Settlement demand letter: what goes in it and how the numbers are built

A settlement demand letter is a written request, usually sent to the at-fault party's insurer, that sets out what happened, why that party is responsible, what the injury has cost you, and the amount you will accept to settle the claim. In personal injury cases it is normally the document that opens formal negotiation. A good one rests on records: medical bills, proof of lost income and evidence of how the injury has affected daily life.

Most demand letters are prepared by an attorney, but the figures inside them come from the injured person's own paperwork. This guide looks at the letter from the numbers side: what each damages category needs to prove it, how the demand amount relates to what you will actually receive, and the tax, lien and payment questions worth answering before the letter goes out. It does not give a formula for what a claim is worth, because no reliable one exists.

When a demand letter is sent

Timing matters more than many people expect. Insurers generally value a claim on the basis of known costs, so sending a demand before the medical picture is clear can leave future treatment out of the figure.

Attorneys commonly wait until the injured person has reached maximum medical improvement, the point at which a doctor considers the condition stable, or until future care can be estimated with reasonable confidence. Against that, every state has a filing deadline (statute of limitations) for injury claims, and some deadlines are short. A demand letter does not usually stop that clock. If the deadline is approaching, a lawsuit may need to be filed even while negotiation continues.

Once the letter is sent, the insurer's review, any counteroffers and the paperwork after agreement all add time before money is paid.

What a settlement demand letter usually contains

The structure varies by attorney and by claim, but most letters cover the same ground.

Section	What it does
Introduction	Identifies the claimant, the insured, the claim number and the date of the incident
Facts and liability	Explains how the incident happened and why the insured is legally responsible, with supporting evidence
Injuries and treatment	Describes the diagnosis, treatment history, current condition and expected future care
Economic damages	Itemises medical expenses, lost earnings, out-of-pocket costs and future costs
Non-economic damages	Explains pain, suffering, loss of enjoyment of life and similar harm
Demand amount	States the figure the claimant will accept
Response deadline	Sets a date by which the insurer should reply
Enclosures	Lists the medical records, bills, wage evidence and other documents attached

The facts and liability section is often where an insurer pushes back first. If the other side may argue that you were partly at fault, your state's comparative or contributory negligence rules will affect value, and the letter usually addresses that point directly rather than leaving it for the insurer to raise.

Documenting economic damages

This is the part of the letter where an accountant's habits help. Every figure should trace back to a document the insurer can check.

Medical expenses

List each provider, the dates of service and the amount billed. Your attorney will also want to know what was actually paid and by whom, because health insurers, Medicare, Medicaid and some employer plans may have a right to be repaid from the settlement. State rules differ on whether the billed amount or the paid amount is the measure of damages, so keep both figures.

Lost earnings

The evidence depends on how you earn a living.

• Employees: pay stubs from before and after the injury, a letter from your employer confirming time missed and your rate of pay, and recent W-2s.
• Self-employed people: recent tax returns with Schedule C or partnership and S corporation returns, invoices or contracts that were lost or delayed, and bank records showing the drop in income. A one-year comparison is weaker than several years showing a pattern.
• Lost earning capacity: if the injury affects future work, a physician's opinion on restrictions and, in larger cases, a vocational or economic expert's report.

Keep a simple schedule that ties each lost-income figure to its source document. It saves time when the adjuster asks how a number was reached.

Out-of-pocket and future costs

Mileage to appointments, prescriptions, equipment, home modifications and paid help around the house all count if they are documented. Future costs, such as later surgery or ongoing therapy, normally need a medical opinion behind them. The personal injury settlement guide explains the main damages categories in more detail.

How the demand amount relates to what you receive

The demand figure is a negotiating position, not an estimate of your net recovery. Three gaps sit between them.

First, the insurer will almost always counter below the demand, and the final settlement is usually somewhere between the two. Second, the policy limit of the at-fault party often caps what the insurer will pay, whatever the damages. Third, fees, costs and liens come out of the gross settlement before you receive anything.

Here is an illustrative example of that last step. The figures are invented to show the arithmetic and do not represent a typical case; outcomes, fee percentages and liens vary widely, so verify every figure with your attorney before relying on it.

