- Legal EditorHenry Dahut, J.D.
Henry Dahut, J.D.
Attorney - Legal Publisher - Educator
Henry Dahut is a licensed California trial attorney. Over the course of his 30-plus years practicing law, Henry has represented and counseled countless clients in legal trouble.
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This article covers how personal injury settlements are paid out, including the types of payments, legal documentation, distribution of funds, tax implications, and the role of personal injury attorneys.
What are Personal Injury Settlements?
Personal injury settlements are negotiated between the injured party, called the plaintiff, and the party at fault, called the defendant. Early settlement negotiations are usually initiated through the defendant’s insurance company adjuster.
If the injured party has retained a lawyer, the insurance company must deal directly with the plaintiff’s injury attorney.
Accepting a personal injury settlement means the plaintiff has agreed to accept a specific amount of money as the final settlement for all damages sustained by the plaintiff and caused by the defendant in exchange for the plaintiff’s legal release of all present and future claims against the defendant arising out of the accident.
Why Settlements are Favored Over Trial
The plaintiff has the legal right to settle their personal injury case or take the defendant to trial. Settlements are generally preferred over trials because they resolve disputes faster, are less costly, and eliminate the risk of an unpredictable result at trial.
How Does the Settlement Process Work?
The settlement process can begin any time after the accident, during litigation, and sometimes even during trial.
What is a demand letter?
The first step involves the injured party, usually through their attorney, putting the responsible party on notice of the plaintiff’s claims. The personal injury claim is usually in the form of a demand letter written by the plaintiff’s attorney to the defendant’s insurance company.
The goal is to convince the insurance company to settle the case now for a reasonable sum rather than incur substantial attorney fees and costs should the matter be litigated.
The demand letter sets out the legal basis for why the defendant is legally responsible for causing the plaintiff’s injuries, the nature and extent of the injuries, the past, present, and future medical bills, and all other related financial losses that resulted, including compensation for the plaintiff’s pain and suffering.
The demand letter is usually followed by intense negotiations between the plaintiff’s lawyer, and the defendant’s insurance claims adjuster. In most cases, experienced personal injury lawyers are highly skilled negotiators and will do everything they can to document and convince the insurance adjuster that early settlement will result in the best possible outcome for both parties.
Should the negotiations not result in a settlement, the plaintiff’s personal injury lawyer will file and serve a civil complaint against the defendant, and formal litigation commences.
What factors can delay a personal injury settlement?
Litigating a personal injury case carries risks for both parties. The litigation and discovery phase is a complicated, expensive, and highly unpredictable process.
Just as experienced plaintiff’s lawyers are experts at what they do, so are experienced insurance defense lawyers, particularly when it comes to poking holes in the plaintiff’s case.
During the discovery phase, the defense will do everything possible to weaken the credibility of the plaintiff’s medical claims by trying to establish the plaintiff’s injuries are not as extensive as first claimed.
Several other factors can delay settlements, including disputes over fault, defense allegations of excessive and unnecessary medical treatment, and that the plaintiff’s injuries do not require long-term medical care or the need for future surgery.
The Settlement
In most cases, once the case has been fully litigated and a trial date has been set by the court, each side will have learned the strengths and weaknesses of the other side’s case. With this knowledge, both sides will be ready and motivated to settle.
Under these circumstances, to motivate settlement between the parties, the court orders most cases to mediation.
Once The Case Settles
Once the law firm receives the gross settlement check from the insurance company, it will deposit the full amount into the firm’s trust account.
The firm will deduct its fees and advanced costs such as:
- Court costs such as filing fees
- Copy services
- Subpoena Services
- Deposition Services
- Expert Fees
The firm must also hold funds in trust pending repayment to third-party creditors who have established legally valid liens and claims on the client’s personal injury settlement, such as medical providers with outstanding bills and insurance company and public healthcare liens.
Once the attorney fees, costs, and claims/liens are deducted from the settlement amount, the remaining net sum represents the client’s actual recovery.
Choosing Client Payment Method
Deciding between a lump sum and a structured settlement depends on various factors, including the client’s financial needs, the advice of their personal injury attorney, and long-term financial planning considerations.
