How Settlement Negotiations Work

The majority of lawsuits never see a courtroom. Many people resolve their cases with settlement agreements. Instead of arguing the case in court, they negotiate the settlement.

Negotiating settlements is as complex as arguing before a jury. Before the parties reach a settlement, they undergo many layers of discussion between attorneys, insurance companies, or other relevant third parties. 

It takes deep consideration to arrive at a settlement amount and offer. It’s wise to gain professional insight from a litigation attorney regarding when to settle and whether an offer is fair.

Read on to learn about the negotiation process below:

• The Demand Letter
• Insurance: Reservation of Rights Letter
• Investigation Prior to the Lawsuit
• Initial Discussions Between Parties
• Settlement Offers and Statutes of Limitation
• Offer and Counteroffer
• Writing the Settlement Agreement
• How To Evaluate a Settlement Agreement as a Plaintiff
• How To Evaluate a Settlement Agreement as a Defendant

The Demand Letter

Once you’ve retained an attorney, they will draft and send a demand letter. In cases when an insurance policy applies, such as a personal injury claim, they will send it to the insurance company. In cases without insurance, they will send it to the defendant. 

A demand letter is the first step in the negotiation strategy, and it lets the recipient know:

• Who you are
• When the incident occurred
• The nature of your injuries or losses
• A general demand for compensation

A formal demand letter tells the recipient that you’re opening settlement negotiations. The case may proceed to litigation if necessary.

Insurance: Reservation of Rights Letter

If the demand letter was sent to an insurance company, the insurance adjuster generally responds with a reservation of rights letter. This letter advises you and your attorney that the company will not pay out on the insurance policy until it has investigated your claim.

The insurer will seek to determine:

• Who is at fault
• Whether the policy covers the claimed injury or damage

The reservation of rights letter protects the insurer if further investigation reveals the policy will not cover the claim.

Investigation Prior to the Lawsuit

You (and the insurance adjuster, if applicable) will carry out an investigation while preparing for settlement discussions and possible litigation.

Some things you must provide your attorney include:

• Medical bills
• Proof of medical expenses, such as invoices and bank statements
• Proof of lost income
• Evidence of property damage, such as photos or videos
• Witness statements

Initial Discussions Between Parties

Once you’ve gathered your evidence, your attorney will review your case to determine how much the initial demand will be. Your losses will vary according to the nature of the dispute and the defendant’s actions. The negotiation process may involve an insurance company if an insurance policy may apply to the dispute.

For instance, after a serious car accident, you need medical treatment for your injuries. You may also need:

• Follow-up medical care, including long-term treatment and surgery
• Lost wages and lost potential income
• Pain and suffering and related intangible damages

A personal injury attorney uses this information to calculate the total amount of money you need to compensate you for this injury for the rest of your life.

For example, suppose a back injury leaves a victim with chronic pain and fused disks that will require at least three additional surgeries during the patient’s life. The doctors estimate the patient will need six months’ recovery time after each surgery before returning to work. The settlement talks must include all these calculations.

On the insurance company’s side, their investigators look for reasons to undermine the strength of your case during discussions. If you have chronic back pain, they’ll look for other accidents in your past that may contribute to the seriousness of the injury. If you can’t work at your current job, they may inquire whether you can work at another occupation better suited to your present level of fitness.

You may not be part of these initial discussions. At some point, the insurer or your attorney will make a first offer. You can then evaluate whether the offer is fair.

Settlement Offers and Statutes of Limitation

The first offer is part of the settlement process. It can be a demand but may only be “testing the waters,” as one side checks to see what the other is willing to accept. Unscrupulous insurance companies sometimes toss out a first offer just large enough to encourage unrepresented accident victims to accept. They count on unknowing victims wanting cash in their pockets and lacking the negotiating skills to get the money they deserve.

In most states, you must file a personal injury court case within a certain amount of time, known as the statute of limitations. This varies from two to seven years, depending on your state. But the deadline is strict. If you miss the deadline, you cannot file your claim.

Insurance companies can use the statute for pressure against unsophisticated clients, claiming they must accept the offer before the statute runs out. This is not true. If you encounter this pressure technique, you should get legal advice immediately.

Offer and Counteroffer

During settlement negotiations, a party may make an offer the other side isn’t quite ready to accept. The other side will make a counteroffer. This figure may be smaller or alter the payment plan in a way that is more beneficial to the other party.

