Reference no: EM13236942

John Campbell, an employee of Manhattan Construction Company, claims to have injuredhis back as a result of a fall while repairing the roof at one of the Eastview apartmentbuildings. In a lawsuit asking for damages of $1,500,000, filed against DougReynolds, the owner of Eastview Apartments, John claims that the roof had rotten sectionsand that his fall could have been prevented if Mr. Reynolds had told ManhattanConstruction about the problem.

Mr. Reynolds notified his insurance company, Allied Insurance,of the lawsuit. Allied must defend Mr. Reynolds and decide what action to takeregarding the lawsuit.Following some depositions and a series of discussions between the two sides, JohnCampbell offered to accept a settlement of $750,000. Thus, one option is for Allied to payJohn $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 goingto trial.

Allied's preliminary investigation shows that John has a strong case; Allied is concernedthat John may reject their counteroffer and request a jury trial. Allied's lawyers spentsome 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 representJohn's possible reaction to a counteroffer of $400,000:

(1) John will accept the counterofferand the case will be closed;

(2) John will reject the counteroffer and elect to have a jurydecide the settlement amount; or

(3) John will make a counteroffer to Allied of $600,000. IfJohn does make a counteroffer, Allied has decided that they will not make additionalcounteroffers.

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 rejectsJohn's claim and Allied will not be required to pay any damages;

(2) the jury finds infavor of John and awards him $750,000 in damages; or

(3) the jury concludes that John hasa strong case and awards 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 probabilitiesassociated with the three possible trial outcomes. Allied's lawyers believe the probabilitythat John will accept a counteroffer of $400,000 is .10, the probability that John will reject acounteroffer of $400,000 is .40, and the probability that John will, himself, make a counterofferto Allied of $600,000 is .50. If the case goes to court, they believe that the probability the jurywill award John damages of $1,500,000 is .30, the probability that the jury will award John damagesof $750,000 is .50, and the probability that the jury will award John nothing is .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 tosettle the claim for $750,000

3. A decision strategy that Allied should follow if they decide to make John a counterofferof $400,000

4. A risk profile for your recommended strategy