How Settlement Negotiations Work

The majority of personal injury cases never see a courtroom. Nearly all parties resolve their cases with settlement agreements. Although personal injury lawyers prepare claims as if heading for court, their goal is reaching a fair settlement for their clients without going to court. 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, personal injury claims undergo many layers of discussion between the attorney and the insurance company. Not all these discussions involve the client since they involve phone calls and e-mail exchanges.

What goes into arriving at a settlement amount and offer? Read on to learn about the negotiation process.

The Demand Letter

Once you've retained an attorney, they will draft and send a demand letter to the insurance company. A demand letter is the first step in the negotiation strategy. It lets the insurer know:

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

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

Reservation of Rights Letter

The insurance adjuster generally responds with a reservation of rights letter. This advises you and your attorney that the company will not pay out on the insurance policy until it has investigated your claim and determined:

• 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

Both you and the insurance adjuster must carry out an investigation while preparing for settlement discussions and possible litigation. Some things you must provide your attorney and the insurer 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

Once you've gathered your evidence, your attorney will review your case to determine how much the initial demand will be. 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.

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.

Related Resources

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.