Finalizing and Accepting a Settlement

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A personal injury settlement is an agreement reached between two parties in a civil lawsuit.  In a settlement, one party attempts to keep the case from going to trial by offering an amount of money in the hopes that the other party will agree.  Once you and the adjuster have agreed on your personal injury settlement, the final step is to confirm it.  Write a short letter to the adjuster detailing the amount agreed upon for the claim, the damages it covers, and the time it will take for the insurance company to send you the necessary documents.  Having a written record prevents the adjuster from going back on his or her word. If the initial settlement offer is not enough, you may elect to hold a settlement conference to push for more money or pursue a trial in the hopes that the court will award more in damages than the settlement offer.

Receiving the Offer by Mail

Most personal injury settlements involve a payment by an insurance company to the plaintiff in exchange for the plaintiff signing a release for the claim.  This legal document releases the person who caused your injuries, as well as their insurance company from all further claims related to your accident.  The insurance company will send a check for the agreed upon settlement.  The settlement check will be endorsed and deposited into the account of the plaintiff.  It usually takes five working days for the check to clear the bank.   No disbursements can be made from the settlement check until it clears the bank due to co-mingling violations that would occur.

What to do When There is No Offer

Insurance claims are usually resolved through an agreement.  If no agreement can be reached between the injured party and the individual or company that negligently caused the injury, then the claims are resolved through a judicial proceeding.  If arbitration or mediation is unsuccessful, you and your attorney may continue to trial.  The insurance company is in the business of settling claims.  They know if you retain an attorney, you would have to pay one-third of the settlement award as attorney’s fees.  They will only offer you two-thirds or less of what the claim is worth if you don’t have an attorney. 

Liens on Your Settlement Money

A complicating factor in a settlement or trial of any personal injury case is the existence of liens filed by health care providers who treated the plaintiff.  Liens may also be filed by any entity that has paid all or part of the plaintiff’s bills, which may include health insurance companies, auto insurance companies, the State, city or county.  Furthermore, if the plaintiff received worker’s compensation benefits as a result of the accident, that insurance carrier will also be entitled to reimbursement.  Liens are created either by statutes or by prior agreement.

Cases have been decided and laws have been passed with have strengthened the rights of the lien holders to seek recovery from a plaintiff’s personal injury settlement.  Quite often, after the lien holders have collected their money, there is very little money left over for the plaintiff.

Tax on Your Settlement Money

As a general rule, compensation for personal physical injury where the payments are for lost wages or lost profits are not taxed.  Emotional distress is not considered a physical injury; therefore damages for emotional distress are included as taxable income.  Non-punitive damages and other amounts received for personal injuries are excluded from taxable income.  However, punitive damages (damages that represent punishment to defendants who engage in conduct that causes injuries to someone else) are taxable, even when they relate to a physical injury.  The Federal law regarding damages obtained in a settlement or trial is:

Damages That Are Taxable Include:

  • Punitive Damages (of all types, even if physical injury is involved)
  • Emotional Distress (or any other form of mental anguish)
  • Physical Manifestation of Emotional Distress
  • Lost Personal, Business or Credit Reputation
  • Wrongful Discharge and Other Common Law Employment Tort Theories (without resulting physical injury or sickness)
  • Pre-Judgment and Post-Judgment Interest
  • Interest Earned on Lump Sum Judgments or Settlements

Damages Which Are Not Taxable Include:

Special Wrongful Death Circumstances

  • Physical Injuries Accompanied by Emotional Distress
  • Wrongful Death
  • Lost Services of Injured Offspring
  • Lost Wages (on account of physical injury or sickness)
  • Lost Consortium Due to Spouse’s Physical Injury
  • Bystander Claims of Negligent Infliction of Emotional Distress
  • Attorney’s Fees Associated with Non-Taxable Damages
  • Interest Component of Otherwise Non-Taxable Structured Settlements

Previous Page: Negotiating Your Settlement Money | Next: When to Get Legal Help for Your Case


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