Question
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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.
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