Note to victims of accidents, medical malpractice, broken contracts and the like: When you sue, make a deal.
That
is the clear lesson of a soon-to-be-released study of civil lawsuits
that has found that most of the plaintiffs who decided to pass up a
settlement offer and went to trial ended up getting less money than if
they had taken that offer.…Defendants made the wrong decision by proceeding to trial far less
often, in 24 percent of cases, according to the study; plaintiffs were
wrong in 61 percent of cases. In just 15 percent of cases, both sides
were right to go to trial – meaning that the defendant paid less than
the plaintiff had wanted but the plaintiff got more than the defendant
had offered.
Here is the story. The good news is that 80 to 92 percent of cases do in fact settle. The bad news is that, over time, poor decisions to go to trial have become more rather than less frequent.
I don’t have access to the article, but from a rational standpoint it’s OK to make mistakes as long as the potential upside from going to trial is sufficiently large (except for a very risk averse individual). Assuming decision makers face some uncertainty, this ex post analysis says little about the quality of their decisions. The more interesting comparison is between the average return when going to trial and the rejected settlement. Only if the former is less than (or not much above) the latter are these really `mistakes.’
Wouldn’t an increase in tendency to settle over time result in smaller settlement offers?
One should also factor in the value of having a public judgement in your favour, something that a settlement with the norm being a confidentiality clause, doesn’t provide.
Just a semi-informed guess, but I think defendants are likely to be smarter than plaintiffs.
I don’t get why going to trial is generally viewed as a failure of the two sides to come to an understanding. Why doesn’t the mechanism of a trial count as a peaceful way to settle disagreements?
As has been pointed out, this could have a lot to do with altruistic punishment.
The risk adversity should be higher for the plaintiff [who has just the one case, probably won't get any more, and in a meritorious case is in worse shape financially than is hir norm] than for the lawyer [who has a percentage interest in each of the many cases in house and will get more in the future].
Is it any surprise that the situation is being handled in ways that favor the lawyers?
Defense lawyers do not work on a contingency basis and there are repeat cases against defendants, so this principle does not apply.
-dk
MS made the astute observation – “Wouldn’t an increase in tendency to settle over time result in smaller settlement offers?”
Indeed, if we consider this from a game theoretic perspective, it appears that the equilibrium outcome is one in which plaintiffs will accept all settlement offers that cover their costs (possibly including the real net loss incurred that prompted the suit), and defendants would offer exactly this amount. In the current outcome described, plaintiffs who go to trail are simply increasing the payoffs for other plaintiffs who settle. Defendants are forced to offer higher settlements because they have observed and expect irrational behavior from plaintiffs, and presumably have no way of knowing if the plaintiff in their case is the irrational type. This is not an equilibrium outcome.
My guess is that the equilibrium outcome is not approximated in reality simply because the decision maker is often the lawyer, facing different incentives entirely, and not the plaintiff. I don’t know how lawyer pay works in cases like this, but if lawyers get paid for their time (in working the case) in addition to a cut of the award, it’s possible that when we consider the lawyers as players in this game, we do have an equilibrium.
“Settling may be better for you. That doesn’t mean it’s better for your lawyer (and it probably isn’t).”
In my experience, lawyers know better than the clients that settlement is likely a better outcome for the client. Contrary to popular belief, most lawyers are ethical and strive for the best outcome for their clients, by strongly recommending settlement in almost all cases, excepting those where the other side’s offer is clearly insufficient. It is usually the client, and not the lawyer, who is against settlement, even though the lawyer often has a financial incentive not to settle.
“That’s because plaintiffs take no risk in filing a suit. It could be remedied pretty easy: If you sue someone and lose, you owe them every penney they spent defending themselves. If you can’t pay, your lawyer owes them. If neither of you can pay, you both go to prison.”
There are certain circumstances in which a losing plaintiff will be liable for the defendants’ attorneys’ fees, and certain circumstances where they will not be liable for the defendant’s attorneys’ fees. These rules have been crafted over the last two hundred years by very smart men, who have considered extensive arguments laid out by other smart men both for and against the imposition of fees in each specific context. The funny thing is, most of the people who argue that the rules should be changed do not even know when a plaintiff is or is not liable for attorneys fees, and cannot articulate the rationales that courts have given in favor of the rules as they now stand.
