The two-dimensional slider labeled "policy limit and coverage fractions" works as follows. The
axis determines the per occurrence limit of the liability insurance policy rescaled to run from 0 to the size of the largest possible judgment against the insured. The
axis determines the probability [0,1] that a court will ultimately determine that "coverage" exists, that is, that the insurer has a duty to pay on behalf of the insured all sums for which the insured is liable, subject to applicable limits of liability.
The two-dimensional slider labeled "litigation costs fraction" works as follows. The
axis determines the litigation costs the plaintiff will bear. The
axis determines the litigation costs the insurer will bear. Both values are rescaled to run from 0 to the size of the largest possible judgment against the insured.
The slider labeled "insured's attachable assets fraction" determines the amount of assets the plaintiff could collect from the insured defendant in the event a court rendered a judgment in excess of the per occurrence limit. The value is rescaled to run from 0 to the size of the largest possible judgment against the insured.
The two-dimensional slider labeled "strength of duty to settle" works as follows. The
axis determines the extra amount in addition to policy limits that will be taken into account in determining whether a settlement offer is reasonable or not. A settlement is reasonable if it is less than
Min[ℓ,
pωMin[ℓ+r,jω]] where ω is a possible outcome of the lawsuit (all possible outcomes are
),
is the probability of that outcome,
is the policy limit,
is the extra amount set by this slider, and
is the size of the judgment corresponding to outcome ω. This slider thus helps determine the size of the "reasonable settlement zone" marked on the top panel. Both the
and
values are rescaled to run from 0 to the size of the largest possible judgment against the insured.
The checkbox "discount for coverage issues" allows simulation of settings in which a court permits the insurer to discount the amount of any possible judgment by the probability that it would not be covered. It thus affects the size of the reasonable settlement zone.
