Settlement

Learn all about settlements in the US legal system.  Get the legal definition facts about what the average settlement amounts are, how long it takes to get one, what a Covenant Not to Sue is, and more. 

What is a Settlement?

In legal terms, a settlement is an out-of-court agreement reached between two or more parties to resolve a legal claim dispute.

In law, settlements are often used in civil cases, where one party alleges to have been harmed or suffered some loss and seeks remedy or compensation from another party.

The parties and their attorneys negotiate the terms of the settlement. The parties agree to resolve the dispute without needing to continue a lawsuit or stand trial by entering a legal settlement.

Once the settlement is reached in principle, a written agreement is drafted for both parties to sign and fulfill.

The written contract sets out the settlement terms, which generally do not include a formal admission of fault or liability by one or more parties alleged to have caused harm.

The settlement contract will include specific requirements and obligations specific to each party.

These terms can include the agreed settlement payment amount (how much money is to be paid to the claimant) or the implementation of the specific changes or actions expected to be made by each party.

What Are Different Types of Legal Settlements?

Different types of legal settlements exist that can be agreed upon to resolve a legal dispute between litigating parties. The below list contains some of the most common types of legal settlements:

Lump Sum Settlement

A lump sum settlement is a one-time payment made by the defendant to the plaintiff to resolve the lawsuit. This type of settlement is the most common type to be paid out in personal injury cases.

The defendant agrees to compensate the plaintiff by writing a lump sum settlement check to help the plaintiff recover their injuries and losses.

Structured Settlement

A structured settlement is paid out over time, usually through a series of payments. This settlement type is often used when the plaintiff requires ongoing medical treatment or care or if the total settlement is very large.

Consent Decree

A consent decree is a settlement agreement between two parties in a lawsuit that a court approves. A judge makes a consent decree, also called a consent order, with the consent of all lawsuit parties.

It is a commonly used tool in discrimination cases, where the defendant agrees to specific terms or actions to address the alleged discrimination.

With a consent decree, the defendant typically agrees to take specific actions to remedy the alleged wrongdoing and refrain from engaging in certain behaviors in the future.

These actions may include implementing new policies or procedures, conducting training, or providing compensation to the plaintiff. Consent decrees allow parties to have legal recourse (file a lawsuit) if a party involved does not follow the order made by the judge.

Release and Waiver

A release and waiver is a settlement-type contract where the potential plaintiff (the releasor) agrees to release the defendant (the releasee) from any further liability for the instance. The releasor’s waiver to file a legal claim is often in exchange for a payment or other form of compensation from the releasee.

This type of settlement is often used in cases involving breach of contract or other financial disputes where the wronged party seeks to waves their right to sue the releasee from a potential legal claim.

Covenant Not to Sue

A covenant not to sue is a contractual settlement agreement where one party agrees to restrict itself from filing a lawsuit against another in which it would seek compensation and damages in exchange for a wrong it suffered.

The covenant is typically made in exchange for payment or other forms of compensation. Unlike other types of settlements, a covenant not to sue often does not involve proving fault or liability on the accused party.

People and companies often enter the covenant agreement before any harm is caused.

This type of agreement can also be included in contracts between corporate entities to avoid situations where one party who signs the contract could file a claim against the other party.

The party who signs the covenant not to sue for consideration still preserves its right to take legal action if the other party breaks its contractual obligations.

What Are Examples of Out of Court Settlements?

Out-of-court settlements are agreement contracts signed between parties in a legal dispute without needing a trial or a court judgment. Some most common examples of out-of-court settlements include the following:

