How Do Insurance Companies Calculate Personal Injury Settlements?

If you’ve been injured in an accident caused by someone else’s negligence, you’re likely wondering how much compensation you might receive. Insurance companies play a huge role, determining whether they are liable for payouts, calculating the value of claims, and offering settlements to cover injured victim’s losses.

Understanding how insurance companies calculate personal injury settlements can help you know what to expect and whether a settlement offer is fair and compensates you appropriately for your losses.

The Insurance Claim Process

Contacting Insurance Companies

The first step after an accident is to contact your insurance company, even if it wasn’t your fault. Your insurer can help you with this process. If someone else is responsible — and, therefore, liable to cover your losses — your insurance company won’t say, “Well, you’re on your own!”

Remember, insurance companies don’t make money by paying out on claims. Your insurer may submit a claim to the at-fault party’s insurer, or they might tell you you need to get in touch directly.

Whatever the case, it’s important to contact your insurer as soon as possible after your accident. You have a two-year time limit (called the statute of limitations) to bring legal action if you cannot resolve your claim out of court.

However, running out of time and missing the deadline to file isn’t your only concern. If you wait to begin the claims process, the insurance company might question the validity of your claim, accusing you of trying your luck because you want a payout, or even disputing whether you suffered your injuries in the accident. This is a common insurance company tactic to challenge liability and get away with offering you a much lower settlement amount.

Getting an Insurance Adjuster Assigned to Your Claim

At the beginning of the process, an insurance adjuster will be assigned to your case. An adjuster is a representative of the insurance company, whose job is to assess whether they are liable for paying damages (your losses). To do this, they will have a lot of questions for you, including how the accident happened and the severity of your injuries.

It’s vital to be cautious about what you say to an insurance adjuster. They may seem caring and genuinely concerned about your welfare, and they very well might be — they’re human, and if you’ve been hurt, it’s only natural to ask if you’re okay and feeling better. But they also have a job to do, and anything you tell them can be used against you to justify offering you a reduced settlement.

If you tell an adjuster your injuries aren’t that bad — even if you’re only saying it to be polite — they will take you at your word. If you later say you have severe pain that makes it hard to do everyday tasks, or that your injuries are affecting your mental health, they can point back to that initial conversation and argue that you were fine when they spoke to you.

But you’re not obligated to speak to an insurance adjuster at all. Our personal injury attorney in McAllen and San Antonio can handle all communications with insurance companies for you. We’ll let the evidence do the talking and negotiate the best possible outcome, allowing you to focus on your recovery.

If you do speak to an insurance adjuster before appointing an attorney, we recommend sticking to the facts — what happened and when. Avoid discussing your injuries and politely state that you’re still seeking medical attention and consulting an attorney.

At this point, the insurance adjuster will investigate your claim. The process is similar to how our team investigates accidents and gathers evidence. However, while our goal is to demonstrate your losses and prove the other party is at fault, the insurance company will look for evidence that disputes it.

Calculating Your Settlement Offer

Once they have gathered and reviewed the evidence and information, they will calculate a settlement offer. It’s worth stressing that an insurance company’s opinion on the value of your claim is not necessarily how much your case is worth. If an insurance company has to honor a claim and pay a settlement, they will try to minimize the impact on the bottom line as much as possible.

How Insurance Companies Value Claims

Insurance companies use sophisticated software and complex formulas to calculate a claim’s value. When you suffer a personal injury, you will incur losses, which form the basis of an insurer’s calculation. But there are different types of losses, or damages, separated into two categories:

• Economic damages
• Non-economic damages.

Economic damages are your quantifiable, monetary losses, such as medical bills, lost wages, and the costs of repairing or replacing property, whether your car, cell phone, or eyeglasses. These can be proven with documentation such as pay stubs, receipts, bills, and quotes. 

You are also entitled to the cost of future treatment and lost earnings if you can’t work for several months, years, or ever again, or if you need additional surgery, long-term physical therapy, or lifelong medication. This can make the process a little more complicated, as nobody can predict the future.

