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High-Low Agreements: A Viable Settlement Alternative

In today's society litigation is nearly unavoidable. It affects all facets of our lives. If you are a professional, malpractice is always a concern. If you are an employer, you must be concerned with worker's compensation and complaints of sexual harassment. Even driving an automobile puts you at risk. If you have never been involved in litigation you soon learn the reality. . . it is time consuming and costly. In fact, who hasn't heard of the excessive verdicts being rendered by juries recently?

A defense lawyer's job is to assess liability and determine, along with the client and the insurance company, whether a lawsuit should be defended or settled. Even when a determination is made to settle the case, for strategy reasons we may proceed with discovery until settlement becomes obtainable. If a decision is made to defend the case, we proceed with discovery until the time of trial. As trial approaches, we again engage in an assessment of the case to determine the chance of success. This assessment focuses not only on liability, but damages as well. If the case presents with a strong liability defense, but a sympathetic plaintiff and high damages, the concern is an excess verdict above and beyond the policy limits. The following case study serves as an example:

The Plaintiff is a minor child who suffers from cerebral palsy and spastic quadriplegia. The minor child does not walk, talk, or have independent motor function above the two to three month old level. A nasal gastric tube is in place for feeding purposes. The level of cognitive functioning cannot be assessed, but the child attends school and can work with a computer to communicate. The parents appear to be devoted to their child and make good witnesses. The plaintiffs allege the child's disability is the result of a birth injury. The Defendant is the obstetrician/gynecologist that delivered the child. The Physician's policy limit is $1 million dollars. The hospital where the child was born is self-insured. The damages are estimated at $12 million dollars. The trial date is approaching and neither defendant has made an offer to settle. There is a strong defense.

Many different factors affect whether a case will be tried or settled. In malpractice actions, the case may proceed to trial despite the amount of potential damages and despite the fact that the defense may be problematic. Often neither the defendant physician nor the insurance company wants to settle. However, sometimes the defendant wants to settle merely because of the potential for an excess verdict, such as the case study above. With only a million dollar policy and a potential verdict in excess of $12 million dollars, the risk is great. However, what happens when the defendant wants to settle, but the insurer does not? Are alternatives available short of settling the case or proceeding to trial?

A. High-Low Agreements

If it appears a verdict for the plaintiff could exceed the policy limits and the defense is uncertain, a high-low agreement should be considered as an alternative to a full settlement of the case. The high-low can be considered prior to trial or after trial begins. In fact, if the case has proceeded to trial, and it appears a verdict may be entered against the defendant, it may be wise to consider a structured settlement agreement prior to the jury returning a verdict. Although it is difficult to predict how a jury will perceive the evidence, during trial the defense attorney and her client will "get a feel" for the jury and the manner in which the trial is progressing and evidence is being received. If the trial is not proceeding well, a structured settlement is a good option. The plaintiff too may have an interest in a high-low agreement. For example, medical malpractice cases are expensive to take to trial. Often the plaintiffs are forced to find their experts out of state, driving up the costs of the case. The trial itself is costly. Thus, a high-low agreement is attractive to the plaintiff. If the plaintiff were to lose at trial, there is some comfort in knowing that the expenses will be paid.

The high-low settlement agreement is similar to a typical settlement agreement, with some added features. The theory behind the agreement is that the plaintiff and the defendant insure the other against an excessive verdict. The plaintiff and defendant agree that the outcome of the case will be no less that X dollars (the low) and no more than Y dollars (the high). If the verdict is in favor of the plaintiff, and exceeds Y dollars, the plaintiff gets Y dollars. If the verdict is in favor of the defendant, and lower than X dollars, the plaintiff gets X dollars.

High-low agreements are legal and enforceable. However, there are limits to the type of agreements that can be entered into.

B. Forbidden Agreements

Although Illinois courts have approved high-low agreements, the proposed agreement should not have any aspects of the forbidden "loan-receipt" or "Mary Carter" agreements.

