The Economics of Settlement

Clients sometimes question why we want them to consider settling their case before trial. Some view the litigation process as a type of war. They equate early settlement with a peace treaty, or even worse, a surrender. They want to win the war and have a ticker-tape victory parade. Settle? No way.

What these clients fail to realize is that the litigation “war” is different from the traditional battlefield. In a war, the participants must kill or be killed; nothing but brute force counts. In litigation, the stakes do not involve life or death, or even battlefield injuries. Any physical injuries associated with litigation happened before the lawsuit was ever filed. Once the lawsuit is underway, only one thing matters – money. As personal injury and medical malpractice lawyers, our goal is always to maximize the amount of money that our client receives.

So how can an early settlement ever maximize the money received? Isn’t a settlement always going to require a compromise? A compromise means accepting less money, right? Wrong!

Powers Taylor handles personal injury, medical malpractice, and nursing home abuse & neglect claims. In most of these cases, the attorney advances out-of-pocket litigation expenses. These litigation expenses include things like:

  • filing fees paid to the court to start the lawsuit,
  • fees charged by doctors and hospitals to obtain certified copies of medical records,
  • fees charged by court reporters and videographers who attend every deposition,
  • travel expenses to attend depositions or hearings,
  • and fees paid to expert witnesses for their analysis and testimony about complicated or technical aspects of the case.

When the case is over, the attorney gets to recoup all of these expenses from the money paid by the defendant.

These litigation expenses can be substantial, especially in cases where the expected verdict is less than $250,000. If a case goes through trial, litigation expenses can be at least $30,000, and it is not at all uncommon for expenses to exceed $100,000. If we can convince the defendant to make a substantial settlement offer before all of these expenses are paid, our client may net more money from an early settlement than from a victorious trial.

Here’s a personal injury example:

A client is injured, suffering a broken arm. After considering medical bills, lost wages from her job, and pain and suffering, we might determine that her claim is worth $100,000. To get a $100,000 verdict at trial, we might estimate that the litigation expenses will be $26,000. If she wins trial and collects $100,000, the first $40,000 would go pay attorneys’ fees, and the next $26,000 would repay the litigation expenses, leaving only $34,000 for the client.

However, if the defendant offered $80,000 in settlement at a point when only $10,000 in litigation expenses have been paid, the first $32,000 would go to attorneys’ fees, the next $10,000 to repay expenses, and $38,000 would go to the client.

So, in this example, by settling for $20,000 less, the client increases her actual cash received by $4,000. And the settlement is likely to be received months, if not years, sooner than if the client insisted on going to trial. That’s a major victory!



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