When calculating this portion of your settlement, insurers may hire a medical professional or economic expert to assess your case and determine your future losses. Of course, if you hire a personal injury attorney to represent you, they will have their own expert witnesses offering their opinions.

The insurer will total these costs, and the final figure represents your economic damages.

Calculating the second type of damages you are entitled to — non-economic damages — is more complex. Non-economic damages are subjective: they don’t have a fixed value that can be proven with bills and receipts. Common non-economic damages recovered in personal injury claims include:

• Pain and suffering
• Emotional distress
• Loss of enjoyment.

For example, if you suffer a burn injury after a car or motorcycle accident, you might need skin grafts that cause intense pain. Then, you may have visible scars that affect your self-confidence, causing you to become withdrawn and develop depression. Your relationships might deteriorate, and you might lose your job because you can’t face going to work.

If your injury leaves you disabled, or you have an injury that requires home care, you might struggle to adapt to relying on others for help, especially if you were previously headstrong and independent.

If you have a head injury that causes dysarthria, you might feel embarrassed when others can’t understand you, or feel exposed and that others are judging you.

These are all examples of damages you are entitled to — you would not be in this position but for the wrongful and negligent actions of someone else, and just because your suffering or distress might not be immediately visible like a physical injury does not make it any less profound.

The law recognizes the long-term impact of a personal injury on a victim’s life, which is why non-economic damages can be sizable. But they’re also tricky to calculate. How do you put a dollar amount on something so subjective and capable of affecting people in so many different ways?

There are two main methods insurance companies use to calculate non-economic damages.

The Multiplier Method for Compensation

The multiplier method takes your total economic damages and multiplies it by a number, typically between 1.5 and 5. The multiplier used depends on many factors, including the severity of your injuries, how long you will continue to suffer, and whether you’re permanently impaired. In some cases, insurance companies may use a multiplier up to 10 — usually when aggravating factors apply, such as if a person’s conduct was egregious or reckless.

The exact formulas used by insurance companies can vary, calculated by software that analyzes multiple data points and scenarios. At a basic level, though, a higher multiplier corresponds to severe injuries that have a long-term or permanent impact.

An Example

Here’s a hypothetical example for an imaginary client called John. John was injured in an accident and files a claim with the at-fault party’s insurance company. The insurer calculates his economic damages to be worth $30,000 — comprising $20,000 in medical bills and $10,000 in lost wages.

John’s non-economic damages could be worth between $45,000 ($30,000 multiplied by 1.5) and $150,000 ($30,000 multiplied by 5). If John can return to work after his recovery and his injuries heal without complication, his non-economic damages might fall toward the lower end of that range.

However, if he suffers extreme emotional distress in the form of post-traumatic stress disorder, and he is in severe pain every day that makes it impossible for him to enjoy activities and hobbies, a higher multiplier might be used.

Once the insurance company determines the multiplier and the total non-economic damages, they will add the figures to calculate the claim’s value. In John’s case, if a multiplier of 3 is used, his claim would be worth $120,000, based on $30,000 in economic damages and $90,000 in non-economic damages.

The Per Diem Method of Calculating an Insurance Settlement

The per diem method is less commonly used, but it is an alternative to the multiplier method. Its name comes from the Latin for “per day”, and it works by assigning a daily rate for pain and suffering and multiplying it by the number of days you have suffered, and will continue to suffer.

This method of calculating compensation has its challenges. The first hurdle is determining how much your suffering is worth. Again, pain is subjective and hard to quantify. In most cases, this value is based on an injury victim’s income before their injury.

An Example

Let’s return to our hypothetical client, John. Before his injury, John was a construction laborer, earning $39,000 per year. With some basic math, John’s daily pay works out at around $107. If John’s pain and suffering affects his life for 130 days, his non-economic damages would total $13,910.

The per diem method of calculating an insurance settlement is far from perfect.

