Chapter 21, Problem 1CP

Lawsuit Defense Strategy

John Campbell, an employee of Manhattan Construction Company, claims to have injured his back as a result of a fall while repairing the roof at one of the Eastview apartment buildings. In a lawsuit asking for damages of $1,500,000, filed against Doug Reynolds, the owner of Eastview Apartments, John claims that the roof had rotten sections and that his fall could have been prevented if Mr. Reynolds had told Manhattan Construction about the problem. Mr. Reynolds notified his insurance company, Allied Insurance, of the lawsuit. Allied must defend Mr. Reynolds and decide what action to take regarding the lawsuit.

Following some depositions and a series of discussions between the two sides, John Campbell offered to accept a settlement of $750,000. Thus, one option is for Allied to pay John $750,000 to settle the claim. Allied is also considering making John a counteroffer of $400,000 in the hope that he will accept a lesser amount to avoid the time and cost of going to trial. Allied’s preliminary investigation shows that John has a strong case; Allied is concerned that John may reject their counteroffer and request a jury trial. Allied’s lawyers spent some time exploring John’s likely reaction if they make a counteroffer of $400,000.

The lawyers concluded that it is adequate to consider three possible outcomes to represent John’s possible reaction to a counteroffer of $400,000: (1) John will accept the counteroffer and the case will be closed; (2) John will reject the counteroffer and elect to have a jury decide the settlement amount; or (3) John will make a counteroffer to Allied of $600,000. If John does make a counteroffer, Allied has decided that it will not make additional counteroffers. It will either accept John’s counteroffer of $600,000 or go to trial.

If the case goes to a jury trial, Allied considers three outcomes possible: (1) The jury rejects John’s claim and Allied will not be required to pay any damages; (2) the jury finds in favor of John and awards him $750,000 in damages; or (3) the jury concludes that John has a strong case and awards him the full amount of $1,500,000.

Key considerations as Allied develops its strategy for disposing of the case are the probabilities associated with John’s response to an Allied counteroffer of $400,000, and the probabilities associated with the three possible trial outcomes. Allied’s lawyers believe the probability that John will accept a counteroffer of $400,000 is .10, the probability that John will reject a counteroffer of $400,000 is .40, and the probability that John will, himself, make a counteroffer to Allied of $600,000 is .50. If the case goes to court, they believe that the probability the jury will award John damages of $1,500,000 is .30, the probability that the jury will award John damages of $750,000 is .50, and the probability that the jury will award John nothing is .20.

Managerial Report

Perform an analysis of the problem facing Allied Insurance and prepare a report that summarizes your findings and recommendations. Be sure to include the following items:

1. 1. A decision tree
2. 2. A recommendation regarding whether Allied should accept John’s initial offer to settle the claim for $750,000
3. 3. A decision strategy that Allied should follow if it decides to make John a counteroffer of $400,000
4. 4. A risk profile for your recommended strategy