THE BARATELLI INSTITUTE · Mentoring at Scale
FOR PLAINTIFFS, DEFENDANTS, AND THEIR COUNSEL

Settle now, or take it to trial? The NPV your lawyer should be showing you.

A probability-weighted, time-discounted, tax-aware comparison of the settlement offer in front of you against the expected value of trial. Contingency-fee gradient (pre-suit vs. trial), §104(a)(2) tax treatment for physical injury vs. taxable damages, appellate risk, collection risk, and a defense-side cross-check.

P(win)
Probability-weighted
NPV
Time-to-trial discount
§104
Tax treatment modeled
33→40%
Contingency gradient
YOUR CASE
1
The case
2
Settlement offer
3
Trial economics
4
Costs & risk
5
NPV decision
STAGE 1 OF 5

The case

Defaults model a typical contingency-fee personal-injury matter with a $750K offer on the table and a likely-verdict range of $1.0M to $1.6M. Adjust for your matter type and jurisdiction.

Drives the §104(a)(2) tax treatment. Physical injury / sickness damages are tax-free under IRC §104(a)(2). Punitive damages, employment claims, contract disputes, defamation, IIED-only, and most commercial matters are fully taxable as ordinary income.
Tool defaults to plaintiff perspective (the most common framing). Defense view is shown as a cross-check on the results page.
Used for plaintiff state income tax on taxable damages and for damage-cap awareness. Florida, Texas, and other no-tax states have a meaningful tax advantage on taxable damages.
For taxable damages only. Settlement income lands in the year of receipt (often pushes plaintiff into top brackets). For tax-free §104(a)(2) cases, ignored.
Standard PI plaintiff retainer is 33⅓% if matter resolves before trial. Higher for class actions or complex commercial.
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Standard step-up to 40% if matter goes to trial. Some firms 45%+ if appeal required. Verify against your retainer.
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Why this analysis matters. Most plaintiffs decide whether to settle by anchoring on the headline number ("they offered $750K — but the case is worth $1.5M"). That comparison is wrong. The right comparison is the certainty-equivalent net-after-fee-after-tax cash today vs. the probability-weighted, discounted, after-everything cash years from now. The two numbers are usually closer than they look — and sometimes the settlement is the better deal.
STAGE 2 OF 5

Settlement offer

The number on the table right now. If structured (annuity) instead of lump-sum, model the present value of the income stream.

If the offer is structured (annuity over years), use the present-value of the income stream from the carrier's quote. If lump sum, just enter the gross offer.
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Most settlements are funded within 30-60 days of agreement. Some structured settlements have a delay. Assume 1-2 months unless told otherwise.
Filing fees, expert reports, depositions, mediation, court reporters, etc. These are typically reimbursed off-the-top from settlement before the contingency split. They reduce both settlement-net and trial-net equally — but enter them so the math is honest.
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If structured, the §104(a)(2) tax-free treatment of physical-injury damages also extends to the growth on the structure (huge benefit for tax-free cases). For taxable cases, structured settlements still defer income across years and can avoid bracket compression.
The "bird in hand" tax math. A $750K settlement today (physical injury, tax-free) net to plaintiff after a 33⅓% contingency = $475K cash, free and clear. A $1.5M jury verdict three years from now, after a 40% trial-fee, has the same ~$900K net BEFORE you discount for the time-value of waiting and the chance you lose. If P(win) = 60% and your discount rate is 6%, expected NPV is ~$453K — less than the settlement.
STAGE 3 OF 5

Trial economics

If the case goes to trial, what is the realistic verdict range — and how likely is each outcome?

If the jury finds liability but discounts damages — the floor of a plaintiff win.
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The number you and your lawyer believe is the realistic median outcome assuming the plaintiff prevails on liability.
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Sympathetic jury, full damages plus punitives, or the high end of pain-and-suffering. Be honest — not aspirational.
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Be realistic. Most plaintiff lawyers anchor too high here. Civil jury wins for plaintiffs are 50-55% nationally per BJS data; medical malpractice plaintiffs win only ~25%; commercial cases vary widely. Insurance defense view is usually 10-15 points lower than plaintiff counsel's view of the same case.
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From today through verdict and final cash collection. Civil cases in most jurisdictions = 18-36 months from filing to verdict; complex matters 36-60 months. Add 3-6 months for collection after judgment.
For an individual plaintiff: 4-6% (treasury + risk premium). For a small business: 8-10%. For a financially constrained plaintiff with debts or medical bills accruing: 12-15%+ (effectively their cost of capital). The higher this number, the more the settlement-now wins.
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How to weight low/likely/high inside the win scenario. Default 25/50/25 is the standard PERT-style weighting. Use 33/34/33 if the three scenarios are equally likely; use 15/70/15 if you have high confidence in the most-likely number.
STAGE 4 OF 5

Costs & downside risk

Trial costs come out of the verdict (or out of the plaintiff's pocket if the case loses). Appellate risk and collection risk further haircut the trial-side NPV.

