The following was presented as a seminar paper to the Australian Professional Indemnity Group in Adelaide on 8 November 2022.

TLDR. Spoiler alert. YES.

ADR methods are likely to improve the quality and timeliness of
dispute resolution processes and outcomes for insured claims.

Introduction

Litigation is a common part of resolving claims against businesses and professionals under liability insurance policies. It is so common that lawyers and insurers routinely allow for unrecoverable trial costs when calculating possible settlement figures.

The question for this paper is whether there are ways to reduce the cost of dispute resolution and, at the same time, produce a more successful outcome. This paper considers what a ‘successful outcome’ is, and looks at the options that parties should consider to resolve disputes outside of litigation.

In this paper, I will look first at claims against insured parties, where insurers and lawyers defend a claim. Secondly, I will touch on claims by insured parties against their insurers for failure to indemnify.

The claim

In most cases, the dispute starts with a ‘claim’ against the insured. Policy wordings differ, but there is a clear pattern. For example:

‘claim’ means any legal proceedings or written demand against an insured for compensation.

Or,

Claim

The receipt by an Insured of:

a)  any originating process (in a legal proceeding or arbitration), cross claim or counter claim or third party or similar notice claiming compensation against an Insured; or

b)  any written or verbal demand from a third party claiming compensation against an Insured.

In both examples, the claim is defined first by reference to legal proceedings and, secondly, by another form of demand. This sets a presumption of resolution by or through legal proceedings—usually in court.

In my experience, this presumption affects how insurers, lawyers and clients approach the options to resolve disputes.

Litigation

Court proceedings are a traditional way of resolving disputes. The rules and procedures of each jurisdiction are well-defined, and lawyers are well trained to operate in that environment.

The civil division of most courts in the common law world follows a similar process. This process is designed to determine legal rights conclusively, but potentially at the expense of other interests. For example, to give parties comfort about the legitimacy and fairness of the process, Courts follow stringent rules of natural justice and evidence. These tend towards thoroughness but at a cost.

To ensure the correctness of the decision-making, almost every step is subject to appeal—and often several layers of appeal. If the High Court pronounces on a topic, it is final and sets the legal principles others must follow, but any case ending in a High Court appeal is bound to be lengthy and very costly.

Courts have implemented case management principles to mitigate the delay and expense of litigation, but with limited success. More recently, courts have begun to adopt mediation as a court-ordered or court-sponsored process.

Overall, litigation is not well suited to give disputing parties an experience tailored to their individual needs or to prioritise any other interests (including, but not limited to, speed and cost) over the determination of legal rights.

Alternatives to litigation

Notwithstanding this, insured claims are commonly settled outside of a courtroom trial. Indeed, the standard expectation is that insured parties have deep pockets and will prefer to settle rather than fight all the way to a judgment. The fact that settlements are commonly reached at mediation implies that insurers and insured defendants prioritise other interests above the vindication of their legal rights. But the fact that settlements like this are common does not mean that the method by which they are achieved is desirable or appropriate.

The primary alternatives to litigation, and the ones this paper will focus on, are:

• arbitration;

• expert determination; and

• mediation.

Arbitration

General

As a form of alternative dispute resolution (‘ADR’), arbitration is relatively uncommon in Australia. It is very common in some other countries.

There are two relevant types of commercial arbitration—domestic arbitration under the state-based Commercial Arbitration Acts or international arbitration under the Commonwealth’s International Arbitration Act 1974. These statutory frameworks are all extremely similar because they are all based on an international model law for arbitration.

In the commercial context, arbitration is most common in the construction and engineering sectors and in the resources sector.

The reason for this is that arbitration is more flexible than litigation in allowing the parties to agree and control their own process. ‘Party autonomy’ is the governing principle. Almost every aspect of the arbitration process can be modified by the parties’ agreement. For example, the parties can agree to tailor the length of the hearing, or the type or volume of evidence, to the complexity of the dispute.

Accordingly, arbitration has the potential to be much faster and less costly than traditional litigation. This is particularly true under the current domestic laws, which encourage and allow processes that differ from traditional court arrangements, and which discourage interference by courts.

The other big advantage of arbitration is that the process is confidential by default, unlike litigation which is public. This may be desirable for an insured party, especially if defending their professional reputation.

A decision, or ‘award’, of an arbitrator, has broadly the same effect as a judgment from a court. Parties can use ordinary legal processes to enforce the arbitrator’s determination.

Arbitration awards are final and binding. Reviews or appeals are rare, and even then, only available on very limited grounds. The much lower likelihood of an appeal provides the parties with greater cost certainty.

Arbitration agreement

Arbitration can only occur by agreement. There must be an agreement to arbitrate, and it must be in writing. The agreement can be made either before or after the dispute arises, and it can be very simple. For example, Resolution Institute suggests the following clause:

Any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to arbitration in accordance with, and subject to, Resolution Institute Arbitration Rules.

Unless the parties agree upon an arbitrator, either party may request a nomination from the Chair of Resolution Institute.

The advantage of including an arbitration agreement in a pre-existing contract is that the rules of the game can be agreed upon before the parties are in dispute.

