of the proceeding to the insured's home state and several key geographical locations, such as New York, Chicago, Atlanta or Denver.

As for specific methods, ADR clauses typically provide that either the insurer or the insured is free to make an election between resolution procedures; however, the insurer's choice controls unless the insured affirmatively rejects that decision before the start of a given procedure. In other words, an insurer may opt to arbitrate a coverage dispute in New York (where it is located), and the policyholder, a California-based corporation, may prefer to mediate the dispute in Los Angeles.

Unless the insured promptly rejects the insurer's ADR election, the policyholder may be obliged to participate in a binding arbitration in New York - a forum, unlike California, where bad faith has no state tort law analogue. See Aquista v. New York Life Ins. Co., 285 A.D.2d 73 (2001); but see Manning v. Utils. Mut. Ins. Co., 254 F.3d 387 (2nd Cir. 2001).

Consequently, much of the gamesmanship (and, thus, much of the resulting litigation) concerning ADR provisions centers around the timeliness of an insured's election, questions of rejection, and when exactly a given ADR proceeding "commences." See Qwest Communications Int'l v. Nat'l Union Fire Ins. Co., 821 A.2d 323 (Del. 2002).

Finally, policies' ADR provisions typically provide that procedural costs - mediation or arbitration - are to be equally split between the parties. The provisions also dictate what happens when (nonbinding) mediation fails. In the case of American International Group insurance forms, there is a 120-day "litigation hold" based on the date of the mediation's termination. Compare Willis Corroon Corp. of Utah, Inc. v. United Capitol Ins. Co., 97-2208 (N.D. Cal. 1998) (strictly enforcing "cooling off" period following failed mediation).

ACE insurance company forms tend to be more cryptic. They do not discuss the availability of judicial relief. Instead, they merely state that an arbitration may not start for "at least 60 days after the date Mediation shall be deemed concluded or terminated." Given such language, an insurer can be expected to take the aggressive position that, absent reference to a legal proceeding, the form implies that no judicial relief is available to disgruntled policyholders; it's arbitration or nothing.

Demystifying Operations

Understanding what insurers' ADR provisions say is, of course, different from understanding how they operate. The most immediate point to grasp is that insurers' ADR provisions, like ADR provisions generally, are both favored and enforceable under state and federal law. See Mitsubishi Motors v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985); Victoria v. Superior Court, 40 Cal.3d 734 (1985). In this regard, it matters not that such ADR provisions appear in what, historically, is considered a contract of adhesion. See Gray v. Zurich Ins. Co., 65 Cal.2d 263 (1966).

Courts will enforce the provisions even when it pains them to do so. See Michael Angelo's Gourmet Foods Inc. v. Nat'l Union Fire Ins. Co., 2006 U.S. Dist. Lexis 56540 (W.D. Tex. 2006) (enforcing ADR clause while expressing difficulty understanding why sophisticated business entities - or anyone for that matter - would contract away their right to judicial relief).

This basic realization, in turn, highlights the importance of the policyholder's prompt election of (nonbinding) mediation over (binding) arbitration as a preferred ADR alternative. Failure to make an affirmative election risks foreclosing the policyholder's ability to begin suit in 60 days, 120 days or otherwise. The corollary to this rule is, of course, the need to negate promptly the insurer's prior choice of (binding) arbitration. This can happen in two ways: by acting too late or by actively participating in the arbitration's proceedings.

As set forth in the typical ADR provision, the time to negate an insurer's ADR choice is "prior to its commencement." When, exactly, an arbitration "commences" is unclear. According to the AAA rules, which often govern insurers' ADR provisions, arbitrations are not, strictly speaking, "commenced." Rather, they are "initiated" by the filing of a demand for arbitration. See AAA Commercial Arbitration Rules R-4 and R-5 (prescribing rules for "initiation" of arbitration).

