Exposure analysis: expanding the use of modeling and decision trees

In January 2022, Law360 reported on the technology and analytical tools available, which allow the legal profession to move cases towards early resolution. One of the key tools discussed was the use of decision trees. As counsel or organizations approach a case, they need to be aware of some of the considerations in building a tree, understanding the probabilities from the tree and how weighting may be applied.

It’s common to see settlement recommendations that simply fall in the midpoint of best-case and worst-case scenarios. However, even in cases where there are multiple legal or factual issues being disputed, all of which have an equal chance of being won or lost, it doesn’t necessarily mean the case should be valued at the midpoint, or 50% of the damages gap.

Scenario-based models

Working with both in-house and external Counsel on complex cases, forensic accountants are often engaged to assist with exposure analysis. The forensic specialist develops scenario-based models that allow for understanding of the damages exposure under a variety of scenarios and situations. These scenarios address the many legal issues in dispute, allowing the parties to understand the financial implications of each argument, and thus develop the right strategy.

In developing these models, the forensic expert works closely with Counsel to understand the key issues of the case and the potential outcome of those key issues. Once identified, the expert constructs a model that allows the user to modify the potential outcome of those issues. This result is a model which illustrates the impact of financial damages. Changes the parameters and potential outcomes in the model, and an alternative financial damages exposure is shown. Spending time at the outset to understand the issues and the legal arguments, the variables in the damages, and the data available enables an analytical model to be built which can quickly accommodate change.

Many analytical models result in hundreds of thousands of possible outcomes. We set out below just one example of such a variety of outcomes, with four decisions resulting in 16 scenarios.

For the analytical model to have an appropriate use value to our clients, changing the outcome of each disputed item (each decision point) needs to immediately show the impact on the financial damages.