Early settlement vs. the long haul to trial: An economic Cost-benefit analysis of your legal matter
By Sonia Mann, J.D., B.A. Economics
This article is for editorial discussion purposes only. Please do not interpret the content contained herein to constitute legal advice or be an interpretation of any laws or statutes. As always, seek counsel with an attorney with regard to your specific legal issue.
Ever heard of the old adage that a bird in the hand is worth two in the bush? Well, it may ring true as it relates to your legal case. Recent studies have provided an in-depth, case by case analysis comparing the benefit of Plaintiffs accepting earlier settlement offers versus trekking their case through a trial. In some cases, clients who accepted settlement offers earlier in the litigation process resulted in having net settlement amounts after subtracting attorney costs and fees that were far greater as compared to similar cases that progressed onward and possibly went to trial.
How is that possible, you ask? Trial is inherently risky, and no matter how great your case or legal team, you could lose. Likewise, you could “win” at trial, and be awarded less or close to the initial settlement offer. In some situations, plaintiffs were left with much regret and with no better resolution after their case went to trial, not to mention the amount of extra time, costs, and emotional investment involved. The goal of this article, however, is not to suggest or advocate that you should take the first or a “low ball” offer on your client’s case. Rather, it is to serve as a guide in deciding whether or not to advise your client to accept a reasonable settlement offer. When evaluating a settlement offer, there are many factors to consider when measuring it with regard to the facts of the claim and total damages, and your client’s unique situation.
First, consider when the offer is made. If too early in the process, the offer will generally be low relative to the potential damages, which may be still unknown. If your case is in the pre-litigation phase, then perhaps holding out until after a Complaint is filed is a better choice. Fast forward – if you are midway through the litigation process and have sufficiently built up your case and are approaching the time to start retaining expert witnesses for example, this is a good time to give proper and strong consideration to settlement offers (and counter-offers) made by the defense. As a general rule for personal injury matters, you should not settle until your client has concluded all medical treatment. Insurance companies have everything to gain from clients who are in financial strain due to lost wages or high medical bills, particularly so after sustaining a debilitating injury and are thus more prone to accept an initial offer. Insurance companies are running a business with bottom lines and profit margins to maintain. Waiting until all medical treatment has been concluded is the best way to ensure that you have enough information regarding the full breadth of the damages or injuries specific to your client. Further, you do not want to short settle a claim by concluding it too early and open yourself or your firm up to potential malpractice issues.
Another important element to consider also is whether the Defendant has little or no insurance, as you will need to determine if they have sufficient funds to satisfy a damages award even if you do win at trial. As briefly outlined here, timing is everything and it is imperative to factor it when evaluating any settlement offer.
Further, accounting for aspects such as jury climate in your venue, the judge overseeing the matter, or even your assigned trial date, and factoring in how those may influence the outcome of your case is equally important. For example, if you know that juries tend to be conservative in the area where your case is pending, that should impact how you advise your client regarding acceptance of a settlement offer or not. By the same token, if you know that juries tend to be very liberal and offer generous judgments in that county, that should be taken into equal account as well.
While none of the factors discussed above, individually or in totality, will ever give you a clear-cut answer on whether or not to recommend your plaintiff accept a settlement offer, they do provide a starting point on how to evaluate an offer and measure whether holding out or proceeding to trial is the right choice.
In evaluating whether to reject a sure thing for the possibility of something more, we at PLG have found that providing our clients (and ourselves) with a numerical breakdown of possible scenarios for net settlement amounts is highly helpful and effective. Seeing numbers on a piece of paper may be the best way for everyone involved to grasp that accepting a settlement offer, even of an amount that may seem disappointing initially, may actually be the best option. We recognize that many clients will say, “I just want my day in court!” The need for plaintiffs to feel vindicated by telling their story in court is understandable. Emotions during litigation may run high, and clients may perceive offers to resolve their cases prior to trial as an insult on top of injury. Deciding whether or not to accept an offer may be one of the toughest choices our client has ever had to make. They are not faced with this decision as regularly as we are in our legal practice. This is why we recommend actually working out the numbers and presenting your client with a clear application of cost-benefit analysis.
As a case progresses to trial, costs will likely increase significantly as expert witnesses are hired and detailed exhibits are required. Defendants sometimes go bankrupt or even become insolvent, creating a situation where you may win more money at trial but be left with a judgment that will never satisfied. Alternatively, as discussed earlier you could lose at trial.
The following example provides a short economic analysis demonstrating a hypothetical of the phenomenon described herein. Also shown is the fact that present value of accepting the earlier final settlement offer, as it applied here, far outweighed the monetary value of accepting the same amount of money later, as it earned interest and attorney’s costs were lower. These figures do not account for the value of extra time and feelings involved, nor the value of having closure to the matter and moving on with one’s life earlier. Lastly, these figures assume a contingency-fee arrangement between attorney and client, therefore the actual monetary loss to the attorney in the event of a trial loss is not contemplated.
|Settlement Offer: $100,000||Settlement Offer: $100,000||Settlement Offer: $100,000||Settlement Offer: $100,000|
|Settlement Accepted – Guaranteed 30-day payment||Settlement Accepted – One year later||Settlement Rejected
One year later: Win at Trial – Verdict: $75,000
One year later: Loss at Trial – $0*
|Attorney Fees at 33% &Costs – $33,300 plus $4000||Attorney Fees at 33% & Costs – $33,300 plus $10,000||Attorney Fees at 50% (trial fees) & Costs – $37,500 plus $20,000||Attorney Fees & Costs – $0|
|Net to P: $62,700||Net to P: $56,700||Net to P: $17,500||Net to P: $0|
|Plus: Interest earned over period at 1%: $627.00||Plus: Interest earned over period at 1%: $0||Plus: Interest earned over period at 1%: $0||Plus: Interest earned over period at 1%: $0|
|Total: $63,327.00||Total: $80,000||Total: $17,500*||Total: $0.00|
|*Plus – Possibility of owing attorneys’ fees to other side depending on state||(*actual monetary loss to attorney not calculated)|
While the net figure conclusions demonstrated above do not hold true for all civil matters, it certainly holds true that if your settlement net amounts are comparable to your client’s trial net values, proper consideration and negotiation of the offer is strongly recommended.
As legal counsel, we cannot persuade our clients to do anything against their will, but we do have a duty to be fully forthcoming and to advise them of their legal options accordingly. This includes providing clients with a true assessment of their case’s value and merits, weighing in on comparable case law, and factoring in your clients’ best interests given their current financial situation. While we all may be guilty of perceiving settlements as “giving in,” as shown herein, before rejecting that settlement offer it is probably worthwhile to sit down and actually do the math.
Sonia Mann is an Associate Attorney at Parikh Law Group and specializes in Personal Injury, Immigration and Real Estate matters. Sonia is the Managing Attorney at Parikh Law Group’s Columbus, Ohio location.