Despite such distinctions, insurers often initiate (and refuse to dismiss) an ADR arbitration at the first sign that a policyholder may seriously pursue its rights. By claiming that their demand for arbitration is tantamount to a "commencement" under their policies' ADR provisions, insurers argue they have effectively extinguished the policyholder's right to negate their binding election. See Qwest.

From there, insurers rely on arbitration's machinery to drag the policyholder forward into its proceedings. The policyholder faces an unenviable choice: It can either opt to default by refusing to respond to the arbitration demand, or it can participate in the proceedings and, arguably, waive its right to judicial relief. See Fortune, Alsweet & Eldridge Inc. v. Daniel, 724 F.2d 1355 (9th Cir. 1983) (agreement to arbitrate may be implied from conduct).

Manifest Unfairness

The unfairness of such tactics is manifest. Accordingly, courts have recognized that "the only sensible and fair way to construe policy language" regarding electing and negating ADR procedures is to require insurers first to communicate their election in a way that affords the policyholder a reasonable opportunity to reject the insurer's choice. See Quest. This makes sense. A contrary reading would render illusory the policyholder's right to negate the insurer's ADR choice. See Quest (insurers' interpretation held to be "nonsensical and unfair"); see also California Civil Code Section 1643 (contracts to be construed in fashion that makes terms operative if it can be done so without violating parties intentions).

The lesson to be derived from all this is plain: When faced with an insurer who uses the policy's ADR provision to outmaneuver you, don't panic. Sue. Quickly. Try to enjoin the arbitration. An insurer's effort to use arbitration to strip a policyholder of its access to the courts constitutes an irreparable harm. See Goldman Sachs & Co. v. Becker, 2007 U.S. Dist. Lexis 51359 (N.D. Cal.); Qwest; Vector Group.

Deliberating Dismissal

Finally, what should you do if you've (mistakenly) jumped the gun and filed suit in violation of a policy's ADR provision? Wait. See whether the insurer objects. Remember, ADR procedures can be waived either explicitly or by conduct inconsistent with their enforcement. See Platt Pac. v. Andelson, 6 Cal.4th 307 (1993) (failure to make timely arbitration demand waives arbitration right); St. Agnes Med. Center v. PacifiCare of California, 31 Cal.4th 1187 (2003) (under federal law, prejudice is determinative issue for assessing waiver or right to arbitrate) (collecting cases); California Code of Civil Procedure Section 1281.2(a) (West 2008).

With any luck, your adversary hasn't read this article and won't know to look for the provision. In the event there is an objection, argue to the court that a stay is the most just resolution. Such an outcome is desirable for two (not so obvious) reasons.

First, a stayed action is always better than no action. Moreover, if an insurer proceeds with (binding) arbitration over your election of (nonbinding) mediation, you have a case, a caption and a forum where you can seek relief by way of an injunction. The existence of this judicial platform is a huge advantage in any emergency situation.

Second, but equally important, is the fact that a stay allows you to preserve your choice of forum if mediation fails. (And it will.) Remember, typical ADR provisions allow for suit after a mediation's termination and expiration of a proscribed "cooling off" period. Absent a pending lawsuit, a race to the courthouse is likely once that period expires. By leaving the existing action in place, you've won the race to court, kept your chosen venue and defeated the policy's built-in mechanism to throw you off your game.

Michael Bruce Abelson is a founding partner of Los Angeles-based Abelson | Herron. He represents insureds in complex coverage matters.

© 2007 Daily Journal Corporation. All rights reserved.

The "Super Lawyer" designation of Messrs. Abelson and Herron was awarded by Los Angeles Magazine and Law & Politics. Mr. Abelson has held the designation for years 2005, 2006 and 2007. Mr. Herron's recognition is for years 2005, 2006 and 2007. In 2004, Mr. Herron was recognized as a "Rising Star" (for attorneys under 40 years of age or practicing less than 10 years). Ms. Pereira has been named a "Rising Star" for years 2006 and 2007, and Ms. Lewis was named a "Rising Star" for 2009.