Item	Amount
Illustrative gross settlement	$90,000
Attorney fee (assumed one-third under the fee agreement)	−$30,000
Case costs (records, filing, expert fees)	−$2,500
Health insurer lien, after negotiation	−$9,000
Outstanding medical provider balance	−$3,500
Illustrative net to claimant	$45,000

Seeing this calculation before the demand is sent is useful. It shows what level of settlement would actually cover your losses, and it highlights liens that may be negotiable. Your fee agreement sets the attorney's share, and our guide to the medical lien on settlement explains how liens are handled.

Policy limits demands

Where damages clearly exceed the insurance available, attorneys sometimes send a policy limits demand, offering to settle for the full limit within a set time. In many states, an insurer that unreasonably rejects such an offer can face exposure beyond the policy limit. The rules on what makes a time-limited demand valid differ significantly by state, and some states set formal requirements. This is a legal judgement for your attorney.

Tax points to settle before the demand goes out

The demand letter does not decide the tax treatment, but it is the first written description of what the money is for, and the settlement agreement usually follows its framing.

Under IRC §104(a)(2), damages received on account of personal physical injuries or physical sickness are generally excluded from federal gross income. That covers medical costs, lost wages and pain and suffering that flow from the physical injury. Some parts of a recovery are treated differently:

• Punitive damages are generally taxable.
• Interest, including pre- or post-judgment interest, is taxable.
• Emotional distress without a physical injury is generally taxable, except to the extent it reimburses medical care for that distress.
• Medical expenses you previously deducted may be taxable when reimbursed.

If a claim mixes physical injury with other claims, such as employment or property claims, how the settlement is allocated between them matters. The IRS looks at the nature of the claim the payment was made to settle, and it is easier to support an allocation when the underlying documents describe the claim consistently. See are lawsuit settlements taxable for a fuller breakdown.

Thinking about a structured settlement early

If the claim is large, or if the injured person is a minor or will need care for many years, a structured settlement may be worth considering. Part of the recovery is paid over time through an annuity, and for physical injury claims those periodic payments generally keep the §104(a)(2) exclusion.

The key timing point is that a structure has to be agreed before the release is signed. Once you have received or have the right to receive a lump sum, it is too late to make it tax-free periodic payments under a structure. Raising it during negotiation, rather than after agreement, keeps the option open. The structured settlement vs lump sum guide compares the two.

Medicare beneficiaries, and people expected to become Medicare beneficiaries soon, should also ask their attorney whether Medicare's interests need to be considered in the settlement.

Common mistakes in demand letters

• Sending the demand before treatment is complete, leaving future costs out
• Listing billed medical charges without noting what has been paid and by whom
• Claiming lost income without tax returns or employer confirmation
• Missing a lien, which then surfaces after the settlement is agreed
• Overlooking the statute of limitations while waiting for a response
• Describing the claim loosely, making a later tax allocation harder to support

Frequently asked questions

Do I need a lawyer to write a settlement demand letter?

You are not legally required to have one, and some small claims are settled directly with insurers. For anything involving significant injury, disputed liability, liens or a minor, an attorney's experience with valuation and state rules usually matters. Many work on a contingency fee.

How much should I ask for in a demand letter?

There is no fixed formula. The figure is based on documented economic losses, the severity and duration of the injury, liability strength, comparable outcomes your attorney knows of, and the insurance available. It is normally set above the amount you would accept, to leave room to negotiate.

How long does an insurer take to respond to a demand letter?

It varies. The letter usually sets a deadline, and some states have rules on how promptly insurers must acknowledge and handle claims. Complex claims and larger demands often take longer, and the first response is commonly a counteroffer.

Is the money in a settlement demand taxable?

Damages for personal physical injuries are generally excluded from federal income under IRC §104(a)(2). Punitive damages, interest and some other parts of a recovery are taxable. The settlement agreement and the nature of the underlying claim drive the treatment, so get tax advice before signing.

This article is general education, not legal, tax or financial advice. Injury law, filing deadlines and lien rules vary by state, so speak to a licensed attorney and a tax professional about your own claim.