Does It Pay To Settle?

Plaintiffs’ lawyers who feel their clients have more incentive to go to trial than settle are in for a rude awakening.

A new study has found that a majority of plaintiffs who reject a settlement offer and proceed to trial are awarded less money than if they had taken the initial offer.

The study, conducted by Palo Alto, Calif.-based legal consulting firm DecisionSet, found that in 61 percent of cases in which a settlement offer was refused, the plaintiff wound up winning less at trial.

According to the study, plaintiffs who failed to settle received an average of $43,000 less than plaintiffs who accepted a pre-trial settlement offer.

Defendants made the wrong decision by going to trial in only 24 percent of cases. But that decision cost them far more – an average of $1.1 million per case.

The findings were based on a sample of 2,054 civil cases that went to trial between 2002 and 2005.

“It’s critical for lawyers to understand that decision error rates and cost of error can vary significantly by case,” said Randall L. Kiser, a co-author of the study and a principal analyst at DecisionSet. “We can draw a lot of conclusions from the set of cases we studied that plaintiffs were better off taking the settlement.”

Kiser attributed the disparity between settlement offers and trial awards to effective mediation.

The results of the study are not surprising, said plaintiffs’ attorney Hans G. Poppe of the Poppe Law Firm in Louisville, Ky. He said most defendants, which are typically insurers in personal injury cases, will often offer more in a settlement to keep the matter from going to trial.

“Insurance companies are the most litigious industry of all,” Poppe said. “They have a lot of information on how to make a decision on how much to offer, more than any individual plaintiff or lawyer could ever amass. They have extremely good data on how to make a statistically valid decision on how much to pay on a claim.”

From a marketing perspective, the study could suggest a new way for attorneys to advertise their services as risk reducers.

“If you are a litigator, the best way to get new clients is to market yourself as a problem avoider,” said Larry Bodine, a Glen Ellyn, Ill.-based legal marketing expert. “Most litigators market themselves as fire-breathing trial lawyers, but that’s not necessarily what plaintiffs want. Often plaintiffs want a lawyer who will keep them out of court.”

Case variables

While some attorneys have dismissed the study because of differences between cases, Kiser said that his team analyzed 19 such variables, including the type of case, insurance coverage and the gender of the parties and their attorneys.

The study found that “context” variables, such as case type, damages requested and forum, were more predictive of adverse trial outcomes than “actor” variables, such as attorney experience and firm size.

Part of the study involved a sample of 4,532 civil cases from 1964 to 2004, during which time both the frequency and cost of decision-making errors skyrocketed.

Plaintiffs obtained worse results at trial than they would have gained from a settlement in 54 percent of the cases in 1964, and in 66 percent of cases in 2004. The proportion of cases that were error-free, in that neither the plaintiffs nor the defendants made a decision error, decreased from 27 percent in 1964 to 14 percent in 2004. Adjusted for inflation, the cost of plaintiffs’ decision errors has increased three-fold.

The study will be published in the September issue of the Journal of Empirical Legal Studies. Along with Kiser, the study was co-authored Martin A. Asher, an economist at the University of Pennsylvania and Blakeley B. McShane, a graduate student at the University of Pennsylvania.

Questions or comments can be directed to the writer at:justin.rebello@lawyersusaonline.com