For instance, if you need $50,000 for your back injury, the insurance company might counteroffer $30,000. Your attorney might make a second counteroffer of $25,000 now and $25,000 next year. This give-and-take is a critical negotiation tactic. It ensures both sides benefit from the negotiation process.

Writing the Settlement Agreement

When both sides reach an agreement, one party writes the settlement agreement. The agreement contains everything that both parties agreed to during negotiations. A personal injury settlement acknowledges the victim’s injuries, the cause of the accident, the treating physicians, and the cost of treatment.

Some settlement agreements include other clauses. Depending on the nature of the dispute, your agreement could include:

• Property division and assignment of deeds
• Non-disclosure agreements
• Release of liability
• Waiver of right to appeal

The settlement agreement is a replacement for a court order. A judge must approve some settlement agreements, such as a marital settlement agreement following a divorce. Others are only reviewed by a court if one party fails to follow the terms of the agreement.

In most cases, one party drafts the agreement and the other party reviews, corrects, or adds to it before signing. Once signed, the agreement is binding on both parties.

How To Evaluate a Settlement Agreement as a Plaintiff

If someone you’re suing offers you a settlement, it’s worth consideration to spare the costs and stress of a court case. If your primary goal is to secure compensation for your losses, settling can achieve that goal faster and with more certainty. But the amount should be fair. 

Ask yourself what kinds of monetary losses the defendant’s conduct caused you, such as:

• Wages for time lost from work
• Travel or lodging expenses
• Value of item covered in contract
• Cost of repairing damage to land you own or buildings on the land
• Damage to personal property, such as equipment, vehicles, furniture, etc.
• Lost profits
• Future profits (some states don’t allow this option)
• Paying someone else to complete work described in a contract with the defendant
• The replacement cost of equipment or a product
• The amount of the loan the defendant did not repay
• Costs to repossess or foreclose on property pledged for a loan
• Damages or settlement in another lawsuit
• Lawyer’s fees and costs in another lawsuit

If your case involves a contract, you may have a few additional factors to consider for the settlement amount. For example, the contract may stipulate that a breaching party will owe interest. 

Along the way, you should keep track of any expenses your lawyer billed to you. This might include the following:

• Filing fee to start a civil lawsuit or class action lawsuit in court
• Fees to serve the defendant with court papers
• Deposition expenses
• Other expenses arising from discovery
• Expert witness fee(s)
• Photocopying charges
• Travel, meals, and lodging expenses

How To Evaluate a Settlement Agreement as a Defendant

As a lawsuit proceeds, both sides learn the strengths and weaknesses of the plaintiff’s case. This will develop an idea about how much the case is really worth. A settlement can let you limit your overall expenses, but you’ll want to know whether settling would be fair based on the circumstances.

A few questions to consider with your attorney include:

• Is there any merit to the plaintiff’s claim?
• What kinds of monetary losses is the plaintiff claiming? 
• Did you assert any claims against the plaintiff for your own losses or damage? If you asserted counterclaims against the plaintiff, what are they and what are they worth?
• Do you have liability insurance covering the plaintiff’s claim? If so, what are the policy limits?
• If your case involves a contract, does the contract have a clause requiring payment of interest? If so, what is the rate? How much time has elapsed since the alleged breach of contract? Did the contract have a clause requiring payment of lawyer’s fees?
• Do you think the plaintiff is partially at fault for what happened? If so, what percentage of fault would you realistically estimate?

Try to place a value on the risk of going to trial and losing by considering factors like:

• Trial expenses, which you ask your lawyer to estimate
• The value of time you would lose if you had to attend trial (e.g., lost wages, child-care expense if you are a stay-at-home parent)
• The emotional cost of being at trial and the stress of uncertainty about the result (this can be difficult to express as a monetary value)
• The public nature of court records and the value of privacy for yourself, your family, or your business

Get Help With Negotiating or Evaluating a Settlement

If you have any legal matter involving negotiation, you should speak with an attorney right away. A dispute resolution attorney in your area can assist you with your negotiation process. You can also visit FindLaw’s Arbitration and Mediation section for more information.

If a settlement isn’t possible and fair for your case, you may proceed to trial. Prepare for this process with guidance from an experienced trial attorney.