• Personal injury cases: A person who files a personal injury claim, like someone in a car accident, can negotiate a settlement with the responsible party or their insurance company without litigating in court or having a trial. Personal injury settlements often cover medical expenses, lost wages, pain and suffering, and other types of damages.
• Employment disputes: An employment dispute is between an employee and the employer. These disputes are brought against the employer by an employee who claims they have been wrongfully terminated or discriminated against. They often negotiate a settlement with their employer. Depending on the circumstance, the employee may file a complaint with a government agency such as EEOC[Equal Employment Opportunity Commission]. The case can be tried, or the two parties can reach a settlement through mediation or another dispute resolution alternative.
• Intellectual property disputes: Parties involved in intellectual property (IP) disputes, such as patent infringement or copyright infringement, may work together to negotiate a settlement to avoid a lengthy and costly legal battle regarding the claim.
• Business disputes: Business partners involve companies that have a commercial dispute. The companies can negotiate a settlement to avoid damaging their business reputation or incurring high legal fees. Often this will include a non-disclosure settlement agreement where the parties agree not to make the terms of the settlement public.
• Divorce and family law cases: Couples going through a divorce or child custody dispute may negotiate a settlement agreement for the terms of the divorce on their own or with the assistance of a mediator. This saves the couple significant lawyer fees and the risks of a trial where the judge can make a strict order in favor of one party on how to split the resources of the divorcing couple. Additionally, this method is associated with amicable divorces as it reduces the time and stress for those involved with divorce lawsuits.

What is the Average Settlement for Different Lawsuits?

Providing an overall average settlement amount for all case types combined is not practical or helpful. The average settlements are unique to the different types of lawsuits. The expected value of each settlement will vary a lot and become even more unique depending on the specific circumstances of each case.

A settlement amount is generally based on factors such as the severity of the injury or harm suffered by the plaintiff, the strength of the case’s evidence, and the financial resources of the parties involved.

That said, some average settlement amounts can be pointed to for certain types of lawsuits:

Average Lawsuit Settlement Amounts

• Wrongful Death Lawsuits: The average settlement amount for a wrongful death lawsuit can vary widely, depending on factors such as the age and income of the deceased, the number of dependents, and the circumstances surrounding the death. Many law firms report that the median wrongful death settlement is around $500,000.
• Carbon Monoxide Poisoning Lawsuits: The average settlement amount for a carbon monoxide poisoning lawsuit can also vary, depending on the severity of the poisoning, the long-term effects on the victim, and the responsible party’s level of liability. In general, settlements can range from a few thousand dollars to several million dollars. The higher amounts often involve large companies and significant negligence done by them.
• Divorce Lawsuits: The terms of a divorce settlement vary depending on the specific circumstances of the divorce lawsuit, including the state where the divorce is being filed, the length of the marriage, if a prenuptial agreement (prenup) exists, the assets and debts of the two parties, is there alimony, and if the couple has children. However, one constant of divorce is it costs to have one. The cost of a divorce in the United States will range from a few thousand dollars for a relatively uncontested divorce to tens of thousands or more if the parties decide to litigate the divorce.
• Employment Lawsuits: The average settlement amount for an employment lawsuit can vary depending on the type of claim, such as discrimination, harassment, or wrongful termination, as well as the strength of the evidence and the resources of the parties involved. According to a report published by the Federal Register, The Daily Journal of the United States government, the median settlement amount for an employment discrimination case is around $45,000 that employers pay out.
• Police Misconduct Lawsuits: The average settlement amount for a police misconduct lawsuit can also vary drastically depending on the case’s nature, including the severity of the harm suffered (Did the victim(s) die?), the level of police misconduct, and how much the financial resources of the liable parties (Cities can be sued). Some police misconduct and violence settlements have been as high as the low millions of dollar range, while most have been for much smaller amounts. Given the disparity, it would be misleading to say what the average police misconduct settlement amount is.
• Harassment Lawsuits: The average settlement amount for a harassment lawsuit can depend on the type of harassment, the severity of the harm suffered, and the resources of the parties involved. The average amount for a sexual harassment case typically begins around a few thousand dollars. However, settlements for sexual harassment can also be worth millions and often require signing an NDA (non-disclosure agreement).

Is a Lawsuit Settlement Taxable?

The taxability of your lawsuit settlement depends directly on the nature of the settlement or court-awarded judgment and the type of damages awarded to you. The following are general legal guidelines that the government and accountants use to determine if your settlement is taxable:

1. Personal injury or physical sickness: If your settlement includes funds for damages that are related to personal injury or product liability case, the settlement amount is generally not taxable.
2. Emotional distress: If your settlement includes money for emotional distress, then the settlement may or may not be taxable, depending on the circumstances. If the emotional distress included in the settlement is related to the plaintiff suffering a bodily injury due to someone else, the settlement is generally not taxable. However, the settlement may be taxable if the emotional distress is unrelated to a physical injury or sickness. For example, if the defendant traumatized the plaintiff by mentally abusing them.
3. Lost wages: If you receive a settlement or judgment for lost wages or lost profits, the settlement money is typically taxable as it is considered ordinary income you would receive from your job.
4. Punitive damages: If you receive money from the judge’s order for the defendant to pay punitive damages in addition to your court-awarded settlement, the punitive damages are taxable income.

