Be sure you understand what the confidentiality clause in your personal injury settlement means. Here’s what to know before signing on the dotted line.
Most personal injury claims settle out of court, even if your attorney files a lawsuit on your behalf. According to the American Judges Association, less than 3% of civil cases reach a trial verdict.¹
Injury settlements are finalized with a binding, written agreement between the parties. Most settlement agreements contain language called a confidentiality clause.
Often referred to as a “non-disclosure agreement” or “NDA,” a confidentiality clause prohibits both parties from discussing the details of your injury claim and settlement.
Depending on the wording in the agreement, a confidentiality clause can affect the injured party’s tax liability for the settlement proceeds.
Injury victims who breach the confidentiality clause by disclosing the amount or terms of their settlement may be subject to stiff penalties and further legal action.
Why Keep Injury Settlements Private?
A well-drafted NDA generally states that all the parties to a settlement will hold the terms and conditions of the agreement in secrecy.
The specific terms of an NDA, though, may provide a few exceptions to complete confidentiality, and the parties in a case can always negotiate the particular details within a confidentiality clause.
A clause may give a party permission to disclose settlement information to their:
- Spouse
- Attorney
- Accountant
- Others who have a legitimate need to know
Sometimes confidentiality agreements are included in settlement deals with standard boilerplate language. There are other times when a party to a settlement may specifically request the addition of a confidentiality clause.
The injured party and at-fault party both have the right to ask for a confidentiality clause. A party may exercise this right for a variety of reasons, depending on the specific facts of the case.
Settlement agreements are legally binding contracts. Don’t hesitate to contact a personal injury attorney to answer your questions before signing.
Common Reasons Defendants Request Confidentiality
Defendants in personal injury lawsuits (the party being sued) and insurers often want confidentiality agreements in settlements to:
- Minimize damage to their business reputation and goodwill
- Keep things private so as not to encourage similar claims
1. To Protect Reputation and Goodwill
When it comes to company reputation and goodwill, a personal injury claim or lawsuit could hurt the public’s opinion of the business.
Many settlements are compromise agreements, where the alleged at-fault party does not admit to fault, but pays the claimant anyway. The public perception is that there was wrongdoing, or the claimant wouldn’t have been paid.
Negative views and bad press only work to decrease a company’s profits. Confidentiality clauses keep matters from the public eye to prevent bad publicity.
Example: Corporation Seeks Confidentiality to Avoid Public Shame
Brett is severely injured in a highway collision with a truck. The truck belongs to a multi-million dollar alcoholic beverage company. The truck driver is intoxicated and was the sole cause of the accident.
The company, known for its campaigns to prevent drunk driving, offers Brett a settlement. The settlement agreement contains a confidentiality clause that requires Brett to keep the facts of the case and the settlement agreement a secret. Brett signs the deal.
Here, the beverage company wants the NDA because it knows the situation could negatively impact its reputation (and revenues) if leaked to the public.
2. To Avoid Similar Claims in the Future
The second main reason for a defendant to request a confidentiality clause is to avoid similar claims.
If a company settles an injury claim without a confidentiality agreement, the public would have access to the details of the case. These details include the amount of compensation the injured party received. In cases with significant damage awards, people may begin filing similar claims to “cash in” on the prize.
Companies routinely request a confidentiality clause to prevent similar claims from depleting their financial reserves. For example, there could be a surge in product defect cases if word got out that the product manufacturer was settling with injured claimants.
Car insurance companies like to have confidentiality clauses in all their settlement agreements. It’s easier for the insurance adjuster to negotiate lower settlements if the injury victim doesn’t know other victims were paid more for similar claims.
Example: Hot Coffee Claim Kept Private to Avoid Excessive Litigation
Melinda stops by her local donut shop to get a cup of hot coffee. Once she drives off with the coffee in hand, she goes to take a sip and discovers that the server failed to put the lid on tightly. The coffee spills all over her lap, causing second and third-degree burns.
Melinda’s personal injury attorney sues the donut shop for $1.5 million, alleging that the popular restaurant is liable for keeping its coffee at too high of a temperature for safe consumption. The donut shop serves all of its coffee at the same temperature.
The business agrees to pay Melinda $1.5 million, but only if she signs a confidentiality clause stating that she won’t share the details of the settlement with anyone. After discussing the offer with her attorney, Melinda agrees.
Here, the confidentiality clause ensures that the public will not learn how much the donut shop paid to Melinda. The ultimate aim is to prevent other customers from making similar injury claims.
Defendants asking for NDAs is a somewhat controversial issue.
Although frequently used to expedite settlements, many public safety advocates fear that confidentiality in settlements poses a risk to public safety.
The idea is that covering up potential wrongdoings or health hazards fails to protect the public from the same or similar injuries. For example, a large number of people could be harmed when a company manufactures defective medical devices.