Expert witness fees, additional depositions, mock trial, jury consultant, demonstrative exhibits, trial-week costs. These are spent before you know the outcome — and are typically not recovered if the case loses. Typical PI matter through trial: $50-200K. Complex commercial: $250K-2M+.
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In most contingency arrangements, the law firm advances costs and is reimbursed only if the case wins. In some retainers, the client is on the hook for costs regardless. Read your engagement letter — this matters a lot.
Sophisticated commercial defendants and insurance carriers appeal large verdicts as a matter of course. PI verdicts above $1M are appealed ~50-70% of the time. Appeal adds 12-24 months and 5-15% probability the verdict is reversed or remanded.
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National appellate reversal rates run 15-30% depending on jurisdiction and case type. Reduced verdicts (remittitur) are even more common — the trial verdict often gets cut by 30-50% on appeal even when "affirmed."
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A judgment is only worth what you can collect. If the defendant is insured at policy limits or is a solvent corporation, this is ~95-100%. If the defendant is undercapitalized or judgment exceeds insurance, collection drops sharply. Insurance "bad faith" claims can sometimes pierce policy limits but are uncertain.
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Important even for physical-injury plaintiffs: §104(a)(2) tax-free treatment does NOT extend to punitive damages — they are taxable as ordinary income regardless of the underlying claim. Set 0% if no punitives expected.
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The collection problem most plaintiffs ignore. Suing an underinsured defendant is sometimes a moral exercise, not a financial one. A $5M jury verdict against a defendant with a $500K policy and $200K of personal assets is a $700K judgment, not $5M. Insurance "bad faith" excess-judgment recovery is real but uncertain. Have your lawyer pull the defendant's insurance disclosures (or run a financial profile) BEFORE you reject a settlement that exceeds collectible assets.
STAGE 5 OF 5 · DECISION

Settlement vs. trial NPV

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Settle now — net to plaintiff
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Take it to trial — expected NPV
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Settlement waterfall — gross to net

Trial scenarios — probability-weighted

Trial waterfall — expected value, gross to net

Decision metrics

Defense-side cross-check

Same case, viewed from the defendant's perspective. The defense pays the offer or pays the expected verdict plus its own defense costs. If the defense NPV-of-trial is significantly worse than the offer, the defense should be willing to negotiate up. If close, the offer is at the defense's walk-away.

Recommendations

PAIRS WITH
Law Firm Matter Profitability · FO Reference Guide
The Law Firm Matter Profitability tool models the same case from the firm's economics — useful when the contingency split, the cost-advance terms, or the appellate retainer needs to be negotiated. The FO Reference Guide chapter on liquidity events covers the structured-settlement decision and tax-aware sequencing of large taxable settlements. Subscribe to the library →
FO REFERENCE GUIDE

Once a settlement closes, the tax-aware sequencing matters more than the gross number.

Structured-settlement vs. lump-sum decision · §104(a)(2) physical-injury allocation · contingency-fee tax mechanics · qualified settlement funds · charitable bunching of taxable damages · investment of large lump sums · Medicaid/Medicare liens.

This calculator is a decision-support framework, not legal or tax advice. The §104(a)(2) tax-free treatment for physical-injury damages depends on facts and the settlement-agreement allocation language — engage tax counsel before signing. Punitive damages and pre-judgment interest are taxable even on physical-injury cases. Employment plaintiffs face specific complexities including the §62(a)(20) above-the-line deduction for attorney fees on certain claims (which the tool does not separately model). Probability inputs are necessarily subjective — most plaintiffs and defense counsel materially disagree on the "right" number for P(win), which is itself a feature of why settlement exists. Have your lawyer run sensitivity scenarios on P(win) and the verdict range before any settle/no-settle decision.
WANT THE METHODOLOGY BEHIND THIS TOOL?
This calculator is one chapter of CFO & Controller's Reference Guide.
The tool gives you the answer. The guide gives you the argument — the case law, the worked examples, the negotiation playbook, the cross-check tables, the exception cases. Read the chapter and you can defend your number to a board, a buyer, an examiner, or a counterparty.
The methodology behind this calculator is in Ch 14 Capital Allocation (litigation NPV) of the reference guide.
See the Guide → Browse all 22 guides
PROFESSIONAL DISCLAIMER · PLEASE READ

Educational and informational purposes only. This calculator and any output it produces are intended solely for general educational and decision-support purposes. They do not constitute investment, tax, legal, accounting, appraisal, lending, insurance, or any other professional advice, and they do not create a fiduciary, attorney-client, accountant-client, or advisor-client relationship of any kind.

Estimates based on your inputs. All results are estimates derived from the data and assumptions you provide. Tax law, accounting standards, regulations, market conditions, and the specific facts of your situation can materially change the answer. The Baratelli Institute, its affiliates, and any co-branding professional make no warranty of accuracy, completeness, currency, or fitness for any particular purpose, and disclaim all liability for decisions made in reliance on the output.

Consult your own qualified professionals. Before acting on anything calculated here, consult your own attorney, CPA, financial advisor, appraiser, lender, or other qualified professional licensed in your jurisdiction who has reviewed your specific facts and applicable current law. The Baratelli Institute is a publisher of practitioner reference material. It is not a registered investment adviser, broker-dealer, law firm, accounting firm, appraisal firm, or lender.

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