The Settlement Negotiation Process for Automobile Bodily Injury Liability

Third party liability insurance settlements are by their nature the result of negotiations between the claimant, or his/her representative, and a representative of the insurer, acting on behalf of the policyholder (Ross, 1980). When substantial non-economic or general damages are expected in any settlement, such as in auto bodily injury liability claims, the nature of the settlement process must differ from the simple first party reimbursement for medical bills or vehicle repair or replacement costs paid and include negotiation and bargaining strategies. Recent research efforts have noted only the outcomes of lower negotiated general damage settlements, in the form of lower settlement to special damages ratios, in the presence of suspicion of fraud (Crocker and Tennyson (2002), Loughran (2002), and Derrig and Weisberg (2004). This paper uses a unique data set from Massachusetts to investigate the negotiation process in terms of the leverage points available to each party and the sequence of claimant demands and insurer offers through settlement. A framework for the negotiation process is proposed, in terms of offer to demand ratios with the value of one representing the settlement. We find that, on average, the ratio of complete offers to demands will increase by about 1/N, where N is the number of rounds to settlement, but with wide variation depending on claim characteristic specifics. The initial anchoring provided by attorney demands plays a prominent role (Wright and Anderson, 1989) and leads to generally higher settlements as a result of negotiation. Suspicion of fraud and build-up has the opposite effect, lowering the general damage valuation agreed to by both parties. Lower (higher)than average offer/ demand ratio adjustments are generally followed by larger (smaller) ratio adjustments indicating an implicit fixed target ratio at the end of each full round of negotiations, perhaps influenced by the information held by each party on prior settlements. Version 1.1 April 14, 2004