Firstly, a flat number does not account for socioeconomic factors like inflation. Second, it can be challenging to determine how long a person might be in pain. When this method of calculation is used, insurers will set an endpoint — usually when the accident victim has reached maximum medical improvement (MMI). If an injury victim has broken an arm and it heals, and they are no longer in pain, this method might be appropriate.

However, MMI doesn’t always mean a person is fully recovered. It also represents the point when doctors determine that a person is unlikely to see any further improvement. A person with a spinal cord injury might be forever changed by their accident. Immediately after their accident, they may not be able to move their legs at all. They could be wheelchair-bound and have to rely on a spouse, family member, or carer to help them with daily tasks.

With lengthy physical recovery, they might recover some sensation in their legs and feet. They might even be able to stand for brief moments. But at some point in their recovery, their doctor might tell them that despite their incredible progress, it’s unlikely they will see any further improvement.

And, because they’ve reached MMI, they are not entitled to additional non-economic damages for all the years they will have to live with physical pain, not being able to share experiences with their family — like playing ball with their children — and the devastating loss of independence.

These factors make the per diem method less suited to claims when a victim has life-altering or permanent injuries.

How Is Compensation Calculated When You’re Partly Responsible for Your Accident?

The issue of liability underlies the entire personal injury claim process. You are entitled to recover compensation when someone else’s negligence causes an accident that injures you. Conversely, the at-fault party’s insurer will go to great lengths to dispute or deny liability. But few accidents are solely one person or party’s fault.

If you’re partly liable for your accident, it can affect how insurers calculate your claim.

For example, you might suffer a back injury at a Walmart after tripping on a pallet left around the corner of an aisle. The store has a duty to keep the premises safe for customers, and leaving the pallet in the open is a breach of duty and against protocol. 

However, camera footage might show you running down the adjacent aisle and rounding the corner. The store might argue you are not free from liability, saying that if you were walking and looking where you were going, you would have seen the hazard and could have avoided it.

Based on these facts, the insurance company may accept partial liability, and they will offer a reduced settlement as a result. For example, if an insurance adjuster calculates the value of your claim to be $120,000, but they assign 20% of the fault to you, the settlement offer would be for the remaining 80% — $96,000. Under Texas’s modified comparative negligence laws, you won’t be able to recover compensation if you are more than 50% liable for your accident.

Receiving a Settlement Offer from an Insurance Company

So, now you know how insurance companies calculate compensation: the insurance adjuster has investigated your claim, totaled your economic damages, and determined your non-economic damages using the multiplier or per diem method. Assuming they accept full responsibility and do not deduct a percentage for your contribution to the accident, all that’s left to do is add those figures together and you have your settlement offer.

However, that’s not usually how it works.

Insurance companies may have a number that represents the value of your claim, but they won’t lead with it, as it leaves them with little wiggle room if you counter their offer.

This means insurers will usually start low knowing they can increase it to their upper limit (their original calculation). Of course, insurers want you to accept the first offer because it means they pay out less. It’s not fair when you are entitled to more, but that is, unfortunately, how it is.

But while insurers want you to take a lowball settlement, they also know that most people — especially when they have a personal injury attorney representing their best interests — will push back.

Should You Accept a Settlement Offer?

You should never accept the first offer from an insurance company, even if you want to resolve your claim as quickly as possible. With speed comes compromise. Your settlement may barely cover your medical expenses and lost wages, let alone fairly compensate you for your non-economic damages. And, if you’re still recovering from your injuries, it might be too soon to get an accurate idea of how your treatment is going and whether there are additional damages you can demand if your injuries worsen.

You should also consider the policy limits of the person or party that caused your accident. For example, all drivers in Texas must have minimum liability insurance to cover someone else’s losses when they cause a crash. However, they might — quite literally — have the minimum insurance coverage.

An insurance adjuster might total all your losses, feed it into their complex formula, and determine that your claim is worth $50,000. But no insurance company will offer anywhere near that amount if the policyholder’s insurance coverage caps out at $30,000. At best, the adjuster will negotiate up to $30,000, but they will almost always start low, putting you at risk of getting even less than you deserve.

