You may have heard that insurance companies use a secret mathematical formula to figure out how much compensation should be paid in an injury settlement. The formula part is true, but it certainly isn’t secret. And the formula doesn’t actually determine how much compensation someone receives. It is just a device insurance adjusters use to begin the process of figuring out how much a claim is worth. A final determination about compensation is not made until several other facts are considered.
This article explains how insurance adjusters use the compensation formula and how they combine it with other facts to arrive at a figure they are willing to pay for a personal injury claim. Once you understand how the compensation formula works, you will be able to negotiate confidently for a final settlement figure.
Why the Need for a Damages Formula?
In general, a person liable for an accident -- and therefore that person’s liability insurance company -- must pay an injured person for:
- medical care and related expenses
- missed work time or other lost income
- pain and other physical suffering
- permanent physical disability or disfigurement
- loss of family, social, and educational experiences, and
- emotional damages resulting from any of the above.
While it is usually simple to add up the money spent and money lost, there is no precise way to put a dollar figure on pain and suffering, and on missed experiences and lost opportunities. That’s where the damages formula comes in.
How the Damages Formula Works
At the beginning of negotiations on a claim, an insurance adjuster will add up the total medical expenses related to the injury. These expenses are referred to as “the medical special damages” or simply “specials.” As a way to begin figuring out how much to compensate the injured person for pain and suffering, permanent disability, and emotional damages -- together called “general damages” -- the insurance adjuster will multiply the amount of special damages by about one-and-a-half to three times when the injuries are relatively minor, and up to five (and sometimes more) times when the injuries are particularly painful, serious, or long-lasting. After that amount is arrived at, the adjuster will then add on any income you have lost as a result of your injuries.
That total -- medical specials multiplied by 1.5 to 5 (and occasionally higher), then added to lost income -- becomes the number from which settlement negotiations begin.
Damages Formula Example: Mary was injured in an auto accident. Her medical specials --the cost of her medical treatment -- amounted to $600. There were no permanent effects from her injuries. Applying the damages formula to her claim, an insurance adjuster would begin with a figure of between $900 and $3,000 (1.5 to 5 x $600). This would then be added to Mary’s lost income of $400 to get the figure from which negotiations would begin as compensation for Mary’s injuries. Once this figure is arrived at, the adjuster would then factor in all the other variables (discussed here) to determine how much total compensation the insurance company was willing to pay Mary for her injuries.
Insurance Adjusters Don’t Reveal Their Formula
During negotiations on an insurance claim, adjusters usually will not tell you what formula they use to arrive at how much they believe a claim is worth, or even that they are using any formula at all. They are following a basic rule of negotiations: Do not let the other side know how or what you are thinking. Since the insurance adjusters won’t let you know what formula they are using, it’s probably a good idea not to let them know you're thinking, either. Instead, you will simply negotiate total settlement amounts.
The Formula and the Deciding Factors
There are two important points to remember about a damages formula. One is that the figure arrived at by multiplying special damages is only the starting point for reaching a settlement amount. After this starting point is reached, other facts about the accident and your injuries come into play. The second point is that because the starting formula could be anywhere between one-and-a-half to five times specials (and sometimes even more if a higher multiplier is warranted), it can produce considerably different numbers depending on which end of this multiplier spectrum is applied to your claim.
Several things determine which end of the damages formula to apply to the special damages in your claim.
- The more painful the type of injury you suffered, the higher the end of the formula you use.
- The more invasive and longer-lasting your medical treatment, the higher the formula.
- The more obvious the medical evidence of your injury, the higher the formula.
- The longer the recovery period from your injuries, the higher the formula.
- The more serious and visible any permanent effect of your injury, the higher the formula.
To see this formula at work, see our personal injury calculator.
This article is excerpted from How to Win Your Personal Injury Claim by Attorney Joseph Matthews (Nolo).