So who should we trust? The judges who have crafted these rules over hundreds of years after being presented both sides of the argument in fair adversary proceedings, on countless occasions, in countless different factual contexts, or some guy who says that doing it his way will solve everything?
“Indeed, if we consider this from a game theoretic perspective, it appears that the equilibrium outcome is one in which plaintiffs will accept all settlement offers that cover their costs (possibly including the real net loss incurred that prompted the suit), and defendants would offer exactly this amount. ”
This simply is not how people think. There are a lot of plaintiffs with a “make them pay” attitude, whose settlement number is not based on how much they perceive they are damaged, but on how much they believe is an adequate punishment. (I’m not saying that’s the correct measure of damages, just how they judge whether or not an offer is fair). Likewise, there are a lot of defendants who will pay $1,000,000 to defeat a $10,000 claim out of principal, and in order to discourage future lawsuits.
“In the current outcome described, plaintiffs who go to trail are simply increasing the payoffs for other plaintiffs who settle.”
Not if they get less than the defendant offered. In that case they are decreasing the payoffs for other plaintiffs who settle.
“Defendants are forced to offer higher settlements because they have observed and expect irrational behavior from plaintiffs, and presumably have no way of knowing if the plaintiff in their case is the irrational type. This is not an equilibrium outcome.”
This is true to some extent, but even then, a defendant’s offer will not exceed the sum he believes he is likely to be held liable for, plus the cost of defense. Also, there is often as much irrationality on the defense side as there is on the plaintiff’s side.
“My guess is that the equilibrium outcome is not approximated in reality simply because the decision maker is often the lawyer, facing different incentives entirely, and not the plaintiff.”
As I noted above, lawyers usually push for settlement even when it is against their immediate financial incentives. This is in line with the ethical codes governing lawyers, and, in any event, most lawyers perceive it to be in their best interests to get the best result for their client, and gain referrals and repeat business, rather than to extract as many billable hours as possible out of each case.
“I don’t know how lawyer pay works in cases like this, but if lawyers get paid for their time (in working the case) in addition to a cut of the award, it’s possible that when we consider the lawyers as players in this game, we do have an equilibrium.”
Lawyers usually get either an hourly fee or a percentage of the recovery, not both.
Also, Doug’s account of the “loser pays” rule is misleading. In the U.S., unlike most developed countries, the default rule is that the parties bear their own costs. There are very rare, and usually codified, scenarios under which a successful defendant can recover defense costs (and even more cases, thanks to lobbying by the former ATLA, where successful plaintiff’s can recover attorneys fees). This is a matter of lawyers making rules that protect lawyers, and public choice theory-style narrow interest group lobbying, not carefully crafted judicial decision-making in an adversarial system.
True, the “default” rule is that parties bear their own attorney’s fees (though not costs). But this just means that where there is no specific rule or agreement to the contrary, parties bear their own fees. I would not call the exceptions to that rule “very rare” or even “rare.” It is very common to see contractual attorneys fee clauses these days, and at least in California, whenever a contract calls for fees, it applies both to successful plaintiffs and successful defendants. In addition, SLAPP motions are extremely common these days, and such motions award defendants attorneys fees. Furthermore, there are various rules that impose sanctions, including fees for frivolous suits and motions.
I am not all that familiar with the reality of how courts function in England or other European countries today, but I know that in this country, a default rule awarding fees to successful defendants would give insurers and large companies a nearly insurmountable advantage in most cases, even where the plaintiff has a valid claim. Unfortunately being in the right is often not enough to win a lawsuit. Until it is, I would oppose any default rule to impose fees (let alone prison time, as J suggested) on unsuccessful plaintiffs.
I am a civil attorney who has worked in insurance defense for 4 years. JP at 3:55 has it right. Large corporations generally just want to spend the least amount of money, so they often settle for the cost of defense, even on claims with very little merit. Many plaintiffs’ attorneys will take a case only on the word of their client that some negligence occurred, without doing any independent investigation, because they know they are likely to get _something_ in the end. Many cases are settled before a lawsuit is even filed.
