How Do Insurers Use Damage Formulas to Negotiate Settlements?

Have you ever wondered how insurance adjusters determine what a personal injury case is worth?  The answer involves the use of a damage formula.  Adjusters use the formula to help determine a compensation amount at the outset of negotiating a personal injury settlement.  Let’s all put our math helmets on for a moment and take a further look at the use of damage formulas.

What’s the Reason for a Formula?

Before we dive right into equations and formulas, let’s consider why damage formulas are even used in the first place.  Consider a quick hypothetical where Sally and John are involved in an automobile accident.  John was clearly at fault in the accident and admits liability.  As a result of the accident, Sally incurred the following damages:  medical expenses, property loss, pain and suffering, and loss of family opportunities.

As a quick side note, it will help understand matters if we classify Sally’s damages.  The first two she incurred are known as “special damages,” or ones which are based on measurable dollar amounts.  The last two types are known as “general damages,” or ones based on intangible losses.

Returning to our hypothetical, John’s insurance company must reimburse Sally for her losses since John admitted liability.  The company can easily calculate compensation for Sally’s special damages.  Here, Sally will likely have bills and receipts that clearly show how much money was spent on medical treatment and property repair.  However, how does a company even begin to put a price tag on such damages as pain and suffering and lost opportunities?  This is where the damage formula comes into play.  The formula is basically used so that insurance adjusters can put a dollar amount on general damages.

How the Formula Works

Tighten that math helmet because here we go.  In mathematical terms, the damage formula is essentially:

Settlement Amount = Special Damages + x(Special Damages)

Don’t worry.  It seems complicated but it really isn’t.

Insurance adjusters typically follow a specific process when valuing a personal injury claim.  They first begin by adding together any special damages.  Again, these can easily be measured based on bills and receipts.

After special damages are valued, adjusters then try to place a value on general damages.  They do this by multiplying the amount of special damages by a figure of 1.5 to 5.  The specific figure used (between 1.5 and 5) depends on the severity of the case and the damages involved.  In cases involving minor injuries, a figure close to 1.5 will be used.  In cases involving more severe injuries, a figure closer to 5 will be used.  In our equation above, “x” represents the figure that’s used in multiplying special damages.

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Once an adjuster determines an amount for general damages, he then adds this value to the total amount of special damages.  The total figure then becomes the number from which settlement negotiations begin.  All of this is expressed in our handy dandy equation, where settlement amount equals the amount of special damages plus the amount of general damages (which is determined by multiplying “x” by the amount of special damages).  See, math is fun!

Let the Negotiations Begin

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We should reiterate that the final amount generated by the damage formula is just the number from which settlement negotiations begin.  A final settlement amount, that is higher than the amount calculated by the damage formula, can definitely be reached through careful and clever negotiations.  That is where we come in.

The attorneys at the Phillips Law Firm have years of experience in negotiating with insurance companies and claims adjusters.  If you have suffered damages in a personal injury case, please contact our firm for any assistance you need in negotiating a final settlement amount.  Our team of successful attorneys are quite familiar with the damage formula and they are well versed in its operation.  Contact them today for help.

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