Lawsuit Defense Strategy

Presented By

May 9th, 2014

Quantitative Methods & Decision Making

#1 Allied Insurance Decision Tree

Allied Accepts John’s Settlement Offer of $750,000

John Accepts Allied Counteroffer of $400,000

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

(0.30)

John Rejects Allied’s Allied LosesCounteroffer of $400,000 Damages $750,000

Allied Wins Damages $0.00

(0.20)

Allied Accepts John’s Counteroffer of $600,000

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

(0.50) (0.30)

Allied Rejects John’s Allied Loses Counteroffer of $600,000 Damages $750,000

(0.50)

Allied Wins Damages $0.00 (0.20)

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#2

Based on our analysis, Allied should not accept John’s initial offer to settle for $750,000. Rejecting this offer and pursuing the various outcomes associated with the $400,000 counteroffer yields an expected value of $670,000, which is less than the initial settlement offer.

#3

The case would be settled and neither party will be required to attend trial if John accepts Allied counteroffer of $400,000. However, there exists the possibility that John will counter with an offer of $600,000, or even reject Allied’s offer all together and opt for trial.

If the parties decide to go to trial, Allied will be faced with new possibilities. The jury could award John the full $1,500,000 or the settlement amount of $750,000. There still also exists a small chance Allied would win the court case and the jury award John no compensatory damages. John, however, has a strong case so the probability of Allied winning the case if very low.

Given the probability of the various decisions, the optimal strategy would be to take the counteroffer of $600,000 as it is lower than the expected value of $670,000.

#4

Detailed below is the risk profile for the recommended strategy:

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

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 $180,0001.00 $670,000

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Allied Accepts John’s Settlement Offer of $750,000

John Accepts Allied Counteroffer of $400,000

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

(0.30)

John Rejects Allied’s Allied LosesCounteroffer 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 John’s Counteroffer of $600,000

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

(0.50) (0.30)

Allied Rejects John’s Allied Loses Counteroffer of $600,000 Damages $750,000

(0.50)

Allied Wins Damages $0.00 (0.20)

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