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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. He

filed a lawsuit against Doug Reynolds, the owner of Eastview

Apartments, asking for damage 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 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 the 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 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 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 lawyers believe the

probability that John will accept the counteroffer of $400,000 is

0.1, that the probability that John will reject the counteroffer of

$400,000 is 0.4, and the probability that John will, himself, make

a counteroffer to Allied of $600,000 is 0.5. If the case goes to

court, they believe that the probability the jury will award John

damage of $1,500,000 is 0.3, the probability that the jury will

award John damages of $750,000 is 0.5, and the probability that the

jury will award John nothing is 0.2.

Use MS Excel & Palisade Decision Tools (@Risk,

PrecisionTree, etc) while performing an analysis of the problem

facing Allied Insurance and prepare a report that summarizes your

findings and recommendations. Be sure to include:

1) A decision tree (using PrecisionTree),

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 and

4) A risk profile of your recommendation strategy.