FAQ: How is Personal Injury Compensation Calculated? [2024 Guide]

The Different Types of Damages

Damages help determine the amount of compensation a person may be entitled to for their injuries.

In most personal injury claims, a personal injury lawyer factors the different damages into the settlement calculation.

Different types of personal injury damages your settlement amount will likely consist of include:

• Economic damages
• Non-economic damages
• Punitive damages

Economic Damages

These damages are the quantifiable financial losses resulting from your injury and include expenses such as medical bills, lost wages, and property damage.

Economic damages can also include other out-of-pocket expenses like rehabilitation costs (as in the case of medical malpractice), doctor visits, physical therapy, and vehicle repairs following car accidents.

Economic damages are relatively straightforward to calculate, as they involve tangible monetary losses directly related to your injury.

Proving these damages requires documents showing numerical losses, namely medical records, receipts, and other documents showing your expenses.

Non-Economic Damages

In contrast to economic damages, non-economic damages address the intangible losses you’ve experienced.

These include pain and suffering, emotional distress, and loss of enjoyment of life.

In personal injury cases where someone dies, there are additional damages for the surviving family members.

One example is the loss of consortium damage.

Surviving family members or loved ones claim compensation for this when they file a wrongful death claim.

Non-economic damages are more challenging to quantify.

This is because they do not have a clear monetary value, but are equally important in assessing the overall impact of your injury.

Punitive Damages

Punitive damages are awarded in cases of extreme negligence or intentional misconduct by the defendant.

Unlike economic and non-economic damages, punitive damages are not intended to compensate the plaintiff for losses, but rather to punish the defendant and deter similar behavior in the future.

These damages are relatively rare and are typically only awarded in cases where the defendant’s actions were especially egregious.

Factors That Can Influence a Personal Injury Settlement Amount

Several factors come into play when determining the amount of compensation a person may be entitled to receive for their personal injury claim.

Factors that affect settlement amounts in most personal injury cases include:

• How severe injuries are
• Medical expenses
• Lost wages or income
• Pain and suffering
• Non-economic losses
• Extent of fault

How Severe Injuries Are

The severity of a person’s injuries plays a pivotal role in determining the potential compensation amount.

More severe injuries that result in long-term disability, chronic pain, or permanent impairment generally lead to higher compensation awards.

Other factors such as the necessity for ongoing medical treatment, the prognosis for recovery, and the impact of the injury on your daily life are also all considered.

Medical Expenses

The total cost of medical treatment incurred as a result of the injury is a significant factor in calculating compensation to be demanded.

Medical expenses include hospital bills, surgeries, medications, rehabilitation services, and ongoing therapy.

Lost Wages or Income

If an injury prevents a person from working or causes them to miss workdays, they may be entitled to compensation for the income they would have earned during that period.

This includes wages lost due to missed workdays, as well as potential future earnings if an injury affects the person’s ability to work long-term.

Factors such as salary, employment history, and projected career trajectory are taken into account when calculating lost income.

Pain and Suffering

Compensation for pain and suffering seeks to address the physical and emotional distress caused by an injury.

The calculation of pain and suffering damages is subjective and often involves using a multiplier based on the severity of injuries.

Factors such as the intensity and duration of pain, the impact on daily activities, and any emotional trauma suffered are key considerations.

Non-Economic Losses

Non-economic damages encompass intangible losses that are not easily quantifiable but are significant nonetheless.

These include loss of enjoyment of life, emotional distress, and loss of consortium (if applicable).

While non-economic damages don’t have a specific monetary value, they are taken into consideration.

Extent of Fault

In some personal injury lawsuits, accidents or injuries occur because more than one person or party was careless or made a mistake.

When this happens, the law considers the extent to which each person contributed to the accident.

This is called comparative negligence.

Here’s how it works:

Let’s say you were injured in a car accident in Chicago, but it was partly your fault because you were going over the speed limit.

If the court determines that you were 20% at fault for the accident and the other driver was 80% at fault, your compensation could be reduced by 20%.

Understanding comparative negligence is important because it can affect how much compensation you ultimately receive and is a way for the legal system to ensure that compensation is fair and reflects each party’s role in causing the accident or injury.

Methods Used in Determining Compensation

Your personal injury lawyer will use several methods to calculate your personal injury lawsuit settlement.

Methods can include:

• Multiplying economic damages
• Per diem method
• Insurance settlement formula
• Jury verdicts and precedent

Multiplying Economic Damages

Economic damages such as medical expenses and lost income are multiplied by a factor to account for non-economic losses such as pain and suffering.

The multiplier used typically ranges from 1.5 to 5, depending on the severity of the injuries and other relevant factors.

This method gives a ballpark estimate of the total compensation amount to be demanded.

Per Diem Method

The per diem method involves assigning a daily rate to your pain and suffering and multiplying it by the number of days you’ve suffered as a result of your injury.

This method is often used in cases where the duration of your pain and suffering can be accurately determined, such as in cases of temporary injuries or recovery periods.

Insurance Settlement Formula

Insurance companies may use proprietary formulas or software programs to calculate compensation amounts based on various factors, including medical expenses, lost income, and the severity of your injuries.

These formulas are used to determine settlement offers during negotiations and may vary between insurance companies.

Jury Verdicts and Precedent

Sometimes, the different methods mentioned won’t deliver the best results. When this happens, courts and your personal injury attorney will defer to jury verdicts and precedents.

