The vast majority of personal injury lawsuits settle prior to trial. In fact, when a plaintiff hires an attorney, more than preparing for trial, the attorney uses the pre-trial litigation process to “build a case” and reach a higher settlement.
This article discusses the considerations that go into responding to the defendant’s first offer of settlement after a personal injury claim has been filed.
In some cases, a plaintiff or plaintiff’s attorney may inform a potential defendant that they intend to file a claim, unless the defendant compensates the plaintiff for his or her injuries. While such a situation is not the focus of this article, it is worth noting that if the claim involves (or potentially involves) a substantial amount, both the plaintiff and the defendant would be better off seeking legal advice before going forward with anything. It is possible to pay a knowledgeable lawyer an hourly fee to review the case and the settlement offer, instead of having to pay a large contingency fee for a small amount of work.
Once a complaint has been filed, a settlement offer, if any, will be made by either the defendant or the defendant’s insurance company.
If the defendant has little or no insurance to cover potential liability for the plaintiff’s claim, a plaintiff will need to determine if the defendant has sufficient funds to pay damages if the plaintiff wins at trial. If a defendant has little cash and few assets, a plaintiff is not going to get much out of a trial, no matter how big the damage award.
If a settlement offer from a broke defendant isn’t much less than what a plaintiff could hope to collect after a trial, settling and avoiding the hassle could be the best course. Of course, if a plaintiff is determined to punish a defendant, winning a damage award at trial could lead to bankruptcy and long term credit damage for a defendant who cannot pay.
If the defendant has insurance that covers the plaintiff’s claims, then the insurance company will usually be controlling the defense (although not always). Unlike with an uninsured defendant, a plaintiff does not need to worry about the insurance company running out of money -- there are even state “insurance guarantee” funds that will cover a claim if an insurance company goes bankrupt.
The key consideration is what the defendant’s insurance policy limits are. A defendant will have to pay out of pocket for any damage awards that go beyond the policy limit, so if the policy limit is low and the defendant is broke, a seemingly low settlement offer might be as good as it gets. If the policy limit is high, the plaintiff will not need to consider how much money is available to pay a potential damage award, and can focus on other factors.
The other primary factor to consider is when the first offer is made. If a plaintiff is unrepresented by an attorney and hasn’t developed the case by gathering facts (or worse, doesn’t even know how to do so), an insurance company or represented defendant will most likely give a settlement offer that is low relative to the potential damages.
If the insurance company or defendant knows that the plaintiff is desperate for cash and/or new to the litigation process, the offer will be even lower.
On the other side of the spectrum, if a plaintiff is represented by counsel and the case has been developed, a first settlement offer from an insurance company or a defendant may be closer to what the potential damages might be at trial.
It might be tempting to follow standard negotiating tactics and refuse the first offer, no matter what it is, counter with a higher amount, and hope to meet in the middle. However, the unwary plaintiff could get stung by litigation settlement rules, depending on the state.
In some states, if a defendant makes a settlement offer that the plaintiff refuses, and the plaintiff’s damages award at trial are equal to or less than the settlement offer, the plaintiff will be required to pay the defendant’s attorney fees and court costs. Depending on how complicated the case was, even though the plaintiff “won,” he or she may have to pay more to the defendant than the defendant is required to pay in damages! Therefore, a plaintiff should be wary about automatically refusing a reasonable first settlement offer.
A potential plaintiff should also be aware that some unscrupulous attorneys make it a practice to do very little work on a case, tell their client to accept a low settlement offer, and then collect their 1/3 contingency fee. This may make for a higher effective hourly rate for the attorney, but it is terrible for the client. It is crucial that a plaintiff make sure an attorney has a good track record before agreeing to hire him or her.