Neutral Corner: Admitting mediation communications in bad-faith actions

Are statements, offers and demands made during a mediation admissible in a bad-faith case? This issue is presently pending before the 9th Circuit Court of Appeals and is being watched by many in the mediation community with the hope it will clarify to what extent exceptions will continue to be created to the mediation confidentiality statutes. The issues presented by the case have significant implications for lawyers participating in mediations in which bad-faith claims are either currently filed or potentially will be filed.

The case, Milhouse v. Travelers Commercial Insurance Company, 982 F. Supp. 2d 1088 (2013), involved a claim by homeowners against their insurance company to recover damages for breach of contract and punitive damages resulting from the insurance company’s alleged bad faith in adjusting the claim.

The parties did not settle the matter at mediation, and after trial, the jury awarded damages for breach of contract but found that the insurance company had not acted in bad faith. In a motion for new trial, the homeowners alleged that the trial court erred in allowing testimony concerning communications, including offers and demands, made in the mediation session. Plaintiff homeowners had argued at trial that the insurance company acted in bad faith in refusing to settle at what plaintiffs considered to be a reasonable amount. The insurance company offered evidence of the details of the negotiations at the mediation, and the trial court found that such evidence should be admitted under a “due process” exception to the mediation confidentiality statute. The trial court stated:

“The jury … needed to hear all about what happened during and after the mediation so it could determine whether Travelers did in fact act unreasonably, maliciously, fraudulently or oppressively by refusing to settle the Milhouses’ claim. To exclude this crucial evidence would deny Travelers its due process right to present a defense.” 982 F. Supp. at 1107.

The trial court cited Cassel v. Superior Court, 244 P. 3d 1080 (2011) for what may amount to a “due process” exception to the confidentiality rule. The trial court, however, relied simply on one sentence in Cassel which stated: “We must apply the plain terms of the mediation confidentiality statutes to the facts of the case unless such a result would violate due process, or would lead to absurd results that clearly undermine the statutory purpose.”

The trial court’s citation of Cassel is ironic in that the Cassel holding is considered one of the most liberal interpretations of the California mediation confidentiality statute: specifically, the Cassel court excluded conversations between a client and his attorney occurring in advance of and in preparation for a mediation in a subsequent legal malpractice claim in which the client alleged that the attorney’s conduct in connection with the mediation fell below the standard.

Mediator Phyllis Pollack has followed and written about the Milhouse case and reported that a review of the appellate briefs reveals that the developing issue is whether the California mediation confidentiality rule is merely an evidentiary rule governed by interpretation of Evidence Rule 408 (and, therefore, mediation statements may be admissible when offered for a purpose other than proving or disproving the validity or amount of the disputed claim) or whether it is a substantive right of privilege to be interpreted very broadly and with limited exceptions (such as Cassel).

Courts in jurisdictions other than California have reached differing results, depending in part on whether the analysis is made solely pursuant to Evidence Rule 408 or whether it is based on a specifically worded mediation confidentiality rule. For example, in Brown v. Nationwide Mutual Insurance Company, 2015 W.L. 71485 (M.D.N.C.), the court cited the applicable ADR rule stating that mediation statements were inadmissible in any civil action on the “same claim” and held that statements made in the mediation in the underlying claim were admissible in the separate action for bad faith.

Also deciding the issue on the basis of the applicable mediation rule, the court in Dietz & Watson, Inc., 2015 W.L. 356949 (E.D. Pa.), disallowed evidence from a mediation in an underlying claim in a subsequent bad-faith action based on the plain language of the statute that mediation communications shall not be admissible “in any action or proceeding.” 42 Pa. Cons. Stat .Ann. S 5949(a).

When the analysis is based on Evidence Rule 408, the “offered for another purpose” clause is often cited in allowing evidence of mediation communications in a subsequent bad-faith claim. See i.e., Redding v. Prosight Specialty Management Company, 2015 W. L. 860796 (D. Mont.).

Indiana’s mediation confidentiality rule

Indiana’s mediation confidentiality rule, ADR Rule 2.11, is not as broad as the California or Pennsylvania statutes and merely declares mediation to be settlement negotiations and therefore governed by Ind. Evidence Rule 408. It could be expected, therefore, that were the issue of mediation communications to arise in an Indiana bad-faith action, the analysis might turn on the “offered for another purpose” exception. This exception was cited by the Indiana Supreme Court in Horner v. Carter, 981 N.E.2d 1210 (Ind. 2013). In that case, Justice Brent Dickson stated that:

“The admissibility provided for mediation evidence ‘offered for another purpose’ pertains to the use of such evidence only in collateral matters unrelated to the dispute that is the subject of the mediation.”

The result in Indiana, therefore, could be that the mediation evidence would only be admissible in a separate or “collateral” bad-faith case.

It could likewise, however, be argued that the subsequently brought bad-faith claim is not “unrelated” to the underlying case and, therefore, the mediation communications would be inadmissible.

When the bad-faith claim is joined in the same lawsuit as the underlying claim and the matters are mediated together, the prohibition of Evidence Rule 408 would seem to support exclusion of evidence of negotiations in the mediation, but experienced practitioners are nevertheless leery and are generally insisting on separate and broader pre-mediation confidentiality agreements.

Further, as a practical matter, seasoned lawyers understand that they can have a confidential mediation without the chilling effect of the uncertainty created by this issue by reissuing demands and offers after the mediation session. For example, in the Milhouse case, the court was concerned that Travelers would be deprived of due process if the jury did not hear that it offered $1 million at the mediation. Nothing in the facts, however, demonstrates why Travelers could not simply have renewed or made that offer after the confidential session had ended.•

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John R. Van Winkle, of Van Winkle Baten Dispute Resolution, is a former chair of the American Bar Association’s Section of Dispute Resolution and author of West’s Indiana Rules of Dispute Resolution Annotated. This quarterly column will endeavor to highlight recent trends, hot topics, caselaw and other developments in mediation and arbitration. The opinions expressed are those of the author.