Focus on Business Interests: The Case of the Sinking Warehouse

With nearly 30 years of experience mediating business conflicts, it remains my firm conviction that to consistently reach mutually beneficial settlements of commercial disputes, the mediation process must be structured to enable business decision makers to address the underlying business interests of the dispute.

One of the expectations emerging from that approach is that parties will often find 50/50 “split the baby” resolutions deeply unsatisfying. This is because such resolutions typically ignore the  underlying business interests driving the dispute.

To share one real life example. A retail chain operated a warehouse-type store located on a former landfill that had been slowly sinking into the ground. Remediation costs had exceeded $20 million, and the retailer’s expert predicted a complete fix would cost an additional $30 million. A leading global insurance company, which had issued an excess liability policy for catastrophic losses in excess of $25 million, had commenced a declaratory judgment action before an arbitration panel in London for coverage denial. A “White Shoe” law firm representing the insured and a “Magic Circle” law firm representing the carrier litigated for years, at a combined cost in excess of $5 million.

The insured had suggested a “split the baby” (50/50) settlement that the carrier promptly rejected. Caucusing with the parties, we learned the nature of the carrier’s concerns. According to the carrier, the insured had “gotten by” for years after the initial $20 million remediation, and therefore the carrier believed that the problem may have ended. Why pay now if there may be no further problems in the future, the carrier argued. Also, the carrier wanted the insured to have “skin in the game” so that the insured would not make unnecessary and costly repairs simply because they would be paid by someone else. For its part, the insured stuck to the position of its expert (whom it greatly respected) that an additional $30 million would ultimately need to be spent.

The solution proposed, and accepted by the parties, was a “pay as you go” option — when and if the insured made repairs, the carrier would reimburse half. In hindsight, the solution sounds like common sense, right? But in litigation, adversaries are often blinded by their unreasonable and unyielding legal positions. By disregarding the parties’ legal positions concerning such issues as insurance policy interpretation, and instead focusing on the underlying business concerns, mediation can uncover solutions that, yes, in hindsight, should have been obvious from the outset.