Case Problem 2 - LAWSUIT DEFENSE STRATEGY

Case Problem 2

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 build-

ings. He filed a lawsuit against Doug Reynolds, the owner of Eastview Apartments, asking

for damages of $1,500,000. 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

Some depositions and a series of discussions took place between both sides. As a re-

sult, John Campbell offered to accept a settlement of $750,000. Thus, one option is for Al-

lied 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’s case is

strong; 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 they will not make

additional counteroffers. They 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

may reject John’s claim and Allied will not be required to pay any damages; (2) the jury

will find in favor of John and award him $750,000 in damages; or (3) the jury will conclude

that John has a strong case and award 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 0.10, the probability that John will reject a counteroffer of $400,000 is 0.40, and the probability that John will, himself, make a counteroffer to Allied of $600,000 is 0.50. If the case goes to court, they believe that the probability the jury will award John damages of $1,500,000 is 0.30, the probability that the jury will award John damages of $750,000 is 0.50, and the probability that the jury will award John nothing is 0.20.

Managerial Report

Perform an analysis of the problem facing Allied Insurance and prepare a report that sum-

marizes your findings and recommendations. Be sure to include the following items:

1. A decision tree

2. A recommendation regarding whether Allied should accept John’s initial offer to

settle the claim for $750,000

3. A decision strategy that Allied should follow if they decide to make John a coun-

teroffer of $400,000

4. A risk profile for your recommended strategy