With 95% of personal injury claims being settled outside court, it’s important for entrepreneurs to understand how these potentially complicated issues work.
As a small business owner, you may be wondering: what happens if I’m sued? It may surprise you to hear that only 5% of personal injury claims (outside of medical malpractice) reach the inside of a courtroom.
That means that 95% of personal injury and wrongful death cases settle, rather than going to trial. Either the plaintiff drops the civil lawsuit or both parties agree to reach a settlement that is favourable.
This article will answer the following commonly asked questions regarding settlements:
- What is a legal settlement?
- What is a structured settlement?
- Is a structured settlement taxable?
- What are the benefits of a structured settlement?
- How is a structured settlement created?
- What are the common terms of a settlement cheque payout?
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What is a legal settlement?
A legal settlement is a formal and legally binding agreement between two or more parties that ends a dispute.
In the case of a personal injury claim, the plaintiff agrees to certain conditions and that leads to the resolution of the dispute. A personal injury settlement is reached when the plaintiff agrees to drop the lawsuit and the defendant agrees to the terms that include the amount of compensation.
While most legal settlements occur after the plaintiff files a lawsuit, your personal injury lawyer might settle your claim before you file a civil lawsuit. Regardless of when a legal settlement takes place, it typically ends with a payout to the plaintiff that covers most, if not all of the costs that are associated with a personal injury incident.
What is a structured settlement?
Structured settlements are guaranteed tax-free annuities. A structured settlement is a way of paying and settling a claim for damages in a lawsuit over a specified period of time or for life. Usually, instalment payments are stretched out over a period of at least five years.
Is a structured settlement taxable?
As with any legally awarded or required compensation for a wrongful injury or death, such as workers compensation, the structured settlement payments are tax free. However, if the recipient of the payments uses the money to create a gain, such as interest, capital gain, or investment growth, then that portion becomes taxable to income tax.
What are the benefits of a structured settlement?
Structured settlements are becoming increasingly popular among insurance companies, plaintiffs, and defendants.
There are many benefits to structured settlements. For the recipient, the structured settlement is a guaranteed flow of creditor-proof and tax-free payments that can last for years, and sometimes even for life. For insurance companies, the cash requirement to buy the structured settlement annuity may be lower than the damages awarded.
Another benefit of structured settlements is that they can be very flexible in design. Some examples of this flexibility include:
- Payments can be designed to increase at specific points in time, such as when future medical payments are expected.
- The payments can be linked to the Consumer Price Index to offset inflation or they can be indexed at a fixed interest rate.
- Future payments can include a series of lump sum payments.
How is a structured settlement created?
The unsuccessful party in a lawsuit (or their insurance company) purchases an annuity that fulfils the required payments to the successful party exactly. The annuity is non-commutable, non-transferable, and non-assignable. This means that no one, not even creditors, can stop or change the annuity payments under any circumstances.
What are the common terms of a settlement cheque payout?
In order to fully participate in settlement negotiations with another party, it is essential to know some of the most common and important terms of a settlement cheque payout.
The following terms play a significant role in determining how compensation for an injury or injuries will be received:
- Payment schedule: A settlement can be paid out in two ways: either as a lump sum payment, or as a structured settlement that follows a payment schedule (weekly, monthly, quarterly, or annually). A personal injury lawyer may negotiate a mixed structured settlement that includes a combination of two or more payment schedules.
- Decreasing payments: A payment schedule may start with high payments that decrease over time, if agreed upon. This is commonly used in situations where healthcare costs are expected to decline over time, or in wrongful death cases in which a minor receiving payments reaches adulthood.
- Increasing payments: As structured settlements allow you to earn interest, payments can increase over time to account for inflation. Personal injury cases can also be settled to have the payments increase over a defined schedule. This is especially beneficial in situations where healthcare costs are expected to rise.
- Initial lump sum: Structured settlements often include an initial lump sum that is substantially higher than the rest of the payments. This lump sum helps to cover the costs of attorney fees and initial medical expenses.
- Final lump sum: Structured settlements may also include a larger payment at the end of a payment schedule. While this is not as common as receiving an initial lump sum payment, it can be used in wrongful death cases to help an adolescent pay for university or to help a young adult make a down payment on a home.
The importance of small business insurance
As a small business owner, you’re going to want to ensure that you are covered in the event that you are sued.
Small Business Insurance provides you with peace of mind and protects your company or venture. As one of Canada’s leading InsurTechs, APOLLO understands the unique needs of small business owners.
Start an online application today and get custom coverage that supports your needs in just minutes.
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