1 Beyond the Polyester Veil : A Personal Injury Negotiations Case Study I m going to tell you something else almost as useful.i m going to tell you the big secret of handling your personal injury case. For everyone except you it s a business, and that business is all about negotiations. The only way to get ahead in a business that runs on negotiations is to understand the stakes. Who wins, who loses, what the risks are and who takes them. That s why I m taking you behind the polyester veil to show you the dark inner workings of a personal injury negotiation.now in my story the numbers are made-up, and cases will differ, and I ve simplified things a bit, and yada-yada-yada, but basically the players and the rules of the game will all be the same. If you know the players and you know the rules thenyou might be able to play the game without losing your shirt. Dealing the Cards (The Injury) It s a bad day. You get into a car accident or slip and fall in a grocery store. Your hurt and because of your injury you end up being out $100. That includes your time off work, your doctor bills, your medicine, the extra money you spent ordering pizza because you were too hurt to cook, the DVD you rented to keep your mind off the pain, and everything else. Odds are you aren t a trained lawyer or insurance adjuster so you probably don t even know how to figure out how much the injury is costing you. You re adding things that you shouldn t, and leaving things out that should be added in. You have no idea how to figure out what it this injury will cost you in the future. Still you have to put a number on it, so after some hard thinking you figure you re out $80. Player: You (the injured party) You re a normal person, maybe you have some savings, and maybe you don t. Being injured means spending money you didn t plan to spend and probably earning less. Your goal is to get as much money as you can to try to offset your losses, and you re probably motivated to get it sooner than later, because you have bills to pay. You re also the human being in the middle of this who is suffering and who doesn t think this is a business or a game.
2 Player: The Insurance Company. The First Hand (Personal Negotiations) You go to the insurance company and tell them about the accident. The insurance company writes down all the details and then they look at the books and try to figure out what would happen if the case went to court. They figure the odds are 75% that their client is liable and they will have to pay something. If they do pay something they figure the rangewill be between $60-$100. These numbers go to the local bean counter for analysis. He tells them to settle for $60. Insurance lowballs you at $40. You go back and forth for a while andwith some shrewd negotiating you get them up to $60. You re thinking: I lost $80, and I get back $60, so I m still out $20, but insurance came up $20 from $40 to $60, so they are taking as much as a loss as I am and that seems fair. Insurance is thinking: We hit the logical settling point, and we are still at the very bottom of what we would have to pay if we lost in court and we would probably lose. If you take the offer now: You lost $40 Analysis : Logical Settling Point Any nerd from business school will tell you that when risks are involved you multiply the risk by the money involved to figure out the cost. In this case we have a 75% chance of paying between $60-$100. Halfway between $60 and $100 is $80. So we take $85 and multiply it by 75% to get $60. The insurance company makes a little bit of money from everyone s premiums. The more they pay out to injured people the less they make and the higher everyone s premiums go. Also the more time they take to settle a claim the more staff they have to pay and the less they make. This means an insurance company wants to settle cases fast and low. But here s the catch. Even though they want to settle fast and low they aren t very motivated, because no matter what happens the cost just gets passed on to the guy paying the premiums and insurance still makes money. Rule: Liability If the law says your injury was someone else s fault that person is liable for the accident and that person s insurance is supposed to pay you. If it s your fault, or no-one s fault, then nobody pays. It s s like winning a hand in blackjack. When you got injured you put your chips on the table. If you win the hand then the dealer pays you something, if you lose then your chips are just gone. Rule: Quantum (the Range) This is the amount the person liable has to pay. It s supposed to be what you lost when you got injured, but in practice it s always less. This is like the bet in blackjack. If you win the hand then the amount you get depends on the bet.
3 Player: Plaintiff s Lawyer The Second Hand (Lawyer Negotiations) You go to see a lawyer. The lawyer explains more about how these things work and gets more details from you. The lawyer explains that you probably actually lost $100, not the $80 you thought you lost. You re thankful you saw a lawyer, because had you taken the last offer you would have lost $40, not $20. The lawyer files a lawsuit and starts talking to the other side. The lawyer explains that he ll take your case on contingency at 33% (the going rate). This means that if you win or settle the lawyer gets 1/3 rd of the money, and you get the other 2/3 rds but the lawyer doesn t get paid until you get some money, and if you get nothing the lawyer doesn t get anything either. The lawyer explains things to the insurance company in language they understand and helps get the information everyone needs to clarify the odds. The insurance company rechecks the odds. Now it lookslike the chances of being found liable and having to pay something are more like 80%, and the range of awards is between $65 and $100. There is also a new factor to watch now. In addition to paying you the quantum if they lose insurance now also has to pay part of your legal fees in costs. Win or lose insurance will also need to pay their own lawyers. To go to the next step they figure the risk of costs $3 and their own legal fees would be $10. In comes the bean counter who does his analysis and tells them to settle at $ They offer $65, and with some negotiations you get them up to $80 ($79 award + $1 costs). If you take the offer now: You got $54 (2/3 rd of $79 + $1), so you lost $46 A lean mean private enterprise machine, the Plaintiff lawyer fights for your rights in the hopes that you get a settlement and he gets paid. The Plaintiff lawyer wants to get as much as possible for you, because the more you get, the more he gets. The Plaintiff lawyer also wants to settle early. He s not getting paid by the hour, so the longer it takes the more work he had to put in to earn his fee. The Plaintiff lawyer is also a human being and is one of the few people in this process who is working for you, sees you, hears about your pain, and probably wants to help. Rule: Legal Fees Lawyers are expensive. Insurance pays lawyers by the hour, and if they get into legal wrangling they will need to pay those lawyers. Rule: Costs The winner in court has to pay the loser some of their legal fees back. We call this costs. Costs go straight to your pocket and don t get split with your lawyer. Your lawyer got $25 Analysis: Logical Settling Point The possible award is $85.5 (midpoint of $ =$ $3 in Costs) The possible award of $85.5 x 80% chance of losing = risk adjusted loss of $ $68.40 in risk adjusted loss + $10.00 in legal fees = $78.40
