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Attorneys, watch out for release language that could jeopardize a settlement

April 4, 2017 by Steven M. Gursten

If the insurance company insists on some terms in settlement releases, it can lead to your client paying unexpected taxes or filing a legal malpractice claim

Settlement
When you need to go to court to fight language in a settlement agreement that never got your or your client’s approval, Michigan case law is on your side.

Here’s an all-too-common scenario. You are a Michigan auto accident lawyer and your no-fault first party or personal injury case has just reached a settlement. The terms are negotiated to the parties’ satisfaction. All you need now is the release.

But once you receive the release from opposing counsel — all neat and tidy and ready for your client’s signature so your client can finally receive his money — something seems off-kilter.

Namely, the defense attorney has added language in the agreement that could cost you and your client much more than for what you bargained for.

By stating that the settlement is confidential — something neither you nor your client agreed to previously — the defense attorney has created potentially serious tax implications for your client.

You’ve worked too hard to get your client the justice he or she deserves with a full and fair settlement for his injuries. The last thing you want is to let your client be bullied by an insurer that’s instructed its lawyer to demand terms into the agreement that were never bargained for.

Non-consenting language in settlement agreement

When you need to go to court to fight language in a settlement agreement that never got your or your client’s approval, Michigan case law is on your side.

The Court of Appeals, in its published opinion Power Press Sales Co. v. MSI Battle Creek Stamping, 238 Mich. App. 173, 176 (1999), ruled that an indemnification clause is a material term of a contract to which there must be mutual acceptance. The inclusion of such a clause into an agreement when the parties did not previously approve it, constitutes a material alteration of the original agreement.

Under Mikonczyk v. Detroit Newspapers, Inc., 238 Mich App 347 (1999), a party’s counsel cannot unilaterally add terms to the agreement. Further, it’s a sanctionable offense to refuse to perform upon a settlement agreement unless the other party consents, per Wozniak v. Lyons, a 2002 unpublished Court of Appeals ruling.

Insurer demanding confidentiality? Remember settlement with ‘The Worm’

Back when Dennis Rodman was still in the NBA, the man known as “The Worm” kicked cameraman Eugene Amos in the groin during a 1997 game. Rodman settled Amos’ personal injury claim pre-suit for $200,000, but included a confidentially provision in the agreement regarding the settlement amount.

Amos didn’t claim his settlement funds on his tax return for that year, as he relied on law that said personal injury settlements weren’t taxable. The IRS didn’t agree, arguing that the $200,000 really was earmarked for the confidentiality provision more than his injuries, so the funds should’ve been claimed as income. Because the tax court couldn’t find any “sufficient and clearly stated consideration” in the agreement, it could assign any “just or fair amount.”

The tax court eventually determined that Amos’ settlement was to be allocated as $120,000 for the personal injuries, which was exempt from taxation, and $80,000 for the confidentiality provision, which was taxable.

Get that settlement in writing — and read it again and again

Last year, I wrote about how a settlement in writing is binding under Michigan Court Rule 2.507(G). This court rule is an important protection for not just auto accident victims, but also the auto lawyers who represent them.

And when new terms such as confidentiality are demanded, or all of a sudden the agreement contains overly broad indemnification language that was never bargained or negotiated, it’s up to you to make sure the right objections and subsequent adjustments are made.

The mistake that so many Michigan personal injury lawyers make in these circumstances is rushing to get your client a settlement and agreeing to release terms that were never part of the underlying settlement. It is just as important to protect your client at the end of the case, even after a settlement is reached, is just as important as during the case.

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