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Case Study

John Campbell is suing Doug Reynolds for $1.5 million after injuring his back on a faulty roof during a work repair. John offered to settle for $750,000. Allied Insurance, representing Doug, is considering countering with $400,000 or settling for $750,000. They believe there is a 10% chance John accepts $400,000, a 40% chance he rejects it and elects a jury trial, and a 50% chance he counters with $600,000. If it goes to trial, they estimate a 30% chance of a $1.5 million verdict, 50% of $750,000, and 20% of nothing.

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58 views2 pages

Case Study

John Campbell is suing Doug Reynolds for $1.5 million after injuring his back on a faulty roof during a work repair. John offered to settle for $750,000. Allied Insurance, representing Doug, is considering countering with $400,000 or settling for $750,000. They believe there is a 10% chance John accepts $400,000, a 40% chance he rejects it and elects a jury trial, and a 50% chance he counters with $600,000. If it goes to trial, they estimate a 30% chance of a $1.5 million verdict, 50% of $750,000, and 20% of nothing.

Uploaded by

Thanh Thảo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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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 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 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. 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
counteroffer of $400,000
4. A risk profile for your recommended strategy

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