If you’ve been injured in an accident that was caused by someone else’s negligence, you’ve taken a physical as well as a financial hit. Your injuries have caused you pain and suffering. They’ve also reduced your mobility so that even performing the simplest of tasks has become difficult, if not impossible. These physical effects, in turn, have impacted your ability to work. You’ve also incurred medical bills from the treatment of your injuries. All of this because of someone else’s negligence.
This is why the goal of every personal injury lawsuit is to compensate the person who was injured for their damages. This can be done either by settlement or through an award of damages following a trial. Of the two options, a settlement may be preferable for two reasons:
That being said, it is important to remember that every settlement is a compromise. The amount of money received in a personal injury settlement will usually never be as much as the potential amount a jury could award following a trial. However, in many cases, this compromise makes sense. In exchange for perhaps a lesser sum of money, a plaintiff gains a relatively swift resolution of their dispute. The defendant, in turn, will pay this amount in order to obtain a release of all liability from the plaintiff. Both sides avoid the expense of preparing for and conducting a trial, as well as the potential for a negative verdict.
However, once settlement of a case has been achieved, an injured party will still face additional expenses. Some of these expenses will be deducted from the gross settlement amount before the injured party receives their funds. Others will occur later after the injured party has received the net settlement amount. Let’s take a closer look.
Personal injury attorney’s fees are contingent upon achieving a successful result for their client, either through settlement or a judgment following a trial. If the attorney fails to obtain a successful result, they don’t get paid. However, when an acceptable settlement agreement is reached, the attorney is entitled to their contingent fee. This fee is agreed upon in writing between the injured party and the attorney in a formal retainer agreement executed when the attorney is hired. This fee is usually expressed as a percentage of the settlement or judgment. In many cases, it will amount to 33⅓% of the amount recovered. The only exception to this is in cases involving allegations of medical malpractice. In those cases, the California Business and Professions Code specifies maximum percentages that the attorney can charge for their services.
The fee is taken off of the top of the gross settlement amount. So, for example, let’s say a personal injury case is settled for $300,000. The attorney who worked to make the settlement possible would be entitled to a fee of $99,900. The remaining $200,100 would then be subject to any additional deductions for expenses, as will be discussed below.
In the majority of cases, a settlement is only possible after formal litigation has begun. The court where the lawsuit is filed charges specific fees for the filing and service of the initial complaint, as well as for any subsequent pleadings that move the case forward. There are also administrative fees associated with any lawsuit – things like copy and mail costs, court reporter fees for depositions and potential travel expenses. The personal injury attorney handling the case pays all of these costs on behalf of the client. He or she is then entitled to recoup these costs once a settlement is reached. Once again, the written retainer agreement between the attorney and the client must specify how the costs of litigation will affect the client’s recovery.
So, using our example from above, when the case settles for $300,000, the attorney gets $99,100 for his or her fee. In addition, let’s say that the attorney has advanced $10,000 in costs in order to get the case to the point where settlement was possible. This $10,000 in costs will now also be deducted from the gross settlement amount, leaving the client with $190,100.
Subrogation is nothing more than a fancy word for repayment. In general, if an insurance company pays out money on an insured’s behalf, it then has the right to seek reimbursement from either the insured or the insurance company for the negligent party. If this weren’t the case, you would end up unfairly being compensated twice for your injuries – once from the insurer and once again from the party who caused your injuries.
However, a legal principle known as the common fund doctrine forces an insurer who paid for that client’s medical treatment, but did no work to obtain the settlement or judgment, has to offset the amount they are reimbursed by the percentage of the attorney’s fees. This rule essentially prevents the insurance company from gaining a benefit – the attorney’s efforts that led to settlement – at the injured party’s expense.
So, once again using our example from above, let’s say that injured party’s health insurer has paid $25,000 for the treatment of the injuries caused by the accident in question. Once the case settles, the insurer is entitled to $25,000 minus 33⅓%, or $16,667.50. This amount will also be deducted from the settlement, leaving the client with $173,432.50.
In general, the portion of a personal injury settlement that compensates an injured party for their medical bills and pain and suffering is not subject to taxation. However, any part of the settlement that is compensation for lost wages is taxable. Like any tax issue, this can be a complicated area, subject to numerous exceptions. It is wise to consult with a tax professional regarding any taxes you may owe as a result of settling a personal injury lawsuit.
Settlement is the goal of any personal injury lawsuit. The attorneys at Sevey, Donahue & Talcott welcome you to contact us for a free consultation. We can assess your situation and give you our professional opinion regarding the strength of your case. You can reach us by phone at (916) 788-7100 or through our website contact page.