The civil liability system in the US is not what it is written up in most law journals to be – a way to right wrongs and have defendants bear the costs of their negligence. Instead, it is generally a form of distributive justice, funneling money from “rich” corporations and middle-class people with insurance to the poor. You will often see lower-class people who have been in 5-10 car accidents before middle age, as well as have had workers comp claims and a slip and fall lawsuit or two. If you live on the margin of poverty, it means nothing to you to file a lawsuit in which you only may end of collecting $1,500 or $2,000 after attorneys fees are taken out.
The system really is broken. The fact that nearly all cases settle is not necessarily a good thing.
Insurance defense atty,
I’d appreciate your comment on one thing that troubles me – what I think of as frivolous lawsuits caused not by unreasonable plaintiffs but by unreasonable defendants. In other words, lawsuits that are filed just because the defendant doesn’t want to meet its obligations, and thinks it can bluff the plaintiff.
I’ve been involved in one such case, as a plaintiff. Ignoring repeated requests to turn over property to which I was clearly entitled, the defendant caved instantly and completely when I filed suit. Insurance companies, I think, are often accused of this kind of behavior, because they have huge tactical advantages over individual plaintiffs – lots of legal staff and, probably even more important, all the time in the world. I am personally familiar with peple who found themselves in this predicament and settled for much less than any reasonable estimate of their damages.
It is in these sorts of case that I think the plaintiff ought to be able to recover legal fees, plus substantial punitive damages. Unsnarkily, I’d like to hear your perspective on this.
One other thing – about insurance companies having “all the time in the world” to sit on a claim until the statute of limitations runs out. While theoretically true, claims adjusters are also under tremendous pressure to resolve cases and get them closed and off their desk. After all, more new cases come in every day. Upon a review of files that do go into suit, I am often privy to negotiations that occurred in the claims stage. Many times offers are made just to get rid of something early, even if an attorney would declare the case to be of little to no value.
Bernard,
Maybe we can both agree that reforms should be enacted so the loser in a lawsuit pays the winner’s costs and legal fees, in a sum to be determined “reasonable” by the court after the case is over. As it stands, plaintiffs who hire attorneys on contingency fee basis have no incentive to avoid filing what really is a frivolous claim, that later ends up being dismissed on summary judgment (before it gets to the jury). Plaintiffs attorneys theoretically have an incentive to avoid these types of claims because they could spend a lot of time for zero payoff in the end of the case. However, when nearly everything settles, no matter how weak the case, this creates an incentive to file suit for each and every claim that sounds remotely plausible.
I understand your point about the claimant needing the money now, while the insurance company may have a longer time horizon. (Here I am speaking of personal injury or property damage, not your case.) I think, though, that some of this is due to the claimant not understanding that the process is a negotiation. The claimant calls up, sends their bills, and the insurance company makes what some would consider to be a lowball offer. Instead of the claimant making a fair counter offer, claimants often ask for outlandish sums, or else fail to make any counteroffer at all, all the while being angry at the company. Claimants tend to take these things personally, instead of looking at it as a business decision. Just like the car dealer isn’t on your side trying to give you the best deal, the adverse insurance adjuster is not looking out for your interests. Its up to the claimant to make sure the deal ends up being fair to them. Sometimes this does require hiring a lawyer.
Insurance defense guy,
You’re right that the claimant gets emotional sometimes. That probably cuts both ways. Sometimes it leads to outlandish claims, as you say, and sometimes to taking a lowball claim just to get it over with.
Certainly there is bad behavior on both sides. We probably differ as to who is worse. You obviously have a lot of experience with this, but as you say, you only see a case when the adjuster can’t get it settled. That probably means you are more likely to see the outlandish claim kind of situation than the kind where the claimant accepts a bad offer because of financial pressures.
Your comments are very interesting. Thanks.
i’m not all that surprised that the adjudicated result hit in between the bid-ask spread only 15% of the time… it doesn’t mean that a party made a mistake ex ante 85% of the time.
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