Types of Settlement Payments
Lump Sum Payments:
Most personal injury settlements are paid out in one large sum. This allows the plaintiff to manage large expenses quickly, such as medical bills or rehabilitation costs.
While lump sum will provide immediate financial relief, they require careful financial management to ensure the settlement money will last, especially if the injuries are substantial and require long-term medical care.
Structured Settlements:
Alternatively, structured settlements provide compensation through regular payments over a fixed period of time. This type of structured settlement offers a steady income stream and potential tax benefits.
It is also particularly beneficial for covering ongoing medical expenses or for securing long-term financial security. Structured settlements are arranged through the purchase of annuities, which can be tailored to meet the future financial needs of the plaintiff. In this regard, it is helpful to learn the difference between a structured settlement and a fixed-income annuity
The following video explains Structured Settlement Versus the Fixed Income Annuity:
How Personal Injury Settlement Cases Are Paid Out To Minors
The court will also consider whether the settlement should be paid out in a lump sum or staggered within a structured annuity, which will pay out a large amount over time. In either case, the court will consider what is in the minor’s best interests.
Structured Settlement Cases With Minors:
Legal Documents and Agreements
Several legal documents must be signed during the settlement process, including a general release of liability, which absolves the defendant of all future claims once the settlement is agreed upon. Personal injury attorneys play a crucial role in ensuring these documents reflect the injured party’s interests and that all terms are clearly understood before signing.
Statistic: Original research first published in 1999 by the Insurance Research Council (IRC) suggests that settlements for personal injury claims are, on average, 40% higher when an attorney represents the claimant compared to those who settle without legal representation.
How Settlement Money Is Divided Up
Once a settlement agreement is reached, the funds are typically distributed first to cover legal fees and then to pay off any medical liens imposed by healthcare providers and insurance companies. These liens are often negotiated by personal injury attorneys, who can sometimes significantly reduce the reimbursement amount.
Do you pay taxes on personal injury settlements?
The tax implications of a personal injury settlement can be complex. Usually, settlements for physical injuries are not taxable. However, punitive damages and interest accrued on settlements are taxable.
The IRS outlines specific guidelines for which aspects of a settlement are taxable under the Internal Revenue Code Section 104(a)(2). Plaintiffs should consult a tax professional to understand the tax implications of their settlement.
How Long Does a Personal Injury Settlement Take?
The timeline for receiving settlement payments can vary. Typically, once a settlement is agreed upon, it takes a few weeks to several months for the plaintiff to receive the personal injury settlement funds.
This timeline may be impacted by various factors, such as the processing times of the involved insurance companies and the completion of necessary legal documentation.
Statistic: According to a study conducted by the Bureau of Justice Statistics, the median duration from filing to disposition for tort cases, which includes personal injury cases, is approximately 13.8 months. This timeline varies significantly based on case complexity and jurisdiction.
Bottom Line
Personal injury settlements involve detailed processes that require the expertise of skilled attorneys to navigate successfully. Understanding the nuances of settlement types, legal implications, and financial management is crucial for injured parties aiming to secure fair compensation.
By leveraging the specialized knowledge of personal injury attorneys and other professionals, plaintiffs can ensure that their settlements adequately cover their damages and contribute to a stable financial future for the client.
FAQ’s on Settlement Timelines:
How long does a typical personal injury settlement take?
The timeline varies significantly based on the complexity of the case, the severity of injuries, and the clarity of fault. Simple cases might settle in a few months, while complex cases can take a year or more.
Can I do anything to speed up the settlement after filing a claim?
Yes, keeping thorough documentation, following your doctor’s recommendations for treatment, and staying in regular contact with your attorney can help. Additionally, being open to compromise in negotiations can expedite the settlement.
Does involving an attorney typically slow down the personal injury settlement process?
No, involving an attorney informs you of your settlement’s value range. An experienced attorney can skillfully navigate the settlement process. Sometimes, a quick settlement isn’t in the client’s best interests.
Cases involving major injuries may require litigation for a higher settlement. Insurance companies aim to settle for the least amount possible and may offer a quick settlement to avoid paying more if the case goes to court.
How long after reaching a settlement agreement will I receive payment?
Assuming the release agreement is in proper order and agreed to, payments are typically made within 30 to 60 days. The exact timing can depend on the administrative processes of the involved parties’ insurers and legal teams.
