The Plaintiff’s Attorney in the Liability Insurance Claims Settlement Process: A Game Theoretic Approach

The decision of a claimant to obtain legal counsel, the timing of this decision, and the impact on the settlement amount an insurer successfully can offer are the focus of this study. This paper draws on strategic models of litigation/settlement with endogenous settlement amounts in the law and economics literature, but differs by endogenizing the decision to hire an attorney and its timing. The main results are that under symmetric damage information the claimant gains bargaining power over the insurer and a higher net payoff by retaining an attorney on a contingency fee basis before the insurer makes an offer. Hourly fees never appear in equilibrium under symmetric information. Under asymmetric information when only contingency fees are available, there exists a separating equilibrium where the insurer can deduce the expected damage award of each claimant by his attorney-hiring strategy and offer a settlement appropriate for each type. There is no separating equilibrium if the possibility of hourly fees is included.