Crystal Ball Suits Lawyer for Insurance Defense

Stephen Cavanagh has been practicing insurance law for 20 years as a partner at Kelly, Howard, Santini in Ottawa, Canada. His clients are insurance companies who retain his firm to defend their insureds in lawsuits of various sorts, typically liability claims such as personal injury, product liability, professional liability, and construction cases. Because the outcomes of such cases can vary widely, Cavanagh has turned to Crystal Ball and spreadsheet simulation to better determine the outcome his clients might face.

In insurance suits, the plaintiff and the insurance company almost always disagree on what the various damages are worth. The assessment of damages is quite a subjective matter and therefore, except in extreme cases, no one can truly say which side's number is right. When the plaintiff and defendant cannot agree on an amount, a judge or a jury will assess the damages at a trial, and both sides of the suit must try to predict what the decision will be.

The amount of damages could be very high or very low, and because clients are required to set aside a reserve for payment of the claim, Cavanagh needs to estimate the specific amount used in setting reserves. His calculations grow in complexity when he includes variables such as liability for the accident, multiple defendants, and damages sought for losses that will only be suffered, if at all, in the future. These possibilities create uncertainty and risk for the parties and analyzing the case in any systematic way becomes nearly impossible to do by hand.

When he first began using Excel, Cavanagh was disappointed with its inability to weight the probability of particular outcomes and with the effort and time needed for scenario analysis. With the addition of Crystal Ball, he built sophisticated Excel models that were far more realistic approximations of his cases. For example, he used Custom distributions to define unique outcomes for his variables, and distribution correlation to link dependent variables such as damage awards for individuals and their families. Once the Crystal Ball simulation was run, he could see that, with the probabilities and possible values that he had assumed, 95% of the time the total damages would be $X, 75% of the time, the damages would be $Y, and so on.

"Crystal Ball has forced me to think more analytically and objectively about my cases," Cavanagh said. "To use Crystal Ball effectively, I have to dissect each part of the case in order to come up with a dollar assessment and a probability. But having to go through this exercise has made me more confident in my analyses. They are also more "transparent," in the sense that I can explain to my clients exactly how I have arrived at my figures. As new information is obtained, the values and probabilities can be revised and a new Crystal Ball analysis can be done."

Another feature that adds tremendous value to Cavanagh's work is Crystal Ball's automated report generation. At the touch of a button, Crystal Ball generates a customized report, outlining the assumptions, relevant statistics, sensitivity results, and overlay and frequency charts. The insurance companies that he represents are always looking for greater certainty in handling their claims, and, according to Cavanagh, have been very receptive to the Crystal Ball reports that he sends them.

While he has used Crystal Ball mainly for damages forecasting, Cavanagh believes that it could be equally effective for litigation budgeting. "For most of us," he said, "risk analysis is a subject that was never addressed in law school. It should be. I am convinced that in the future, clients will eschew 'gut feeling' assessments in favor of the objectivity and detail of risk analysis. Crystal Ball is a powerful and yet eminently usable method to give those clients your best professional evaluation of their cases."

Kelly, Howard, Santini is the Ottawa member of "Risk Management Counsel", a national Canadian network of insurance defense law firms.

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