If the insured has a contract containing an agreement to arbitrate and the dispute fits the scope of the arbitration clause, then either party can compel the matter to go to arbitration.

8—Arbitration agreement and substantive claim before court

(1)     A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party's first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

(2)    If an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.

That said, there is still merit in considering an arbitration agreement after the dispute has arisen.

When to consider arbitration

If the claim arises out of a pre-existing contract and you are considering the defence of an insured party, you need to consider (early) whether there is an existing arbitration agreement and whether to seek to enforce it. A failure to enforce the arbitration agreement early will constitute a waiver.

You may also wish to consider whether to propose arbitration as an alternative way of resolving the dispute.

In concept, arbitration is appropriate wherever it would be efficient for the resolution of the dispute for:

• the arbitrator to have some degree of special knowledge of the field;

• the hearing to be kept confidential; or

• the dispute to be determined through a shorter process.

The parties can agree that any arbitrator must have particular experience or qualifications. This has the advantage of minimising the need to educate an arbitrator on technical issues, even though arbitrators are trained not to overstep and take on the role of expert witness.

The parties can agree on procedures to shorten any hearing and, in effect, place a cap on costs. One common example of a shorter process is a ‘stop clock’ hearing, where there is a fixed time divided equally between the parties, to be used as they wish.

Arbitration is still a determinative method. There will be a winner and a loser, but at least the parties benefit from a fair hearing in a more streamlined process.

Expert determination

General

Like arbitration, expert determination depends on the parties’ agreement. Unlike arbitration, it is not supported by any legislation. It will stand or fall on the contract terms alone.

There are two main types of commercial expert determination.

The most common is the special purpose arrangement for an expert to resolve a narrow disagreement. For example, an expert accountant may be asked to resolve a disagreement over the value of an asset in a sale agreement.

The other type, and the one more relevant to this paper, is an all-purpose type of dispute resolution that is functionally very similar to arbitration but without the strictures or support of the legislation. It can apply, for example, to breaches of contract, professional negligence, or infringement of statutory warranties.

Expert determination agreement

An expert determination agreement is usually part of a pre-existing contract between the parties. It requires the parties, once a dispute arises, to enter into an agreement with a third-party expert determiner and submit the dispute to that expert for a decision.

Because it is not supported by any legislation, the parties’ contract needs to set out all of the necessary terms. Any flaw in the expert determination clause may make the clause unenforceable.

To keep things relatively simple, it is common to incorporate standard form rules by reference. One example is the Resolution Institute Expert Determination Rules.

A form of expert determination is, of course, common in insurance policies where the opinion of an independent senior counsel can resolve a dispute between insurer and insured about whether to defend or settle a claim.

When to consider expert determination

Because expert determination is defined by the parties’ agreement, it can be as comprehensive or abbreviated as the parties choose. In this way, it is not much different to arbitration.

In practice, arbitration tends to be conducted following a more formal process, takes longer, and has a higher cost. Expert determination tends to be less formal, is often conducted ‘on the papers’, and is quicker and cheaper. In one sense, expert determination places less emphasis on a fair hearing, and may lack some of the rigour of arbitration. However, the parties may still prioritise other benefits of expert determination.

For one, consistent with the name, expert determination asks the appointed expert to use specialist knowledge to interpret the evidence.

However, the differences from arbitration are not inevitable parts of the process. The parties could (if they wish) agree to arbitrate on precisely the same quick and inexpensive basis.

The biggest difference, and the one that resonates with parties (in my experience), is that expert determination need not be binding. While an arbitration award has the force of a court judgment, expert determination is often agreed to be semi-binding. For example, it could be agreed that a decision is binding for claims up to a certain dollar value, or that it is binding unless one party objects within a short period of time.

Often, in practice, this semi-binding outcome prompts or compels the parties to reach a negotiated settlement, rather than going on to litigation or arbitration.

Mediation

General

We all think we know what mediation is, but the reality is that mediation, as it is often conducted alongside commercial litigation, does not follow best practices.

My experience of commercial mediation is that it is dominated by three features:

• lawyers speak for their clients;

• parties rarely speak directly to each other; and

• mediators spend most of their time shuttling offers between parties who stay almost exclusively in separate rooms.

The Australian National Mediator Accreditation System (NMAS) standards train mediators to follow a process:

• mediator’s introduction;

• the parties (themselves, not through their lawyers) explain their understanding of, and reasons for, the dispute;

• the mediator helps the parties explore the underlying issues in dispute and identify the interests they each seek to meet (for example, financial interests, reputational interests, or the timely completion of work); and

• the mediator helps the parties, separately, identify options to resolve the dispute, and then brings them together again to explore those options and negotiate an agreement.

The key features here are:

• the parties mostly speak for themselves, not through lawyers;

• the parties mostly speak to each other, not to the mediator (but with opportunities for a confidential discussion with the mediator);

• the parties discuss their options directly, ideally without the mediator as the conduit; and

• any resolution is the parties’ own choice.

When to mediate?

