Is Confidentiality A Good Idea In An Injury Settlement?

Settling an injury case is often beneficial for both the plaintiff and the defendant. This can create public relations problems, though, for defendants who have public profiles, such as celebrities, medical organizations, and recognizable corporate brands. To protect their interests, these sorts of defendants sometimes try to sweeten the pot by offering extra money in exchange for the plaintiffs accepting confidentiality agreements. Such agreements often restrict plaintiffs from talking about what happened and how much the settlement was for.

Your personal injury lawyer has to present you with every settlement offer, even one that includes confidentiality terms. Let's take a look at why you may or may not want to enter into a confidentiality agreement as part of a settlement.

More Money Means More Problems

Some parts of an injury settlement are taxable while others aren't. Under IRS regulations, physical damages are never taxable. Conversely, punitive damages and those arising from breaches of contract are taxed. If damages arose purely from a claim of emotional damages, that's also taxable.

A confidentiality agreement has nothing to do with you being compensated for physical injuries. That means the taxman wants his piece of your compensation for keeping quiet. Where this gets sketchy is when a confidentiality agreement is included in a settlement without a clear declaration of how much is being paid just for confidentiality. In the absence of a clear partition between injuries money and confidentiality money, the IRS is free, within reason, to tax whatever amount it thinks was paid for confidentiality.

There was a Tax Court case involving an assault by an NBA player against a photographer. The player paid $250,000 in compensation to the photographer, and the settlement included a confidentiality agreement. Physical damages weren't separated from confidentiality. The IRS eventually collected taxes against $80,000 of compensation that it said was attributable to the confidentiality agreement.

Potential Penalties

One question you'll want to ask is what price are you willing to pay for just mentioning something that did happen? For a confidentiality agreement to be enforceable, it has to include penalties.

As with other elements of injury cases, negotiation is common on confidentiality. A company may be comfortable letting you talk with family and friends about the case, but they may prevent you from posting about it on social media or talking with reporters. You and your personal injury lawyer need to read the terms closely and figure out whether you can live with them.