The taxability of a medical lawsuit settlement depends on the nature of the settlement and the type of damages awarded. Generally, medical lawsuit settlements are not counted as taxable income if the claim is for physical injuries, not just mental suffering.

In summary, compensation received from a lawsuit settlement or judgment to help the plaintiff recover their medical expenses from bodily injuries or physical sickness are not counted as taxable income under the Internal Revenue Code.

The money is a payment for losses. When filing taxes, losses can be used to offset and reduce the total taxable income.

It is important to note that paying taxes for a settlement is not all or nothing. Settlements can include taxable and non-taxable forms of compensation.

The rule of thumb is if the settlement amount includes compensation for medical bills, pain and suffering, and other similar damages for a personal injury, that portion of the funds is not taxable.

Whereas, if any part of the settlement is for lost wages or punitive damages, mental suffering unrelated to a physical injury or sickness, those portions of the settlement are typically considered taxable income by the IRS.

What is a Pre-Litigation Settlement?

A pre-litigation settlement is an agreed-upon and signed settlement contract between disputing parties, reached before the case is filed with the courts.

For example, in a personal injury case, the pre-litigation settlement often happens after the injured victim’s attorney sends a demand letter containing how much they think their client should receive in compensation, but before the attorney files the case and any legal action is taken.

In a pre-litigation settlement, the parties involved in the dispute may negotiate through their attorneys. The goal is to reach an agreement that resolves the dispute without needing a costly lawsuit.

Pre-litigation settlements can benefit both parties, as it saves time and money and takes the uncertainties of litigation out of the equation. Pre-litigation settlements can be agreed upon in a wide range of disputes, such as contract disputes, personal injury claims, employment disputes, and more.

For instance, contingency-based attorneys only charge a fee of 33% for pre-litigation settlements but increase that amount to 40% if the case is filed.

It will save the client money if it makes sense not to file the lawsuit and settle out of court if it makes sense not to prosecute the case.

If the insurance company is paying policy limit litigation, it is typically unnecessary to file a suit.

A pre-litigation settlement most often includes the payment of financial compensation but can also include other remedies, such as changes in behavior or business practices.

How to Negotiate a Civil Lawsuit Settlement?

The first step to successfully negotiating a settlement is for you to hire an attorney who can help you take the following steps:

1. Understand Your Case: Before entering into settlement negotiations, it is crucial to have a good understanding of your case, including the strengths and weaknesses of your legal arguments, the facts of the case, and the potential damages or remedies that may be available.
2. Develop a Strategy: Based on your understanding of the case, develop a negotiation strategy that factors in your goals and objectives, your legal position, and the other party’s legal standing.
3. Exchange Information: To negotiate a settlement, both parties must understand the case well. They can exchange relevant information through discovery with the other party, including documents, witness statements, and legal arguments.
4. Make an Initial Offer: The party with the claim being made against them can start the negotiation process by making an initial offer that reflects their assessment of the case.
   The initial settlement offer can include monetary compensation or other remedies, such as having the parties make changes. For commercial cases between companies, that often means the parties agree to stop the alleged harmful actions. For the plaintiff or the party making a claim, it means agreeing to no longer attempt to hold the party for what they are suing.
5. Respond to the Other Party’s Offer: After you have made your initial offer or demand (if you are the injured party), the other party may respond with a counteroffer.
   Carefully evaluate the counteroffer and consider whether it meets your expectations.
6. Make Concessions: Mediation and negotiations often involve the disputing parties making compromises. So be prepared to make concessions, but make sure that any concessions you make are consistent with your objectives and legal position. 
7. Finalize the Settlement: Once you and the other party have reached an agreement, finalize the settlement by drafting a written contract that sets out the agreed-upon settlement terms.

How Long Does it take to Get a Lawsuit Settlement?

