Decision Analysis

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 East view apartment buildings. He filed a lawsuit against Doug Reynolds, the owner of East view 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 problems. Mr. Reynolds notified his insurance company, Allied Insurance, of the law suit. 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 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'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 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 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 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 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:

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.