While it is true that a confidential settlement of a personal injury case can subject our clients to income taxes, there are several important points where the author is flat-out wrong in his article, “Dennis Rodman: His Single-Handed, Lasting, Misunderstood Contribution to Settlement Agreements”, in the July/August edition of the New York State Bar Association’s Journal.
Secret Settlements are Just Plain Bad
Mr. Wood states that “both sides typically benefit from confidentiality.” Make no mistake, confidential settlements do not benefit injury victims. Confidential personal injury settlements place a veil of secrecy over a settlement and as a result, the terms of the settlement are not available for others as a precedent for future cases.
As trial lawyers, we have a responsibility to get the best result for our clients, but more importantly, we have a higher duty to use every case to establish a precedent that will raise the standards of safety and care for society at large. A confidential settlement negates this important contribution of personal injury law by hiding the content and terms of a settlement from the public.
Personal injury lawyers are not serving anyone’s interests (other than the defendants’) with confidential settlements. For these reasons, some states have attempted to bar secret settlements.
The Biggest Misconception about Secret Settlements
Mr. Wood further states that “to settle cases, one must agree” to confidentiality. This is one of the biggest misconceptions of personal injury law. Liability insurance companies will not insist upon confidentiality if you tell them in no uncertain terms that you will never agree to a secret settlement.
I have been practicing personal injury and medical malpractice law for 19 years and I have never agreed to confidentiality, nor will I ever agree to a secret settlement. Once the defendants and their counsel know where you stand regarding confidentiality, they will not even ask you for confidentiality.
The Best Way to Avoid Income Taxes on Settlements
That said, you won’t have to worry about the income tax consequences of a secret settlement if you follow Mr. Wood’s excellent suggestion, “Do Not Agree to Confidentiality in a Settlement Agreement”. With that tip, Mr. Wood is right on point.