Personal injury settlements are usually paid as a single lump-sum payment, although larger cases may use a structured settlement that provides payments over time. The injured person normally does not receive the entire settlement figure directly from the insurance company. When an attorney handles the case, the payment generally goes first to the law firm’s client trust account. Attorney fees, case expenses and valid medical liens are then deducted before the remaining balance is paid to the client.
The exact process depends on the settlement agreement, state law, insurance coverage and whether the claimant has outstanding medical reimbursement obligations.
The Claimant Signs a Settlement Release
Before payment is issued, the injured person usually signs a settlement agreement and release. The release confirms that the claimant accepts the agreed amount and gives up the right to pursue additional compensation from the released parties for the same accident.
This is an important decision because a settlement is generally intended to resolve the claim permanently. If the injury later becomes worse or additional treatment is needed, the claimant normally cannot reopen the case after signing a broad release.
The completed documents are returned to the insurance company or defense attorney. The insurer then begins processing the settlement payment.
Lump-Sum Settlement Payments
A lump-sum payment is the most common method for resolving an ordinary personal injury claim. The insurance company pays the full settlement amount in one check or electronic transfer.
For example, if a car accident claim settles for $100,000, the insurer may issue one payment for $100,000. That is the gross settlement. It does not mean the injured person will personally receive the full $100,000.
The money may still be reduced by attorney fees, legal expenses, unpaid medical balances and reimbursement claims. The final amount the claimant keeps is called the net settlement.
Structured Settlement Payments
A structured settlement pays some or all of the compensation through scheduled future payments rather than one immediate check. The arrangement may provide monthly payments, annual payments, larger payments on selected dates or payments continuing for the claimant’s lifetime.
Structured settlements are sometimes used in cases involving children, catastrophic injuries or claimants who will require long-term medical care. A settlement can also combine an immediate lump sum with future periodic payments.
Under federal tax law, qualifying damages received because of personal physical injuries or physical sickness may generally remain excluded from income whether paid as a lump sum or as periodic payments. A structured arrangement normally must be established before the claimant takes control of the settlement funds.
Where Does the Settlement Check Go?
If the claimant does not have an attorney, the insurance company may send the payment directly to the claimant. When an attorney is involved, insurers commonly issue the check to the attorney, often jointly payable to the attorney and client.
The law firm deposits the money into a client trust account. Settlement funds must be kept separate from the attorney’s business and personal funds. The lawyer generally cannot distribute the money until the payment has fully cleared and become available for lawful distribution.
Attorney Fees Are Deducted
Most personal injury attorneys work under contingency-fee agreements. Instead of charging the client an hourly rate, the attorney receives an agreed percentage of the settlement.
For example, assume a case settles for $90,000 and the attorney’s fee is one-third. The attorney fee would be approximately $30,000.
The exact percentage comes from the signed representation agreement. Some agreements apply one percentage when the claim settles before a lawsuit and a higher percentage after litigation begins.
Case Expenses Are Reimbursed
The law firm may also deduct expenses paid while investigating and pursuing the case. These may include:
- Court filing fees
- Medical-record charges
- Expert-witness fees
- Deposition expenses
- Accident investigation costs
- Police-report and document fees
The fee agreement should explain whether these expenses are deducted before or after the attorney’s percentage is calculated. That difference can affect the client’s final payment.
Medical Bills and Liens Must Be Resolved
Hospitals, doctors, health insurers and government benefit programs may have valid claims against the settlement. These claims are commonly called medical liens or reimbursement rights.
Medicare, for example, may make conditional payments for accident-related treatment while a liability claim is pending. When a settlement is reached, Medicare can require repayment of the related conditional payments. CMS identifies the relevant charges and issues a formal recovery demand.
A lawyer who knows that a third party has a valid claim to settlement funds may be required to hold the disputed amount in trust until the lien is resolved. The attorney may distribute the undisputed part while continuing to negotiate the lien.
Negotiating medical balances can sometimes increase the amount the client receives, but providers and insurers are not always required to accept a reduction.
The Client Receives a Settlement Statement
Before distributing the money, the attorney generally prepares a written settlement statement showing:
- The gross settlement amount
- Attorney fees
- Case expenses
- Medical bills and liens
- Other authorized deductions
- The client’s final net payment
The client reviews and signs the statement. Once the settlement funds have cleared and all required deductions are handled, the attorney pays the remaining amount to the client, commonly by check or bank transfer.
Special Rules for Settlements Involving Minors
A settlement belonging to a child may require court approval. The judge may examine the settlement amount, attorney fees, expenses and proposed use of the funds.
Depending on state law and the court’s order, the child’s money may be placed in a blocked bank account, trust or structured settlement. The parent may not be allowed to withdraw the funds freely. These safeguards are intended to protect the child’s recovery until the child reaches adulthood or the court authorizes a withdrawal.
Are Personal Injury Settlement Payments Taxable?
Compensation received because of personal physical injuries or physical sickness is generally not taxable for federal income-tax purposes. However, punitive damages and interest are usually taxable. Settlements for employment disputes, nonphysical emotional distress or lost business income may also receive different tax treatment.
The Bottom Line
Personal injury settlements are usually paid in one lump sum, but larger cases may provide structured future payments. When an attorney is involved, the money normally passes through a client trust account. Legal fees, case expenses and valid medical liens are deducted before the claimant receives the net settlement. Reviewing the final settlement statement carefully is the best way to understand exactly where the money went and how much the claimant will receive.