Mediations also tend to occur quite late in a litigious process. Many courts make mediation a pre-condition to trial, and make court officers available to conduct a mediation in that context. As such, court-ordered or private commercial mediations often occur once substantial costs have been incurred, and once the driving interest for both sides becomes the fear of further costs.

One of the potential benefits of mediation is that it allows for resolutions that a court cannot provide. For example, parties might agree to continue working together on favourable terms or to give concessions outside the scope of traditional legal remedies.

Accordingly, if mediation occurs earlier in a dispute, the parties are more likely still to have meaningful interests that can be served, other than vindicating entrenched legal positions and recovering costs already incurred.

Negotiating to get the right mediator

Different disputes may call for different mediation processes. There are two main styles of mediation, but two are the most relevant. Mediators will tend towards one or the other.

In a ‘facilitative mediation’, the mediator helps to open lines of communication between the parties, provides a framework for productive discussion, and guides parties to reach their own conclusion and to make their own agreement.

A facilitative mediation requires both a trained mediator and willing parties. Ideally, the parties will reach a settlement while feeling it is their own decision. Ideally, the settlement will be seen as a ‘win-win’.

In an ‘evaluative mediation’, the mediator not only facilitates a conversation, but also provides an ‘early neutral evaluation’ of each side’s position. By providing an independent reality check to the parties (often, but not always, both of them), perhaps by predicting what decision a judge might make, the mediator influences the parties to re-consider entrenched positions. An evaluative mediator may even propose settlement options for the parties to consider.

An evaluative mediation requires a mediator with enough experience and gravitas in the relevant field that both sides will take the independent evaluation seriously, even where it conflicts with their previous legal advice. For this reason, the approach is common among retired judges and senior barristers. In practice, evaluative mediation still tends to focus on perceived legal rights rather than on other commercial or personal interests.

When considering mediation, the parties and their advisers should consider what role they want the mediator to play. That will guide whether the mediator needs technical expertise in the field or the ability to draw the parties into conversation with each other.

In situations where emotions, personalities or history are barriers to negotiation, or where the primary interests of the parties are not based on legal rights, facilitative mediation might be more appropriate. It may be the best option before litigation, or early in litigation before the parties’ legal positions have become defined (or entrenched).

By contrast, when a key goal for one or both sides is to educate themselves and the other side about the underlying facts and legal basis of their position, evaluative mediation might be best.

Mediators will often have a reputation for which style they follow, but if in doubt, you should be able to ask a potential mediator about their process before nominating them.

Disputes between an insurer and insured

Regrettably, disputes between an insurer and the insured over the extent of cover are quite common.

Each of the alternative dispute resolution methods mentioned is equally available for disputes concerning the insurance policy itself.

Some policies have specific dispute resolution mechanisms, but many professional indemnity policies do not (except for the question of whether to defend or settle a claim).

They certainly do not have an arbitration clause, even though insurers may consider the ability to have questions of interpretation ruled on confidentially—one insured at a time—beneficial. Section 43 of the Insurance Contracts Act 1984 (Cth) prohibits a policy providing in advance for the referral of a dispute to arbitration. However, subsection (2) specifically allows an insured and insurer to agree to refer their dispute to arbitration after it has arisen. In that situation, one or both parties may be attracted to the possibility of a quicker, cheaper option to have the dispute determined.

Similarly, expert determination of the effect of a policy, or the application to certain facts, may well be convenient and appropriate.

Success

How can insurers and insured parties increase the likelihood of a successful outcome? I suggest that they do so by defining success as something other than a vindication of legal rights.

Experience shows that the focus on litigation as the primary method of determining rights leads (on one hand) to a long and costly process, and encourages (on the other hand) a form of mediation that is designed more to mitigate cost and delay than it is to provide parties with a satisfactory outcome.

For an insured party, the indicator of successful litigation is a clearly favourable judgment on the issues in dispute. All other considerations are secondary.

By contrast, the indicators of successful dispute resolution more broadly will likely be:

• quick resolution with minimal disruption to business;

• preserving business relationships if possible;

• avoiding reputational damage;

• confidentiality (which tends to help avoid reputational damage); and

• relatively low financial payment by the insurer to settle a claim (minimising the impact of future premiums).

It may be possible to achieve many or all of these in the same matter.

For an insurer, the indicators of successful dispute resolution will be:

• quick resolution;

• lower claim payment;

• lower defence costs;

• a happy insured customer; and

• reduced likelihood of follow-on claims.

Each of the ADR methods discussed here offers an increased likelihood of serving the interests of the insurer and the insured client, compared to traditional litigation and the traditional settlement shortly before trial. In doing so, they are also likely to be to the benefit of the claimant.

A high proportion of modern commercial contracts include a dispute resolution clause along the following lines:

Within 14 days after receiving a notice of dispute, the parties shall confer at least once to resolve the dispute or to agree on methods of doing so. [AS4092-2000] (emphasis added)

In many cases, if not most, the parties will have an opportunity to consider whether a method other than litigation offers a superior alternative.

In some cases, some forms of ADR will not be appropriate or preferable. For example, some types of disputes are not arbitrable, and expert determination will not have power to join and bind a third party. However, most cases do not turn on these issues, so it is worth time to consider all the options.