CASE STUDY

PRESENTED BY:

Lawsuit Defense Strategy
The Problem
John Campbell, an employee of Manhattan Construction,
claims to have injured his back as a result of a fall while
repairing the roof at one of the Eastview apartment
buildings.
John filed a lawsuit against the owner of the building,
Doug Reynolds asking for $1,500,000 in damages.
John has offered to settle the lawsuit out of court for
$750,000.
Mr. Reynolds insurance company, Allied Insurance,
must now defend the dispute and decide what action to
take regarding the lawsuit.
The Decision Alternative

Should Allied Insurance accept Johns offer to settle
the lawsuit for $750,000, or provide a $400,000
counteroffer?
Possible Outcomes
There are three outcomes the lawyers are considering to
represent Johns possible reaction to a counteroffer of
$400,000.
(1) John Accepts the counteroffer and the case will be closed.
(2) John Rejects the counteroffer and elects to have a jury decide
the settlement amount.
(3) John makes a counteroffer to Allied Insurance of $600,000.

If John does make a counteroffer, Allied will either accept
Johns counteroffer of $600,000 or go to trial.

Allied Insurance Decision Tree

Allied Accepts Johns
Settlement Offer of $750,000


John Accepts Allied
Counteroffer of $400,000

(0.10)
Allied Loses
Damages $1,500,000
(0.30)


John Rejects Allieds Allied Loses
Counteroffer of $400,000 Damages $750,000

Allied Counter offers (0.40) (0.50)
with $400,000
Allied Wins
Damages $0.00

(0.20)

Allied Accepts Johns
Counteroffer of $600,000

John Counteroffers Allied Loses
with $600,000 Damages $1,500,000

(0.50) (0.30)

Allied Rejects Johns Allied Loses
Counteroffer of $600,000 Damages $750,000
(0.50)

Allied Wins
Damages $0.00
(0.20)

1
2 3
4
5
EV Node 1: ($400,000 X 0.1) + ($825,000 X 0.4) +
($600,000 X 0.5)= $670,000
EV Node 2: ($400,000 X 0.1) + ($825,000 X 0.4) +
($600,000 X 0.5)= $670,000
EV Node 3: ($1,500,000 X 0.3) + ($750,000 X 0.5)
+ ($0.00 X 0.2)= $825 000
EV Node 4: ($600,000 X 1.0)= $600,000
EV Node 5: ($1,500,000 X 0.3) + ($750,000 X 0.5)
+ ($0.00 X 0.2)= $825,000
Question 2: Should Allied accept Johns initial offer
to settle for $750,000?
We recommend that Allied not accept Johns initial
offer to settle for $750,000.

The calculated expected value of $670,000 is less
than the settlement offer of $750,000 from John.
Question 3: What decision strategy should Allied follow
if they decide to make John a counteroffer of $400,000?
If John accepts Allied counteroffer of $400,000,
neither parties will be required to attend trial.
But, what if John rejects the counteroffer?
John could offer a different counteroffer of $600,000
Take the case to trail and let the jury decide.
If the parties decide to go to trial:
The jury could award John the full $1,500,000 or the
settlement amount of $750,000.
Allied could win the case leaving John with no compensatory
damages.
The Risk Profile
The optimal strategy would be for Allied to take the
counteroffer of $600,000, as it is lower than the
expected value of $670,000.
Settlement Amounts Probability of Outcome Expected Value
$0.00 0.08 $0.00
$400,000 0.10 $40,000
$600,000 0.50 $300,000
$750,000 0.20 $150,000
$1,500,000 0.12 $180,000
1.00 $670,000