California’s Mediation Privilege Statute Can Impact an Insurer’s Ability to Evaluate Coverage and Litigate Coverage Matters
California’s mediation privilege statute can, at times, present issues for carriers faced with the question of coverage for claims settled in mediation. Under California Evidence Code § 1119(b), “[n]o writing . . . that is prepared for the purpose of, in the course of, or pursuant to, a mediation or a mediation consultation, is admissible or subject to discovery, . . .” Thus, where an insured settles an underlying case via mediation, the insured may argue, and some courts have agreed, that documents relating to the mediation are not discoverable and cannot be relied on by insurers—thereby limiting an insurer’s ability to evaluate and/or present evidence relating to the underlying settlement. Recognizing this issue, some courts that have allowed insureds to pursue this course of action have made efforts to limit its potentially draconian effect on carriers.
The California Supreme Court in Cassel v. Superior Court, 51 Cal. 4th 113 (2011), stated that the “statutory purpose” of the mediation privilege “is to encourage the use of mediation by promoting a candid and informal exchange regarding events in the past. This frank exchange is achieved only if the participants know that what is said in the mediation will not be used to their detriment through later court proceedings and other adjudicatory processes.” Id. at 123 (internal quotations and citations omitted). While this statute addresses an important public policy concern, its consequences in insurance litigation can be significant.
For example, when it is to their advantage, insureds involved in “mixed actions” may attempt to prevent carriers from utilizing communications and writings made during the course of a mediation to evaluate coverage and/or in subsequent coverage litigation. This can obviously present real issues for an insurer both in terms of evaluating what is and is not covered and with regard to presenting evidence in a subsequent coverage action, as one possible source of the relative value of the settled claims is the mediation communications and writings themselves (as opposed to an after-the-fact rationalization/justifications).
This issue is further complicated by the fact that the mediation does not “end” until one of the conditions of California Evidence Code § 1125 (“Section 1125”) is met. Pursuant to that statute, the protection of the mediation privilege “ends” when the parties execute a written settlement agreement or enter into an oral agreement that fully resolves the dispute, the mediator or a party provides a signed writing stating that the mediation is terminated, or there is no communication between the mediator and the parties relating to the dispute for ten calendar days. See Section 1125(a). However, the timing of the mediation termination under this last condition may be shortened or extended by agreement, which arguably allows the parties to keep the mediation open indefinitely pending a complete resolution.
The evidentiary issues created by Section 1125 can be further amplified by the fact that some courts have applied the standard for protection under the statute loosely and required little justification from the party asserting the privilege. For example, in Wimsatt v. Superior Court, 152 Cal. App. 4th 137 (2007), the court held that “[m]ediation confidentiality protects communications and writings if they are materially related to, and foster, the mediation …. Mediation confidentiality is to be applied where the writing or statement would not have existed but for the mediation communication, negotiation or settlement discussion.” Id. (citations omitted). Under this standard, parties have often argued for application of the mediation privilege to documents and communications with tenuous connection to the given mediation.
In an effort to abrogate some of the unintended effects of the mediation privilege, California courts have recognized a due process exception to its application. The court in Milhouse v. Travelers Commer. Ins. Co., 982 F. Supp. 2d 1088 (C.D. Cal. 2013) applied this exception and held that California’s mediation confidentiality statute did not apply in a bad faith claim brought by homeowners against their insurer because the insurer needed to show that its failure to settle the case was the result of the homeowners’ excessive demands in mediation. The court stated, “[t]o exclude this crucial evidence would have been to deny Travelers of its due process right to present a defense.” Id. at 1108. In other contexts, however, courts have declined to apply this exception beyond the facts of Milhouse. See Cassel, 51 Cal. 4th at 135 (declining to apply the due process exception to the mediation privilege to a legal malpractice action).
While California courts have yet to specifically address a solution to the potentially inequitable results of a fulsome application of the mediation privilege, case law from other states provide guidance. For example, in UnitedHealth Group Inc. v. Columbia Cas. Co., 2014 U.S. Dist. LEXIS 134956 (D. Minn. Sept. 25, 2014), the insured sought to avoid disclosure of certain mediation and settlement-related information, and the court found that its other potential sources of allocation evidence were insufficient on a variety of bases. Id., at *70. Ultimately, as a result of the insured’s litigation strategy, the court shifted the burden of proof to the insured on the relevant allocation issues. In granting the carriers’ summary judgment motion, the court held “[b]ecause [the insured’s] litigation strategy has left it without sufficient evidence to prove what portion of the Settlement is attributable to the [potentially covered] claim, [the insured] cannot force the insurers to indemnify it for that portion.” Id., at *72. Through issuing this ruling, the UnitedHealth Group court recognized that by invoking the right of the insured to keep certain communications confidential, there can and should be substantive ramifications for the party choosing to assert the privilege.
In sum, while the public policy behind California’s mediation privilege is sound, a strict application of such a privilege can have unintended and prejudicial consequences. Some courts applying California law have addressed this issue by recognizing a due process exception to the privilege. Courts in other states have dealt with the issue by shifting the burden of proof to a policyholder who elects to exercise its right to keep certain communications privileged while simultaneously pursuing coverage on grounds that makes those communications potentially relevant.
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