Settlement offers in personal injury: identifying the break-even offer.

• Author: Reiss, Jerry

Insurance companies collect premiums to offset risk for the products they sell. The premium structures that are used are determined by actuaries and are based upon historical data. There is a multitude of available data to help the personal injury attorney assess the reasonableness of an offer of settlement. This data can be used to determine actuarially the break-even point for assessing whether the case should be tried before a jury. This is the same methodology that insurance companies employ to set their premium structures. Successful attorneys often negotiate very conservatively, accepting offers well below the break-even point, simply because they have not made an empirical assessment of the break-even point.

Actuaries set premium schedules on the basis of probability of claims, and these probabilities are determined with historical data showing both the likelihood of a claim and the probable exposure of the claim. By utilizing this data in order to determine these probabilities, the actuary does not guarantee the amount of any one claim, or whether it will occur. The actuary simply understands probability theory: In the long run, higher than projected claims will be offset by lower than projected claims, balancing everything out to the total projected claims amount. This same principle is used by Las Vegas and state lottery odds-makers, and a long list of other professionals, including the military and NASA. It can be applied to personal injury cases to assist the attorney in deciding when to accept an offer of settlement or whether a jury trial provides the likelihood of a greater benefit to the client and attorney.

Economic Factors

* Time is Money

Anyone who earns money on the basis of favorable results understands the importance of the saying "time is money." Such individuals also understand all the components that figure into the "time is money" equation: 1) Delay means more work for the attorney once the insurance company defense attorney is engaged; 2) delay makes the same money worth less because of the effect of inflation; 3) delay limits the number of new cases that the attorney can handle during the delay period; and 4) delay poses the additional risk that if a jury award does not equal or exceed 75 percent of the insurance offer, the client may be responsible for attorneys' fees and costs.(1) All of these factors have an economic impact of reducing the value of a jury award, and the personal injury attorney often relies upon seat-of-the-pants guesswork to decide when to accept an offer of settlement and what to offer as a counter proposal. Some attorneys know that the time for guesswork has passed, and they now employ jury consultants to eliminate some of that guesswork. The personal injury attorney can likewise eliminate some of that guesswork.

* The First Step

The first thing that needs to be done is to retain an expert to perform a valuation of the economic loss. This is an essential first step because it is necessary in determining the break-even point for purposes of settlement. It also tells the adjuster that you are serious about the claim and that you may take the matter to a jury. A well-supported valuation report setting forth the extent of the loss demonstrates your good faith in the negotiation process by showing that there is a legitimate claim. After all, if you are unwilling to invest in this report, how could you possibly convince the adjuster of the value of the case, let alone show that you intend to pursue it in a court of law if faced with an unreasonable offer? Without a competent professional valuation, you have significantly less proof to offer an adjuster on the value of the economic loss. Again, it also demonstrates that you are preparing your case for a jury.

The authors believe that if attorneys used experts more often, they would make more money per case, and would spend less time and effort on cases that proved to be less profitable.(2) This would serve the public interest as well. Eventually, use of the expert reports would translate into raising the breakeven point for settlement purposes because adjustors would have to reevaluate the low offers they would ordinarily...