Friday, March 28, 2008

Ask Not for Whom the Bell Curve Tolls . . .

There are many differences in the way liability insurance carriers and plaintiffs approach settlement of personal injury cases or other civil claims. One of the more significant has to do with the science of statistics: insurance companies rely on it, while injured plaintiffs, by and large, do not.

For statistics to be useful in estimating the value of a given case, the analyst needs to examine the results from many cases. Insurance companies have many cases; plaintiffs do not. Insurance companies look at norms; plaintiffs typically are concerned with only one case – their own.

To find the "norm" for a given type of case, companies will (either consciously or unconsciously) make use of a normal distribution chart, a/k/a "Bell Curve," similar to the one depicted above. They reason that some 68+% of whiplash cases, say, will fall between a mid-range of values clustered about the mean, or average (represented on the chart as the green area between A and B). Of course, those of us who have been at this business awhile know that there is no such thing as an "average" case. Every case is different; every jury is different. And because of these differences, "normal distribution" is largely a fiction.

But insurance companies are in the business of assessing risk – and the fact that they remain in business means that, for the most part, they are pretty good at it. For them, the statistically small risk that a jury in a given case will come in with a figure in excess of B is offset by the equal chance that it will come in with a figure less than A. And with lots of cases in their file drawers, they can bet their money on those odds.

This means that for a plaintiff to persuade the insurance company to pay more than B, he or she will have to convince the claims rep either that the case doesn’t even belong on the same chart – e.g., that the chart deals with apples, while the case under discussion is chocolate bars – or that there are unusual factors present (an extremely sympathetic plaintiff, for example) that move its value toward the right of the chart.

For settlement negotiations in most cases to be productive, however, plaintiffs need to come to grips with the fact that insurance companies are not likely to pay a figure above their idea of the normal range. Keep in mind that the claims rep will have to explain his or her settlement decision to someone up the ladder. Plaintiffs should, therefore, focus their efforts on showing why a case falls more toward the upper limit of the normal range of values, rather than waste time talking about the McDonald’s hot coffee verdict or other unusual "brass ring" cases that made the headlines. They made headlines because they were unusual, and are largely discounted by insurance companies for the same reason.

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