A few weeks ago, I posted a blog about a subrogation matter which I mediated. The facts were not complicated: A homeowner parked her vehicle in her garage in her home and the next thing she knew, the garage caught fire and there was extensive smoke damage throughout the house. After paying out on the claim, the Insurer sued the automobile manufacturer contending that it caused the fire. The automobile manufacturer contended that a part in the automobile (manufactured by a third party) allegedly caught fire, thereby causing all of the damage.

The real mediation was between the parts manufacturer (“Parts Manufacturer”) and the automobile manufacturer (“Automobile Manufacturer”) as the Parts Manufacturer was willing to contribute only so much, and the Automobile Manufacturer, (believing that the Parts Manufacturer should be contributing much more) was unwilling to make up the difference by contributing the additional sums necessary to meet plaintiff’s demand. Plaintiff was the insurer who paid out on the claim to the homeowners.

The matter did not settle at mediation, leading me to discuss the Prisoner’s Dilemma. The dilemma is whether two prisoners should cooperate with each other. If they do, they both serve minimal sentences. But, if one betrays the other, the betrayer is set free while the betrayed gets a longer sentence.

Or, as Wikipedia explains:

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is:

If A and B each betray the other, each of them serves 2 years in prison

If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)

If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)

 

By analogy, the fact that the Parts Manufacturer was not willing to contribute more could be likened to a betrayal in which the Parts Manufacturer, as the alleged betrayer, is set free while the Automobile Manufacturer, as the betrayed, gets a longer sentence. (The Plaintiff had agreed to settle separately with the Parts Manufacturer in the amount the latter was willing to contribute to the overall settlement.)

Well… it seems that the pressure of the upcoming trial (if not a written offer to compromise from the plaintiff) caused the Automobile Manufacturer to re-think its position.  It agreed to offer the difference needed to meet Plaintiff’s demand so that a global settlement could be reached. In terms of the Prisoner’s Dilemma, its actions  can  be viewed  either in which now both have agreed to betray each other or in which both are now fully cooperating with each other! Therefore, each receives a “lesser sentence” than   that in which only one betrays the other.  The global settlement puts an end to the ensuing and endless motions, trials, possible appeals and litigation. Both are “freed” from this matter.

So, while this mediation may seemingly have been about a fire doing a lot of damage to a home and who was going to pay for it, in truth, it was game theory in action. Long ago, I learned that things are not always as they seem. Game theory has a lot to teach us, especially about how to resolve disputes.

…. Just something to think about.

 

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