Jason Carter, a subcontractor of Riverside Construction Company, claims to have injured his back as a result of a fall while repairing the roof at one of the Westview apartment buildings. He has filed a lawsuit against Don Reyna, the owner of Westview Apartments, asking for damages of $1,500,000, claiming that the roof had rotten sections and that his fail could have been prevented if Mr. Reyna had told Riverside Construction about the problem. Mr. Reyna notified his insurance company, National Insurance, of the lawsuit. National must defend Mr. Reyna and decide what action to take regarding the lawsuit.
Some depositions and a series of discussions took place between both sides. As a result, Jason offered to accept a settlement of $750,000. Thus, one option is for National to pay Jason $750,000 to settle the claim. National is also considering making Jason 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. National's preliminary investigation shows that Jason's case is strong; National is concerned that Jason may reject their counteroffer and request a jury trial. National's lawyers spent some time exploring Jason'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 Jason's passible reaction to a counteroffer of $400,000: (1) Jason will accept the counteroffer and the case will be closed; (2) Jason will reject the counteroffer and elect to have a jury decide the settlement amount; or (3) Jason will make a counteroffer to National of $600,000. If Jason does make a counteroffer, National decided that they will not make additional counteroffers. They will either accept Jason's counteroffer of $600,000 or go to trial.
If this case goes to a jury trial. National considers three outcomes possible: (I) the jury may reject Jason's claim and National will not be required to pay any damages; (2) the jury will find in favor of Jason and award him $750,000 in damages; or (3) the jury will conclude that Jason has a strong case and award him the full amount of $1,500,000.
Key considerations as National develops its strategy for disposing of the case are the probabilities associated with Jason's response to a National counteroffer of $400.000 and the probabilities associated with the three possible trial outcomes. National’s lawyers believe the probability that Jason will accept a counteroffer of $400,000 is 0.10, the probability that Jason will reject a counteroffer of $400,000 is 0.40, and the probability that Jason will, instead, make a counteroffer to National of $600,000 is 0.50. If the case goes to court, they believe that the probability the jury will award Jason damages of S1,500,000 is 0.30, the probability that the jury will award Jason damages of $750,000 is 0.50 and the probability that the jury will award Jason nothing is 0.20.
What decision strategy will result in the lowest expected value of cost to dispose of this lawsuit? What is that value?