The Illinois Supreme Court describes a typical loan-receipt agreement as follows:

The plaintiff receives an interest-free loan (settlement monies) from the settling tortfeasor, who is then dismissed from the Plaintiff's tort action. Under the terms of the loan-receipt agreement, however, the plaintiff is obligated to repay the settlement monies received pursuant to the loan-receipt agreement to the settling tortfeasor out of any judgment or settlement that the plaintiff obtains from the other non-settling tortfeasors.
In re Guardianship of Babb, 162 Ill.2d 153, 168, 642 N.E.2d 1195 (Ill. 1994).

The Illinois Supreme Court has found that such agreements violate the terms of the Contribution Act because they attempt to deprive the nonsettling tortfeasors of their statutory right to a setoff.

A Mary Carter agreement, on the other hand, has been described as follows:

The liability of the settling defendant is limited and the plaintiff is guaranteed a minimum recovery; the settling defendant remains a party to the pending action without disclosing the full agreement to the nonsettling defendant and/or the judge and jury; and if judgment against the non-settling defendant is for more than the amount of settlement, any money collected will first offset the settlement so that the settling defendant may ultimately pay nothing.
Banovz v. Rantanen, 271 Ill.App.3d 910, 913-14, 649 N.E.2d 977 (5th Dist.1995).

The problem with Mary Carter agreements is that they give the settling defendant a financial stake in the outcome, which distorts the adversarial process when the settlement is kept from the jury.

What about an agreement where defendant #1 pays $ X dollars if defendant #2 is found negligent by the jury and $Y dollars if defendant #2 is found not guilty? Such agreements are legal and enforceable according to the Second District Appellate Court, but only if there is no pending contribution action. Wingo v. Rockford Memorial Hospital, 292 Ill.App.3d 896, 686 N.E.2d 722 (2nd Dist. 1997). In Wingo, a medical malpractice action, a settlement agreement was reached where the physician would pay $1 million if the hospital was found negligent and $3 million if the hospital was found not negligent. The agreement was reached after closing arguments but before the jury finished deliberating.

The Wingo court held that such an agreement was similar to a high-low agreement. It was not like a loan-receipt agreement because it did not require the plaintiffs to repay any money to the settling doctor. Further, it was not like a Mary Carter agreement because there was no danger that the settling defendant would ultimately pay nothing and there was no agreement until after closing arguments, so the adversarial process was not distorted. The outcome in Wingo, however, may have been different had the evidence reflected that the agreement was made before the defendant's testimony, because at that point the doctor would have had a financial stake in the outcome.

Although high-low agreements are viable in all types of cases, special care should be taken in cases involving minors. For instance, in the case study above, even though the parents are involved in the lawsuit and approve of the high-low agreement, along with the plaintiffs' attorney, the agreement should receive judicial approval to prevent a reversal. The judge will appoint a Guardian ad Litem who will approve or disapprove of the settlement. If it is approved, all parties are assured that the settlement will be binding.

C. Conclusion

Illinois courts encourage settlement agreements. A simple agreement to compromise will be favored. If, however, there are two or more defendants, the court will more closely scrutinize the settlement agreement to determine if it was made in good faith, particularly when there is a pending contribution action.

High-low agreements are a viable settlement alternative. Although such agreements tend to discourage full settlements during the discovery process and encourage the parties to proceed to trial, the high-low is attractive and useful to insure against an excess verdict on behalf of the defendant. They are also attractive to plaintiffs to protect the plaintiffs in cases with a potential for a not guilty verdict. High-low agreements also work in the context of binding arbitration. In this respect, litigation costs can be kept low proceeding to a binding arbitration, with a high-low agreement in place, where the only issue to be decided is liability. If the defendant is found not guilty, the plaintiff recovers the low; if guilty, the plaintiff recovers the high. This type of litigation is similar to "night baseball".

Regardless of the forum, a high-low agreement should be considered when the damages are high and the liability is uncertain. Often, in cases where an excessive verdict has been rendered, the jurors have been persuaded by sympathy, and the verdict does not correlate with the damages. Accordingly, it is prudent to step back and evaluate a case before the verdict comes in, and consider a high-low agreement if the course of the case dictates the need for one. High-low agreements are a wise alternative.

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