How Prejudgment Interest Impacts Car Accident Settlements

When a person is involved in a car accident, the insurer for the responsible party may offer a settlement. If the victim doesn’t accept this settlement and is awarded a higher amount at a later time, they may be entitled to prejudgement interest. Many people don’t understand how prejudgment interest impacts car accident settlements. 

Prejudgment interest functions to account for the time value of money. When a person is entitled to compensation following an accident or injury, the insurer of the responsible party may attempt to delay paying the settlement. If they do, the victim may be entitled to this interest. However, to understand prejudgment interest, one must have additional information. 

What is Prejudgment Interest?

Prejudgment interest is the interest that accrues on a victim’s damages from the date they were injured until all parties reach a settlement or a court issues a judgment. Resolving the case immediately would prevent the victim from suffering additional financial loss. Because the insurer delayed the settlement, the victim should receive compensation for any funds they lost during negotiations or the trial. The victim receives these funds to compensate them for the time value of money. This remedy ensures the funds awarded are worth what they would have been immediately following the accident or injury. Prejudgment interest takes into consideration inflation and lost earning potential. 

While most jurisdictions permit prejudgment interest in personal injury cases, the rules governing this practice vary from one location to another. Some states require payment of this interest, but others allow judges to decide whether to award it. In most cases, the interest is only calculated on economic damages. 

Calculating Prejudgment Interest

Laws within the jurisdiction where the case is filed and the specifics of the case determine how the interest is calculated. In many areas, the statutory interest rate is applied to the amount of economic damages. This rate is often fixed and generally ranges from 5% to 10% annually. However, some areas tie the interest rate to a benchmark, such as the prime rate. Simple interest is typically applied in personal injury cases, although there may be instances where the interest is compounded. 

This interest is usually calculated from the accident date or the date the lawsuit is filed. When a judgment is entered or the settlement is finalized, interest stops accruing. The interest is added to the settlement before it is distributed to the plaintiff. 

How Prejudgment Interest Impacts Negotiations

Prejudgment interest plays a role in settlement negotiations. Plaintiffs are more inclined to hold out for fair compensation when they know the other party will be required to pay interest on the funds if they delay. For every day the other side delays, they receive interest. As a result, they are less likely to accept a lowball offer early in the process. 

Defendants are pressured to settle quickly. They know they will pay more if the victim is awarded a higher amount than the amount being offered. Insurers will often increase the settlement offer to avoid paying this interest. However, there is no guarantee they will do so. The insurer might choose to fight the settlement amount and prejudgment interest. They may attempt to obtain a lower interest rate or argue that the interest shouldn’t apply to specific damages. 

Prejudgment interest is a consideration in many personal injury cases. When both parties are aware that interest may be charged, they often adjust their negotiation strategies. Insurers are usually more willing to provide fair compensation, knowing that doing so could ultimately save them money. Victims often receive a fair settlement sooner, so both parties should evaluate the benefits and drawbacks of settling, taking into consideration prejudgment interest, to obtain the best outcome for all.