Pricing Trial Risk: The Tangible Cost of Uncertainty in Commercial Litigation - A New Report by SettlementAnalytics

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A New Quantitative Model of Legal Dispute Calculates the Cost of Trial Uncertainty to Commercial Litigants and Provides Insights into the Value of Legal Information.

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Quantifying the cost of trial risk is an essential first step in litigation risk management.

SettlementAnalytics™ has today issued a report which describes the negative impact of trial uncertainty on legal claim valuation.

The report, “Pricing Trial Risk: The Tangible Cost of Uncertainty in Commercial Litigation”, calculates and visually demonstrates a real cost to uncertainty when examined in a settlement bargaining context.

The report reveals how uncertainty about the judgment award or the defendant’s liability can act to erode a litigant’s expected wealth from a legal dispute. The results of this approach differ sharply from conventional claim valuation methods in which litigants average over trial risk and price legal claims equal to the expected trial value. In the conventional framework, the economic cost of trial uncertainty is ignored.

A New Model of Litigation

The analytic approach described in the report employs a proprietary quantitative model of legal dispute developed by SettlementAnalytics. The model explores the value of legal claims in a settlement bargaining context and draws upon ideas from game theory and information economics.

The firm’s model factors over 40 different economic dimensions of litigation and settlement and can be used to describe almost any real world legal dispute. Unlike conventional approaches to claim valuation, the model takes into consideration not only the effect of trial risk, but the potential for settlement, the contingent nature of legal claims and the bilateral bargaining process upon which the occurrence of trial hinges.

The Results

The report quantifies and illustrates the relationship between trial risk and claim value for a typical corporate defendant and demonstrates that there is a tangible cost to the uncertainty associated with the trial outcome. In extreme cases, uncertainty could exacerbate the economic liability for defendants by as much as 20% of the average trial award. Similar but opposite effects can be seen in the plaintiff case, where claim values are eroded by the effect of trial uncertainty.

The report demonstrates how the failure to eliminate uncertainty about the trial outcome can be as economically detrimental to litigants as the failure to correctly quantify the scale of the liability itself.

“This is the first time that a fully-specified model of legal claim valuation has quantified the real economic cost of trial risk,” said Robert Parnell, author of the report and founder of SettlementAnalytics. “We think this is important development, because the ability to quantify the cost of trial risk is an essential first step in litigation risk management.”

The Consequences

This approach to pricing trial risk could contribute to the management of individual legal claims and litigation portfolios. The report underscores the importance not just of working to maximize trial outcomes, but of controlling their potential value dispersion.

Trial risk pricing could also be used to better direct the allocation of legal resources within and across legal claims. According to Parnell, “Understanding the cost of uncertainty about a lawsuit can only help to improve the level and efficiency of the subsequent legal spend.” Moreover, the analytic approach described in the report could help to promote a better dialogue between client and outside counsel as to the priorities in any legal action and act to shape counsel’s overall remit.

Another important aspect of these insights is the converse. By quantifying the cost of trial uncertainty, litigants now have a means by which to value the information that would reduce it. Measuring the “certainty dividend” to be gained by eliminating trial risk suggests a value for the legal information that creates this certitude. These quantitative methods could therefore contribute to the valuation of legal services and potentially influence law firm pricing policies.

About the Author

Robert Parnell is the founder and CEO of SettlementAnalytics.

About SettlementAnalytics

SettlementAnalytics is a legal economic research, consulting and software development firm focused on litigation valuation, settlement bargaining optimization and claim risk measurement. The firm is dedicated to advancing the application of scientific and quantitative methods to legal disputes and settlement bargaining. SettlementAnalytics is the legal economic research and advisory division of Macro Research Associates Limited, a Hong Kong economic consulting company. More information about SettlementAnalytics can be found at SettlementAnalytics.com.

Contact Information

For more information please contact:
Robert Parnell, CFA
Founder and CEO

Tel: +852 3589 3377
Email: info(at)settlementanalytics(dot)com

SettlementAnalytics
Macro Research Associates Limited
1301 Bank of America Tower
12 Harcourt Road, Suite 1479
Central, Hong Kong

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Robert Parnell, CFA
@LitigationQuant
since: 07/2014
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