Settlement negotiation after a car accident: offers, releases and payment

How offers and counteroffers work#

Negotiation usually starts once the insurer has your demand letter, your medical records and your bills. The adjuster reviews the file and answers with an offer, a request for more information or a denial. Under the model rules many states follow, an insurer should reply to a claimant's letters within 15 days, though your state's own rules decide the actual deadline.

A first offer is rarely the insurer's last word. You can reply with a counteroffer, explain why the offer is too low and point to evidence the adjuster may have overlooked. Each side then moves, usually in smaller steps as the gap narrows. Most claims end this way: in a federal study of state courts, only about 4% of tort cases ended in a trial.

Settlement talks have some protection in court. In federal court, and under similar rules in the states, offers to settle, and statements made during settlement talks, generally cannot be used to prove or disprove the claim or its amount. That lets both sides make offers without fearing that an offer will be read to a jury as an admission.

What adjusters weigh#

No law, regulation or industry standard sets a formula for valuing an injury claim. You may read about "multipliers" online; they are rules of thumb, not an official method. Adjusters look at the whole file, and so do the lawyers on both sides:

• Fault. Your share of the blame can reduce or bar recovery under your state's rule. The fault-rule explainer shows how each state treats it.
• Medical evidence. Records that tie each injury to the crash, a steady course of treatment and a clear prognosis carry weight. Gaps in treatment are questioned.
• Documented losses. Itemized bills, receipts, proof of lost income and notes on future care.
• Effect on daily life. How the injury changed work, sleep, family life and activities, often shown through a journal, photos and statements from people who know you.
• Insurance limitsPolicy limits. The most an insurance policy will pay for one claim or one accident, no matter how large the losses are. Glossary. The at-fault driver's coverage caps what that insurer can pay, whatever the losses.
• Risk of a trial. The strength of witnesses, how a jury might see the case and the cost of going to court.

The release: what signing ends#

When you accept an offer, the insurer sends a release for you to sign. It is a contract: you give up your right to sue the people it names over the crash, in return for the payment. Once it is signed and the money is paid, the claim is usually closed even if the injury turns out to be worse than expected.

Releases are written by the insurer, and the wording varies. Points worth checking:

1. Who is released. Some releases name only the driver and the insurer; others cover "all other persons," which could affect claims against someone else.
2. What is released. Most cover all injuries from the crash, known and unknown. Property damage may be settled separately.
3. Promises about liens. Many releases make you responsible for repaying health plans, hospitals and Medicare out of the money.
4. Other terms. Look for confidentiality clauses and statements that the payment is not an admission of fault.

If you may have an underinsured motorist claim on your own policy, the policy may require you to notify your insurer, or get its consent, before you settle with the at-fault driver. Check your policy before you sign.

Liens and Medicare come first#

Money from a settlement often has to repay others who covered your care. A health plan, a hospital, Medicaid or your own insurer may hold a lienLien. A legal claim on part of your settlement by someone who paid for your care, such as a hospital, health plan or Medicare. Glossary or a right of subrogationSubrogation. An insurer's right to be repaid from your settlement for what it already paid on your behalf. Glossary, and these claims are usually paid from the settlement before the rest goes to you. Our guide to medical liens and subrogation explains who can claim what.

State law sets some limits. In Texas, for example, a hospital lien for emergency care can never be more than 50% of what the injured person recovers.

Medicare has its own federal rules. Medicare must be repaid its conditional payments when a settlement, judgment or award is paid. Medicare's recovery contractor sends a Conditional Payment Letter listing the bills it paid, usually within 65 days of the letter confirming that a case was opened. After the settlement is reported, it issues a final demand, and interest is charged if the debt is not resolved 60 days after that demand letter. Medicare's guide explains that part of your attorney fees and costs may be deducted from what you owe.

Settlements for children#

A child cannot sign a binding release, so many states require a judge to approve a minor's settlement. The court checks that the deal is in the child's best interest and may appoint a guardian ad litemGuardian ad litem. A person, often a lawyer, whom a court appoints to look after the interests of a child or another person who cannot act for themselves in a particular case, such as a settlement. Glossary to advise it.

The court may also decide how the money is held until the child becomes an adult, for example in a restricted account or through future payments. Rules differ from state to state, so a licensed attorney in your state can tell you what applies.

Lump sum or structured settlement#

Most car accident settlements are paid in one lump sum. In larger cases, part of the money may be paid as a structured settlementStructured settlement. A settlement paid as a series of future payments, often funded by an annuity, instead of one lump sum. The amounts and dates are fixed when the settlement is signed. Glossary: a series of future payments on a fixed schedule.

Federal tax law has a framework for these. The insurer can transfer its duty to make the payments to another company through a "qualified assignment" under 26 U.S.C. § 130. The payments must be fixed and determinable in amount and timing, and the person receiving them cannot speed them up, delay, increase or decrease them. They are usually funded with an annuity from a licensed insurance company or a US government obligation.

For physical injury claims, the federal tax rule is the same either way. Under 26 U.S.C. § 104(a)(2): Damages (other than punitive damages) received on account of personal physical injuries or physical sickness are excluded from gross income. The law applies whether the damages are paid as a lump sum or as periodic payments; our guide to whether settlements are taxable has the details.

A structure trades flexibility for steady income: once it is set up, the schedule cannot be changed. Some companies later offer to buy future payments for a discounted lump sum. Federal law charges the buyer a tax of 40% of the discount unless a court approves the sale in advance under a state law and finds it in the seller's best interest.

When the money is paid#

After you sign the release, the insurer issues payment, often to your lawyer's trust account or as a check payable to you and your lawyer together. The NAIC model asks insurers to pay within 30 days once they accept liability and the amount is not in dispute, and some states set their own deadlines. In Pennsylvania, once a lawsuit has settled, a court rule requires the defendant to deliver the funds within 20 days of receiving the signed release, unless the parties agree otherwise in writing.

From there, liens are paid, the lawyer's fee and costs are taken out under the fee agreement (see contingency fees), and the rest is paid to you. Waiting for Medicare's final demand or a judge's approval of a child's settlement can add weeks or months.