This method is known as the jury verdict and precedent method.

Using this method, personal injury lawyers and courts will base settlement amounts on how much past personal injury settlements paid plaintiffs.

Otherwise, called the market method, this jury verdict and precedent method ensures consistency and fairness in compensation awards across different cases.

It’s also useful for guiding fair settlement amounts for future similar personal injury cases.

Are Personal Injury Settlements Taxable?

Receiving a personal injury settlement means more money for you.

Recognizing this, you may be wondering about the tax implications that come with your settlement.

So, are personal injury lawsuit settlements taxable?

The short answer is no — at least in most cases.

There are some exceptions under the IRS’s guidelines.

Understanding the nuances of what the IRS considers taxable will help you accurately assess the true value of your compensation and avoid unexpected tax liabilities down the road.

The Taxability of Settlements

According to the IRS’s Tax Implications of Settlements and Judgements, amounts received from settlement payouts are generally exempted from taxation.

This means that you typically won’t have to pay income taxes on the money you receive as compensation for your injuries.

This tax-exempt status applies to both economic damages (such as medical expenses and lost wages) and non-economic damages (such as pain and suffering) awarded in personal injury settlements.

Knowing that your settlement is not taxable can provide reassurance and help you plan your finances accordingly.

Common Misconceptions

Despite the general rule that personal injury settlements are tax-free, there are some exceptions and nuances to be aware of.

If a portion of your settlement is designated to cover taxable damages like lost wages, that portion may be subject to taxation.

It’s crucial to understand the breakdown of your settlement and consult with a tax professional to ensure compliance with IRS regulations.

What You Can Do To Minimize Tax Liabilities

If you’re looking to minimize your tax liabilities, there are two options that are worth considering.

These options include:

• Structuring Settlements: One way to mitigate tax liabilities is by structuring your settlement strategically. This involves negotiating with the defendant to arrange payments in a manner that minimizes tax consequences.
  • For example, spreading out payments over time or allocating funds to cover non-taxable expenses like medical bills or future medical care can help preserve the tax-free status of your compensation.
• Qualified Settlement Funds (QSFs): In certain cases, establishing a Qualified Settlement Fund (QSF) can provide tax advantages for plaintiffs. A QSF is a legal arrangement that holds and disburses settlement funds.
  • This arrangement is a fund that allows for the deferral of taxes until distribution. This can be beneficial for plaintiffs who wish to defer taxes on their settlement funds, as well as for defendants seeking to resolve legal liabilities while managing tax obligations.

Lump Sum vs Structured Settlements

Personal injury cases pay plaintiffs in two ways.

One is through a lump sum payment arrangement.

The other is with a structured settlement plan.

Lump Sum Settlements

A lump sum settlement involves receiving the entire compensation amount at once.

This option provides immediate access to the full amount of money awarded in the settlement, which can be particularly beneficial if you have immediate financial needs.

Plaintiffs may need to pay off significant medical bills, cover living expenses due to lost income, or make essential home modifications.

With a lump sum payment, you have full control over your money right away, allowing you to manage and invest it according to your preferences and needs.

Managing a large sum of money all at once may be challenging for individuals and their families, especially without proper financial planning.

Structured Settlements

Structured settlements provide compensation in regular payments over a predetermined period.

These payments can be tailored to meet ongoing needs, providing a steady income stream to help with budgeting and long-term financial planning.

Structured settlements also offer potential tax benefits, as payments received over time maintain their tax-exempt status on personal injury compensation.

Structured settlements lack the flexibility of lump sum payments.

Once the terms are set, it can be challenging to alter the frequency or amount of payments if your financial situation changes.

Structured settlements may involve a delay in accessing the full amount of your settlement, which can be problematic if you have immediate financial needs.

How an Experienced Attorney Can Help You Maximize and Recover Your Settlement

Recovering an adequate personal injury settlement requires more than an awareness of how settlements work.

To potentially maximize a personal injury settlement, the guidance and representation of an attorney is highly recommended.

The experienced attorneys at TorHoerman Law can help recover the maximum compensation you deserve.

Here’s how our team can help you:

• Detailed Case Assessment: We meticulously assess the specifics of your case, considering all factors that impact your potential settlement. This includes documenting injuries, collecting evidence, and identifying all liable parties.
• Expert Settlement Negotiations: On your behalf, our attorneys will negotiate with the at-fault party and insurance company. We’ll aim to secure a settlement that accurately reflects the full extent of your losses — both economic and non-economic.
• Litigation Expertise: In the unlikely event that negotiations fail, our lawyers are prepared to take your case to court. We have a proven track record of securing favorable jury verdicts, demonstrating our commitment to achieving justice for our clients.
• Strategic Financial Guidance: We are available to offer advice on the compensation structure to suit your financial needs, whether it’s a lump sum or a structured settlement. This ensures that your settlement is not only fair, but also tailored to your long-term financial security.

At TorHoerman Law, we are dedicated to helping you receive the maximum compensation possible, with minimal stress and uncertainty.

TorHoerman Law: Your Personal Injury Attorneys

When it comes to personal injury cases, it’s about more than just receiving a payout.

Settlements can provide justice and even secure a person’s financial future in the wake of unexpected hardship.

If you’re considering taking legal action against a negligent party, we are here.

Contact TorHoerman Law for a free consultation.

You can also use the chatbot on our page to find out if you qualify for a personal injury claim instantly.