4 Player: Insurance Lawyer The Third Hand (Post discovery Negotiations) No settlement was reached. The case progressed to a place called discovery. Discovery includes exchanging documents, getting medical reports, and questioning people under oath. The insurer has had to hire a lawyer now and that s adding to the costs. Some money has alsobeen spent on an expert doctor s reports and stuff; this is what we call disbursements. If you settle or win the insurance company pays for these, but if you lose then you personally pay for them. Let s say there are $5 in disbursements now. Things are getting serious and it s time to make offers again. The insurance company sits down with its lawyer. The lawyer says the chances of your winning at trial are 85% and if you win you will get between $75 - $95. Why is the max $95 even though the real cost is $100? That s because the awards of courts in Canada are conservative. Although awards are supposed to put you in the place you would be had the accident never happened in practice you re always a little bit worse off. So the new numbers go to the bean counter who tells the insurance company to settle at $ They offer $90 and after some negotiations you get up to $115 ($100 award + $10 in legal fees + $5 for disbursements). The insurance company lawyer is paid by the hour whether she wins or loses. You would think that means the lawyer has an interest in delaying as long as possible. Realistically though if she doesn t bill her hours on your file, she will just work on somebody else s file and get paid anyway. As a result the insurance lawyer is fairly neutral. Player: Expert Doctor The expert doctor gets paid to write a report. Doctors are very busy and their time is expensive. They have no financial stake in the outcome. Some are swayed by wanting to help you. Some are dedicated scientists who will give it straight and a few make their living doing reports for the insurance companies. The last set seem overly sceptical of injuries to people like you and I, but they also make sure the fakers are kept at bay. If you settle here this is what it looks like. You got $76 (2/3 rd of $100 + $10 costs), so you lost $29 Your lawyer made $34 The insurance lawyer made $10 Analysis Logical Settling Point The possible award is $100 (midpoint of $75-95 =$85 + $15 in Costs) Rule: Disbursements When a lawyer spends money trying to run a case it s called a disbursement. The big ones are expert reports. Whoever loses the case pays the disbursements, or if you settle insurance pays them. If you lose the case even on contingency you have to pay the disbursements. The possible award of $100 x 85% chance of losing = risk adjusted loss of $ $85.00 in risk adjusted loss + $45.00 in legal fees = $130.00
5 The Last Round (Trial) You go to trial and one of three things happens: (1) you do well, (2) you do poorly, (3) you lose. Let s say you do well. The court agrees with you and awards you the upper end of the range at $95, plus $15 for legal fees, and $5 for disbursements. Here s how it works out: You got $78 (2/3 of award + $15 costs), so you lost $22 Your lawyer made $32 (probably a lot less than his hourly wage) The insurance lawyer made $55 (hourly wage) Let s say you do poorly. The court agrees that you should be paid, but it comes in at the low end of the range at $75 + $15 for legal fees, and $5 for disbursement: You got $65 (2/3 rd of award + $15), so you lost $35 Your lawyer made $25 (far less than his hourly wage) The insurance lawyer made $55 (hourly wage) Let s say you lose. The court doesn t think the other party should pay, it was a true accident or it was your fault. You get nothing, and the other side gets $15 in legal fees. You paid $20 ($5 disbursements + $15 in opposing legal fees), so you lost $120 Your lawyer wasted a great deal of time and effort working for free The insurance lawyer made $55 (hourly wage)
6 Conclusion So you watched the game, and now here s the post-game analysis, looking at the different players and stats. What do you take from all this? Should you negotiate with the insurance company or get a lawyer? It depends on too many things, even in this simplified scenario it s a tough call whether you would have been better off losing $40 at the beginning or spending all the time and energy to end up losing $22 at the end. Should you talk to a lawyer? Yes! Almost any personal injury lawyer will do a free consultation with you. You can learn about the process and maybe a little bit about the odds. In a game like this the only way to get ahead is to know the players, the rules, and the odds. Hopefully you re a little bit closer now. Parties No Claim No lawyer No discoveries No Trial Trial Win Trial Loss Trial Mixed You Paid Your lawyer The insurance company lawyer The expert doctor The cost of the accident Lawyers Earned Insurance Company Paid ANALYST: Best for Insurance Best You don t file a claim and they pay nothing. 2 nd Best You lose at trial and they pay $40 and the overhead of running your claim for a very long time. 3 rd Best You settle without a lawyer, and they pay $60, but save on staff time. ANALYST: Best for You Best You win at trial and lose $22 as well an enormous amount of time and effort. 2 nd Best You settle prior to trial and lose $24 and a lot of your time and effort, but are spared the trial ANALYST: Best for Lawyers Insurance Lawyer Makes the hourly wage on your file, or some other file, so it really doesn t matter. Your Lawyer - Settle prior to trial, either $25 pre-discoveries or $34 post discoveries which is a similar deal considering the work involved.
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