In: Finance
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 buildings. 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
result, 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 counter- offer 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 its 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 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 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
that 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 that
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 summarizes your findings and recommendations.
Be sure to include the following items: • A decision tree
• A recommendation regarding whether Allied should accept John’s
initial offer to settle the claim for $750,000 • A decision
strategy that Allied should follow if they decide to make John a
counteroffer of $400,000 • A risk profile for your recommended
strategy