California's Super Lawyer and Rising Star designations are awarded only after a thorough and rigorous selection process, which includes:

• A state and regional survey of lawyers to determine candidates;
• Research of candidates by an attorney-led staff which reviews designees' publications, consults databases and online sources, and conducts in-person and telephonic meetings with law firms;
• An evaluation of candidates and their work and careers touching upon subjects, including:
  • Verdicts and settlements
  • Representative clients
  • Experience
  • Honors and awards
  • Special licenses and certifications
  • Bar and or other professional activity
  • Pro bono and community service
  • Scholarly lectures and writings
  • Education and employment background
• Peer evaluation by a select panel of attorneys representing a broad range of practice specialties.

Only the top 5 percent of Southern California's lawyers are eligible for designation and inclusion in Super Lawyers. In the case of Rising Stars, the percentage eligible is 2.5% of Southern California lawyers. For more information see www.SuperLawyers.com

Daily Journal / DJC Law (Los Angeles, CA)

05/31/2005

By Lorelei Laird

Vince Herron and Mike Abelson really, really liked working at Latham & Watkins. So when they left to open business litigation boutique Abelson & Herron, they announced their intentions with a promise to make the transition as amicable as possible.

"When Vince and I left, we said the most important thing to us is that we maintain a good relationship with the firm," says Abelson, a litigator who also counsels clients on insurance matters. "We're not going to leave in the dead of night."

Herron, a trial lawyer, adds, "We don't want to take a client, a case, a secretary, an associate, a box of pens, nothing."

They made good on that promise May 2, when they opened their doors in the Wells Fargo Center in downtown Los Angeles without so much as a paper clip from Latham & Watkins' offices.

With no established clients and no support staff, it might sound like a risky venture, but the two partners think they have a business model that will prove very popular: providing big-firm-caliber legal services to middle-market companies that can't afford a global firm.

"There's a perception that lawyers at big firms are really high-quality lawyers. And at Latham, that's true," Herron says. "But the perception is that at smaller firms are folks that couldn't hack it. So clients have to compromise."

He and Abelson, he says, can offer the experience of two careers spent entirely at Latham & Watkins - until this month. Herron was there 11 years and Abelson 17. It might have been even longer, Abelson says, but for a combination of big-firm trends that made their practices unsuitable for a large firm. First and foremost were conflicts between his insurance litigation practice, in which he was handling many cases against insurers of corporate officers, and the firm's securities group, which is often appointed to defend directors and officers.

"Big firms, like Latham & Watkins, defend those types of securities cases, rather successfully as a matter of fact," Abelson explains. "I was pressing the insurer to pay on those claims at the same time as those directors and officers' insurers were appointing our firm to defend directors and officers."

At the same time, he says, his clients were becoming very sensitive to the high billing rates that a very large firm charges. And at a smaller firm with lower overhead, the two plan to practice the same type of commercial business litigation and torts they always have, but for medium-size clients that their old firm wasn't set up to handle efficiently.

"I think we recognize that, if you have a $500 million problem, you want Latham to represent you," Abelson says. "But if you've got a $5 million or a $1 million problem, Latham's not going to handle it in an economic matter."

Because their parting was amicable, the pair hopes referrals of smaller matters from their old firm will be one source of work in the future. That's likely, according to Jamie Wine, co-chair of the litigation department in the Los Angeles office of Latham & Watkins. "We are absolutely looking forward to sending referrals their way," Wine says. "Likely referrals would be if a matter was too small for Latham to handle, if there was some sort of conflict ... or a practice area that Latham doesn't focus in."

She adds that Herron and Abelson "maintain a lot of good friendships here." "I couldn't say more about how amicable the split had been," Wine says.

For now, Abelson | Herron has only one employee who's not a name partner, a secretary and office manager. They say they're looking to hire associates and more support staff, but only when the time is right.

"We don't want to get to the point where we're so overwhelmed that someone has to walk into a firestorm. We want to have them when the work is there," Herron says. "Are we in a hurry to get a bunch of work? You bet."