That said, there are multiple advantages of accepting a settlement — if the offer is fair. Settling an insurance claim means you avoid the stress, uncertainty, and additional cost of filing a lawsuit. It can take years for a personal injury claim to get to court, and going to trial is a risk for both parties. It could result in a major payout worth way more than any amount the insurer was willing to offer, but it only takes one juror to believe the defendant wasn’t negligent, or that your level of fault outweighs the defendant’s liability, and you won’t recover any compensation.

Before accepting a settlement offer, we would always advise discussing your options with a personal injury attorney. They are experienced negotiators who will fight to get you the maximum compensation you deserve.

Should You Use an Online Calculator to Calculate Your Personal Injury Claim?

Online settlement calculators can be a convenient and helpful way to work out how much your claim might be worth. We have even created our own personal injury settlement calculator you can use.

It works based on the multiplier method of calculating a settlement, as this is the most common way insurers determine the value of a claim. First, you input your economic damages — the tangible losses you’ve suffered in the form of medical bills, lost wages, and property damage. If you have documentation close to hand, you can get a fairly accurate idea of your economic damages (or at least of the costs you’ve incurred to date).

Then, we ask you a couple of questions to determine the multiplier for your non-economic damages. For example, if you have suffered a catastrophic injury, such as a severe traumatic brain injury or spinal cord damage, the calculator will apply a higher multiplier.

However, we always caution visitors who use our calculator that the result should only ever be taken as a rough guideline. As we’ve covered, insurance companies use complex formulas known only to adjusters, and they can vary between providers. Even if these formulas were available, no calculator could realistically account for every single policy.

Insurers will also tailor their settlement offer based on the strength of a case. If you have indisputable evidence that the other party has been grossly negligent and caused substantial losses, the insurance company will often be more willing to increase the offer to avoid a lawsuit. If the case goes to trial and you win, they could be ordered to pay substantially more. Of course, if you have a strong case, you might want to file a lawsuit anyway — we can advise you on this, but the decision is always yours based on whether you want to go through the litigation process.

In any case, a simple online calculator cannot account for every piece of evidence, nor does it account for the complex issues of comparative negligence.

The best way to get a realistic idea of how much an insurance company might offer you is to get in touch with an accident attorney and explain your accident and injuries. No reliable attorney will make you a guarantee or give you a specific figure — we know that there are too many factors to consider and that we are in a much better position to advise on the fairness of an offer after beginning conversations with the insurance company. However, we can talk to you about the cases we’ve won before and our previous experience negotiating with insurance companies on claims that are similar to yours.

If you’re wondering whether it’s worth consulting a personal injury attorney, using a settlement calculator can be a helpful way to verify if you could be entitled to a sizeable amount, but it will never be as reliable as picking up the phone and talking to an attorney who can apply their experience to the unique facts of your accident.

Patino Law Firm offers a free, no-obligation case review so you can see if you have a claim and understand your options and what to expect. You only pay us if we win your case, and we will never encourage you to settle for less than you are entitled to. Our McAllen and San Antonio-based personal injury attorney serves the Rio Grande Valley and Greater San Antonio.

Call 855-LAW-NINJA, submit a confidential contact form, or use our chat widget to book your case review and get personalized legal advice on your situation.

References

Texas Civil Practice and Remedies Code § 16.003 sets the two-year statute of limitations for personal injury claims in Texas.

The Labor Market & Career Information (LMCI) Department of the Texas Workforce Commission establishes the statewide mean annual wage of a construction laborer (SOC 47-2061) at $38,987.

 Texas Civil Practice and Remedies Code § 33.001 establishes Texas’s modified comparative fault system, and the fault cap preventing claimants from recovering compensation.

 Texas Transportation Code § 601.072 establishes the minimum requirements for motor vehicle liability insurance coverage.