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DECISION ANALYSIS WITH TREEPLAN 587

CASE PROBLEM 2 Lawsuit Defence Strategy

rik Jansson, an employee of Stockholm Con- Erik’s claim and Allied will not be required to pay
E struction Company, claims to have injured his any damages; (2) the jury will find in favour of Erik
back as a result of a fall while repairing the roof at and award him E750 000 in damages; or (3) the jury
one of the LakeView apartment buildings. He filed a will conclude that Erik has a strong case and award
lawsuit against Linus Olsson the owner of LakeView him the full amount of E1 500 000.
Apartments, asking for damages of E1 500 000. Erik Key considerations as Allied develops its strat-
claims that the roof had rotten sections and that his egy for disposing of the case are the probabilities
fall could have been prevented if Mr Olsson had told associated with Erik’s response to an Allied coun-
Stockholm Construction about the problem. Mr Ols- teroffer of E400 000 and the probabilities associ-
son notified his insurance company, Allied Insur- ated with the three possible trial outcomes. Allied’s
ance, of the lawsuit. Allied must defend Mr Olsson lawyers believe the probability that Erik will accept a
and decide what action to take regarding the lawsuit. counteroffer of E400 000 is 0.10, the probability that
Some depositions and a series of discussions took Erik will reject a counteroffer of E400 000 is 0.40
place between both sides. As a result, Erik Jansson and the probability that Erik will, himself, make a
offered to accept a settlement of E750 000. Thus, one counteroffer to Allied of E600 000 is 0.50. If the
option is for Allied to pay Erik E750 000 to settle the case goes to court, they believe that the probability
claim. Allied is also considering making Erik a counter the jury will award Erik damages of E1500000 is
offer of E400 000 in the hope that he will accept a 0.30, the probability that the jury will award Erik dam-
lesser amount to avoid the time and cost of going to ages of E750000 is 0.50 and the probability that the
trial. Allied’s preliminary investigation shows that Erik’s jury will award Erik nothing is 0.20.
case is strong; Allied is concerned that Erik may reject
their counteroffer and request a jury trial. Allied’s law- Managerial Report
yers spent some time exploring Erik’s likely reaction if
Perform an analysis of the problem facing Allied
they make a counter offer of E400 000.
Insurance and prepare a report that summarizes
The lawyers concluded that it is adequate to
your findings and recommendations. Be sure to
consider threepossibleoutcomes to represent Erik’s
include the following items:
possible reaction to a counteroffer of E400 000: (1) Erik
will accept the counteroffer and the case will be 1 A decision tree.
closed; (2) Erik will reject the counteroffer and elect to
2 A recommendation regarding whether Allied
have a jury decide the settlement amount; or (3) Erik
should accept Erik’s initial offer to settle the claim
will make a counteroffer to Allied of E600000. If Erik
for E750 000.
does make a counteroffer, Allied decided that they will
3 A decision strategy that Allied should follow if
not make additional counteroffers. They will either
they decide to make Erik a counteroffer of
accept Erik’s counteroffer of E600000 or go to trial.
E400 000.
If the case goes to a jury trial, Allied considers
three outcomes possible: (1) the jury may reject 4 A risk profile for your recommended strategy.

Appendix 13.1 Decision Analysis with Treeplan

2
TreePlan is an Excel add-in that can be used to develop decision trees for decision
analysis problems. In this appendix, we show how to use TreePlan to build a decision
tree and solve the PDC problem presented in Section 13.3. The decision tree for the
PDC problem is shown in Figure 13.15.

2
TreePlan was developed by Professor Michael R. Middleton at the University of San Francisco and modified for
use by Professor James E. Smith at Duke University. The TreePlan Website is located at http://www.treeplan.com.

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