Lawsuit Defense Strategy

Presented By








May 9
th
, 2014



Quantitative Methods & Decision Making










Page 1

#1 Allied Insurance Decision Tree


Allied Accepts Johns
Settlement Offer of $750,000


John Accepts Allied
Counteroffer of $400,000

(0.10)
Allied Loses
Damages $1,500,000
(0.30)


John Rejects Allieds Allied Loses
Counteroffer 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 Johns
Counteroffer of $600,000

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

(0.50) (0.30)

Allied Rejects Johns Allied Loses
Counteroffer of $600,000 Damages $750,000
(0.50)

Allied Wins
Damages $0.00
(0.20)



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Page 2

#2
Based on our analysis, Allied should not accept Johns 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 Allieds 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 $180,000
1.00 $670,000


Page 3

Allied Accepts Johns
Settlement Offer of $750,000


John Accepts Allied
Counteroffer of $400,000

(0.10)
Allied Loses
Damages $1,500,000
(0.30)


John Rejects Allieds Allied Loses
Counteroffer 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 Johns
Counteroffer of $600,000

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

(0.50) (0.30)

Allied Rejects Johns Allied Loses
Counteroffer of $600,000 Damages $750,000
(0.50)

Allied Wins
Damages $0.00
(0.20)
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