How long it takes to negotiate a lawsuit settlement can vary widely and depends on a variety of factors, such as the case’s complexity, the willingness of the parties to negotiate, and the court’s schedule. Some of the most important factors that can impact the timeline of a lawsuit settlement:

1. The Complexity of the Case: If a case involves complex legal or factual issues, it will likely take longer to resolve than a more straightforward case.
   Complex cases may require more discovery, expert witnesses, and legal research, which inherently lengthens the process.
2. The Willingness of the Parties to Negotiate: The length of time it takes to reach a settlement can also depend on the parties’ willingness to negotiate. If both parties are motivated to settle, the process may be quicker than if one party is unwilling to negotiate.
3. The Court’s Schedule: If a lawsuit is filed and begins to get litigated, the court’s schedule can impact the timeline of a settlement due to when the earliest the case could go to trial. Courts are often busy and have backlogs, especially in larger cities. This ends up meaning they may have limited availability for trial dates in the near future, which can push back the settlement process.
4. The Total Amount of Money (injuries and damages) at Stake: In some cases, the amount of money that is at stake that a party that can file a lawsuit for will have will impact the timeline of the settlement process.
   Parties are more willing to negotiate more quickly if the total amount of the injuries and damages that can be won is not very much ( if there is an insurance policy with minimum coverage) and if liability has been established. However, it will often take longer if significant financial compensation and damages are at stake.

Can a Lawsuit be Reopened After Settlement?

No, except for rare exceptions, once a lawsuit has been settled and the settlement contract signed, neither party cannot reopen it. That is because of how settlement agreements work. They are legally binding contracts that resolve legal disputes between the parties.

Even so, there are some limited exceptions to this rule, which by when a settlement agreement can be made void and require a new contract to be signed. For instance, a court can annul a settlement agreement when there was fraud or coercion during the negotiations or the signing of the settlement release itself.

Typically, even if there is a material change to the circumstances of the case by the discovery of new information, it will be too late to get out of the agreement after the complainant signs (however, there may be a cancellation period).

Although, settlement agreements may be modified if the parties consent to the changes, which is uncommon.

The finality of settlements is why taking caution when reviewing and signing a settlement agreement is vital. By signing a settlement, you are releasing your right to future claims against the defendant for the same incident.

What is the Highest Payout of a Class Action Lawsuit?

The largest settlement amounts in US history have been from class action lawsuits. The settlements often involve the government and are for compensating thousands of people for the harm they suffered who have been wronged by large corporations.

The highest payout of a class action lawsuit to date is the $246 billion tobacco settlement reached in 1998 for people hurt by smoking cigarettes.

The Tobacco industry settlement was between the tobacco industry and 46 US states, and in the years following, smoking rates have seen a significant decline across the country.

Other notable settlements in very recent history include

• The Volkswagen “Dieselgate” scandal resulted in a $14.7 billion settlement.
• The Enron securities fraud case resulted in a $7.2 billion settlement between the Houston, Texas-based Enron, and the government. It is still the highest dollar amount for US securities shareholder settlements.

Class action lawsuits continue to be a powerful legal tool to hold corporations accountable and compensate large groups of victims who suffer harm.

What is a Covenant Not to Sue?

A covenant not to sue is a legally binding agreement between two parties in which one party agrees not to sue the other party for any specific legal claims or causes of action.

This agreement is often used to settle disputes outside of court and can be a helpful legal option for avoiding costly and time-consuming litigation.

In a covenant not to sue, the party gives up their right to sue (the “releasing party,” often referred to as the releasor ) and agrees to waive all claims and causes of action that they may have against the other party (the “released party,” often referred to as the releasee).

This can include claims for damages, breach of contract, personal injury, or any other legal claims the releasing party might have against the released party.

In exchange for the releasing party’s agreement not to sue, the released party typically agrees to provide some form of consideration, such as a payment of money, a release of liability, or a promise not to engage in certain conduct in the future.

A covenant not to sue can be entered into before there is any cause of action as a preemptive measure, such as with patent licensing agreements.

The reason licensing deals often contain a covenant not to sue for intellectual property infringement upon the licensed property.

For example, a company that licenses graphics for t-shirts may sign a covenant not to file suit against the party paying for the right to use its intellectual property on the t-shirts that the licensee plans to print and sell.

However, the entity that signs the covenant has no bearing on the rights to file a legal claim for reasons not included in the contract.

Written by Aaron R. Winston
Last Updated: May 16, 2023 7:50am CDT