Underwriters, risk managers and agents often promote the use of an Alternative Dispute Resolution [“ADR”] clause in engagement letters. ADR reduces the cost and time in a legal dispute and can lead to fairer outcomes. ADR may be via Arbitration, Mediation or even a formal settlement conference. However, because Arbitration follows the format of a trial and is often legally binding and requires the participation of counsel and a three party panel, many firms are opting for the less formal process of mediation. Conversely, Mediation is much less formal and is usually non-binding (but persuasive in the event that a claim is later filed in Court).
Because of the foregoing, Underwriters reward the use of Mediation clauses in engagement letters in the following ways:
1. During the underwriting process the premium attracts a discount of up to 2.5% during the rating process. This impacts all levels of deductible and applies before the limit of liability adjustment.
Certain underwriters will agree to the apply the credit if a firm will commit to the use of mediation clauses in all future engagement letters.
2. Accountants’ Professional Liability policies contain a clause which can reduce the deductible. For example, the CPAGold™ policy contains the following wording:
3.2 In the event a Claim is fully and finally resolved to the satisfaction of all parties, including us, as a result of Alternative Dispute Resolution, without resorting to litigation, we will waive your Deductible obligation for such Claim up to a maximum waiver of $50,000 each Claim.
8.2 Alternative Dispute Resolution means the use of arbitration or non-binding mediation in a form approved by us in which a neutral panel or individual assists the parties in reaching their own settlement.
Which means the deductible is fully waived for amounts of up to $50,000.
Ralph Picardi, Esq., the risk manager to the CPAGold™ program has suggested firms use the following wording in engagement letters:
"We will submit to mediation, before initiating litigation, any dispute (other than our efforts to collect an outstanding invoice) arising from this engagement or any prior engagement between us. We will participate in that process in good faith in [County and State] before [Name of Mediation Organization]. We will bear our own costs, except that we will share equally any charges assessed by the mediation organization. The results of any such mediation will be binding only upon our agreement to be bound. Any ensuing litigation will be conducted within the county and according to the state law noted above."
Mediation clauses are a great way to reduce the impact of malpractice claims and there are various other types of wording for ADR clauses. Please contact our office for for further guidance.
By Rickard Jorgensen, FCII, ARM, ACIArb. Rickard is not a lawyer and any legal questions about the foregoing should be referred to qualified legal counsel.