I’ll Tell Mommy: The exploitation economics of settlements

Suppose that a lawsuit is threatened against you for breach of contract, and your insurance policy would NOT cover your resulting legal fees and liabilities. Suppose both parties expect that a lawsuit would generate a judgement against you for $25,000. However, the would-be plaintiff asks for a settlement payment of $35,000. Why? They know that if the lawsuit went forward your expenses, including for lawyers, your time, and stress, would cost you $20,000. So, if the lawsuit went forward, you would be responsible for the $25,000 judgement plus $20,000 for expenses. That is $45,000 total. You are bullied into accepting a $35,000 settlement when you have only done $25,000 of damage. It gets worse if your contract requires that the losing party pay the legal expenses of the winning party. Then you can be coerced into an even higher settlement because the would-be plaintiff knows your alternative to a settlement is paying the judgement and BOTH parties’ legal expenses. Even if your insurance company paid the settlement on your behalf, you will likely have to pay an increased insurance premium. There is no winning.

On the other hand, with expert determination, the cost of dispute resolution is significantly lower and it is capped at the time of contract signing. For expert determination, the cost of dispute resolution might be capped at $3,000. Again, the losing party pays this cost. Therefore, the maximum settlement that you could be bullied into accepting would be $28,000 (which is $25,000 + $3,000).

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