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Settlement Conferences and the Price of Contempt

Just Court ADR, May 27th, 2014

In a settlement conference, what is the value of having someone present with full authority to settle? If one party lacks the authority, it can result in aggravation, wasted court fees, and lost time for trial preparation. American Family Insurance (AFI) recently learned this to their cost in a dog-bite case in Washoe County, Nevada. Because Judge Janet Berry did not believe the insurers had complied in good faith with her rules on authority to settle, she found the company in contempt and sanctioned them $50,000.

In Moberly vs. Mathis, a landscaper was bitten by a dog that had bitten several people before, causing him to fall and aggravate a spinal condition. The judge’s order scheduling the conference spelled out the need for party authority in great detail. Both clients and their representatives must have complete authority to negotiate and consummate a settlement.  While parties and representatives had discretion as to how much they would ultimately commit to, each must have the authority to commit to the option most favorable to the other party. Thus, the plaintiff must be able to commit to dismissal with prejudice, the defendant to the plaintiff’s prayer or last offer ($925,000), and the insurer to the full value of the relevant policy ($1 million). Any representative present must have “both the authority to exercise his or her own discretion, and the realistic freedom to exercise such discretion without negative consequences, in order to settle the case during the settlement conference without consulting someone else who is not present.”  At the outset of the settlement conference, all parties claimed full authority to settle, including the insurance representative.

Negotiations began at 9:30 and continued until mid-evening, when the plaintiff made a final demand of $750,000. At this point, the insurance representative said the company would likely accept the offer, but requested an extra day to confirm. Several days later, the representative said he could not secure authority, and requested another extension.

From this point, several more irregularities regarding settlement authority emerged:

  • At a meeting between both party counsels and AFI’s counsel, the insurance counsel first said that the company representative had no authority to make an offer beyond the company’s initial offer.
  • Therefore, all subsequent offers throughout the day were the representative’s “mistake”
  • At the contempt hearing several days later, the counsel reported that the company was now prepared to settle at the highest sum offered ($750,000)

Citing these contradictions, the judge found the insurance company in contempt for entering the process in bad faith, and sanctioned them for $50,000.

While the violation of the judges’ rules seems clear here, the case does raise a few interesting questions.

  1. Suppose the insurance representative had never admitted his lack of authority, but instead had stayed strictly on his opening offer. Would there be grounds for bad faith in that case?
  2. Is the judge’s requirement that a party entering a settlement conference must be able to settle for the other side’s most extreme request reasonable?
  3. What is the most important aspect of authority at a settlement conference?

Source: Court documents from Second District of Nevada, Case CV13-00370

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2 Responses to “Settlement Conferences and the Price of Contempt”

  1. Kent Lawrence says:

    …this sounds like a law school test question, except in real life. This is an extremely difficult area to figure out how to deal with the problem of “authority to settle”. In this day and age of huge corporations with multiple levels of authority, in individual cases how “empowered” must the negotiator be? Then there is the question of the degree the “top” authority person must be “on site” and hearing how matters developed at the negotiation/mediation session. Does “readily available” do it, even if any mediator will tell you that it is certainly not optimal? The insurer in the case in question seems to really “not had its act together”, but the problem is common, with very unclear “mechanical” corrections evident.

    • Mary Novak says:

      It sounds like you’ve run into some of the same problems that came up in this case. It seems to me that a lot of people are left in a bind when there isn’t enough authority on-site. Is there a solution to make settlement conferences practical in an age of huge corporations?

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