There are not as many concerns about confidentiality clauses when the harm is caused by a singular event, like a rear-end collision caused by a distracted motorist.
Reasons Injury Victims Request Confidentiality
Injured parties might have more reasons to request a confidentiality clause than at-fault parties or their insurers. If you’re hurt in an accident, you may request an NDA to:
- Keep significant settlements quiet. A confidentiality clause will ensure friends and family members don’t suddenly ask for a few extra bucks when you get your money.
- Keep personal injuries a private matter. Sometimes accidents can cause embarrassment due to the nature of the injury. An NDA can protect your dignity.
- Keep the details of medical treatment private. Like with specific injuries, a confidentiality clause can avoid the embarrassment associated with some courses of treatment.
- Avoid confrontation because of the details of a case. People may frown upon a claim against a particular person or institution. In these cases, an NDA will help you avoid any ill-will or confrontation because of the mere existence of the settlement.
- Avoid charities and investment advisors. Confidentiality clauses help shield you from those who want to tell you what to do with your settlement money. Maintaining distance is especially helpful if you settle for a large amount of money.
Example: Injured Athlete Requests a Confidentiality Clause
Frank is a college football player with high hopes of an NFL career. Frank suffers serious injuries to his right arm and leg after he’s broadsided while driving near his home during Spring break. Joe hit Frank after blowing through a stop sign in their small town.
As a result of the car accident, Frank spends two nights in the hospital, and doctors tell him he will need ongoing physical therapy. Frank believes he’ll make a full recovery, but he’s worried that publicity about his injuries could ruin his chance to be considered by professional football teams.
Joe and his insurance company agree to settle with Frank for $100,000. Frank’s attorney negotiates a confidentiality clause in the settlement agreement. The confidentiality clause prohibits disclosure of:
- The settlement amount
- The scope of Frank’s injuries
- Frank’s medical prognosis and treatment
Defining Confidential Settlement Information
The parties to an NDA can negotiate what type of information is considered confidential.
Some examples of confidential information include:
- The entire settlement agreement
- The nature and extent of a person’s injuries
- The amount of money that an injured party receives in compensation
Typically, a confidentiality clause has either an opt-out provision or an opt-in provision:
- An opt-out provision states that all the settlement information is confidential unless it’s specifically listed as non-confidential.
- In an opt-in provision, the parties specifically list what part of the settlement information is confidential. If information is not explicitly defined in the NDA, then that information is not confidential.
It helps to understand confidentiality clauses by referring to the parties involved as the disclosing party and the recipient:
- The disclosing party wants the confidentiality clause. The party wants the provision because it is disclosing specific information that it wants another party to keep a secret.
- The recipient receives confidential information and is asked by the disclosing party to keep it under wraps.
Disclosing parties often want a broad definition of what’s confidential in an NDA. Disclosing parties might ask for an opt-out provision in the agreement since this provision defines confidentiality more broadly than an opt-in provision.
Recipients, on the other hand, often prefer an opt-in provision because it’s easier to comply with the terms of the confidentiality clause. They can just look at the NDA for a list of the precise information that must remain secret.
Definitions are Negotiable
Until the final agreement is signed, the parties to a confidential settlement can always change how they wish to define what’s confidential.
The final version may include:
- An opt-out provision
- An opt-in provision
- Any other definitions
The injured party and the at-fault party must agree to the changes. They should also draft a new settlement document that includes the agreed-upon changes to the confidentiality clause.
Exclusions May Apply
Many confidentiality clauses have exclusions which are specific bits of information that are not subject to the confidentiality provision.
While exclusions will vary from clause to clause, they are often used for:
- Information that is a matter of public record or public knowledge
- Information that a member of the public can readily find
- Information that the recipient has to disclose under a court order or subpoena
- Information that the recipient may find on their own, without the use of the disclosing party’s confidential information
While parties may be allowed to disclose confidential information under a court order, they might also be required to let the other party know in advance before disclosing it. Then the other party has the opportunity to object to its release.
Penalties for Violations of Confidentiality
Well-constructed confidentiality clauses should state in detail what happens if a party fails to uphold confidentiality.
The most common remedies that apply to a violation of a confidentiality clause include financial penalties (called monetary liquidated damages), repayment of the settlement, and injunctive relief.
Financial Penalties for Disclosures
Monetary liquidated damages refers to an amount of money that the party who violates the confidentiality clause is forced to pay to the other party. The amount of liquidated damages is spelled out in the original settlement agreement.
For example, a surgeon injures a man’s groin while operating on his leg. The injury results in ongoing therapy of a personal nature. The doctor, hospital, and the injured party enter into a settlement agreement to resolve the medical malpractice claim.
The agreement contains a confidentiality clause that says the doctor and hospital cannot disclose the details of the man’s injury or therapy. The agreement also states that if the doctor or hospital violates the clause they must pay the man $50,000.
Repayment of Settlement Money
Sometimes when parties settle a case, the confidentiality clause states that the party receiving the settlement award must return the money if they violate the clause.
Example: Injury Victim Forced to Return Settlement Award for Violating Confidentiality
Amanda is seriously injured in a slip-and-fall accident in the parking lot of a major department store.
She hires an attorney and sues the company. The company later admits it was responsible for her injuries. Amanda’s claim settles for $1.5 million. The settlement agreement includes a confidentiality clause with the provision that Amanda must return the full amount of the settlement if she violates the confidentiality clause.
A news outlet interviews Amanda about the accident, and she shares details of the settlement. As a result, the corporation demands its money back, and Amanda is required to return it.
Court Ordered Injunctive Relief
Injunctive relief occurs when a party gets a court order to force the other party to complete a specific act or abstain from a particular action.
For example, the at-fault party may ask the court for an order to stop the injury victim from sharing their settlement information on social media in violation of the confidentiality clause in the settlement agreement.
Injunctive relief usually does not include monetary penalties.
Liability for Legal Costs
Sometimes when a party breaches a confidentiality clause, the breaching party has to reimburse the other party for any legal costs incurred because of the violation.
Legal costs include all reasonable out-of-pocket expenses that are incurred because of the case.
Legal costs for enforcing a confidentiality clause might include:
- Court costs
- Attorney’s fees
- An accountant
- An investigator
- Expert witnesses
What You Can Do to Protect Yourself
You deserve a fair amount of compensation for injuries caused by another party’s negligence, whether it’s a car crash, slip and fall, or some other wrongful conduct that led to your damages.
Minor injury claims can usually be settled directly with the at-fault party’s insurance company.
Severe or complicated injury claims should be handled by an experienced personal injury attorney to best protect your interests.
Remember to Negotiate Terms
Injured parties have goals, values, needs, and desires, just like at-fault parties have. This means it’s okay for you to try to get what you want, and likely deserve, in a confidentiality clause.
If you feel embarrassed, for example, because of your medical treatment, then ask the insurer to keep your medical information private.
If you’re negotiating your own injury claim, you can negotiate the terms of the settlement as well as the amount of your compensation. There has to be some give-and-take on both sides.
Be Aware of Taxable Income
It’s important to understand that confidentiality clauses can impact your tax liability for settlement money.
In general, courts have established that settlements for personal injuries are not taxable. That is, if you receive money from a settlement, the government cannot tax your settlement proceeds if you haven’t itemized your injury-related medical expenses in prior tax years.
However, when the settlement involves a confidentiality clause, the Internal Revenue Service (IRS) believes that the portion of the settlement attributable to the clause is taxable. For instance, if the insurance company offered you a higher settlement to get you to agree to a confidentiality clause.
Case Example: U.S. Tax Court Determines Taxable Settlement Income
In 1997, cameraman Eugene Amos settled a claim against Dennis Rodman for injuries Amos sustained from an “incident occurring with Rodman” during a basketball game. Amos settled his claim for $200,000 and signed a confidential agreement.
Amos did not claim the $200,000 as income on his 1997 federal tax return, believing the settlement proceeds to be non-taxable. The IRS disagreed.
The Tax Court ruled:
“Mr. Rodman paid [Amos] $120,000 of the settlement amount at issue on account of … physical injuries and $80,000 of that amount on account of the nonphysical injury provisions in the settlement agreement. On that record, we further find that for the year at issue [Amos] is entitled … to exclude from his gross income $120,000 of the settlement amount at issue and is required… to include in his gross income $80,000 of that amount.“
But the recipient of the settlement can avoid being taxed if the agreement states that there is no consideration being paid because of the confidentiality clause. If the agreement does not include language that says you aren’t being paid extra for the clause, the settlement money becomes taxable.
Since this can be confusing, it’s in your best interest to consult with a qualified personal injury lawyer.
Read and Understand the Agreement
Before racing to sign a settlement agreement, you must carefully read and understand everything within the documents. You need to know exactly what is required of you and the other party.
Ask questions before signing anything. Even if you’ve handled your own settlement negotiations, you have the right to seek legal advice from an injury attorney before signing a binding legal agreement.
An experienced attorney can negotiate the best settlement terms, and help you understand the information that should be protected under a confidentiality clause.
Most attorneys offer free consultations for personal injury cases and usually work on a contingency fee basis. This means they don’t get paid unless your claim settles or you win an award in court.
If you’ve concluded negotiations and just want an attorney to review the proposed settlement agreement, you can usually pay a flat fee for that service.
Don’t let the insurance company set the terms for your injury settlement. It costs nothing to find out what a good attorney can do for you.
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