What Comes Out of an Injury Settlement

A settlement figure is not the same as the amount you take home, and the difference is often a surprise. This guide explains, for the personal injury cases we handle, what may be paid out of a settlement or judgment before the rest reaches you, the California rules that limit each item, and how to see the numbers before you sign.

The aim is not to discourage anyone from settling. It is to make sure the offer is judged by what you will actually receive, which is the number that has to cover your future care and lost income.

How is a settlement paid out, step by step?

The settlement is agreed. The insurer and you agree on a total amount, usually after the medical picture is clear.
You sign a release. The release ends the claim against the people it names. Read it closely, since its wording decides what you give up (Civil Code 1542 sets the rule for general releases and unknown claims).
Lien holders are identified. Anyone who paid for your treatment and has a legal right to be repaid is listed: a hospital that gave notice, your health plan, Medi-Cal, or a workers' compensation insurer.
Lien amounts are checked against the legal limits. Several of these claims are capped by statute, as the table below shows, and many can be negotiated.
The fee and costs are calculated under the written agreement. California requires a contingency fee agreement to state how costs affect the fee and your recovery (Business and Professions Code 6147).
You receive a written breakdown and the balance. Ask for a settlement statement that shows every amount paid out and to whom.

What can come out, and what limits apply?

Item	What the law says	Source
Attorney's fee and case costs	Set by a written, signed agreement that states the fee rate and how costs affect the fee and your recovery; for most cases the fee is not set by law and is negotiable	Business and Professions Code 6147
Hospital lien	A hospital that treated you may claim a lien on the recovery if it gives proper written notice before payment; payers must honor it out of no more than 50 percent of the money due after prior liens	Civil Code 3045.1, 3045.3 and 3045.4
Health plan or insurer lien	Limited to what the plan actually paid; if you had a lawyer, no more than one-third of what you receive, or one-half if you did not; reduced for your share of fault and for a share of the fees and costs	Civil Code 3040
Medi-Cal	The settlement is not final until the State gets notice and a chance to claim; its recovery is limited to the part of the settlement that pays for medical care	Welfare and Institutions Code 14124.76
Workers' compensation	An employer or its insurer that paid benefits can be reimbursed from a recovery against a third party, after litigation expenses and attorney's fees ordered by the court	Labor Code 3856
Income tax	A settlement for personal physical injuries is generally not taxable, except amounts for medical costs you deducted earlier; interest and punitive damages are taxable	IRS Publication 4345

How do hospital liens work in California?

A licensed hospital that provides emergency and ongoing care to someone hurt by another person's wrongful act has a lien on the damages that person recovers (Civil Code 3045.1). The lien only works if the hospital sends a written notice, by registered mail, to the people alleged to be liable before they pay you. The notice must give your name, the date of the accident, the hospital and the amount it claims as reasonable charges (Civil Code 3045.3).

Once a payer has that notice, it must pay the hospital's lien out of no more than 50 percent of the money due after any earlier liens, or become liable to the hospital itself (Civil Code 3045.4). Hospital liens do not apply to injuries covered by workers' compensation.

How much can my health plan take back?

If your health plan or health insurer paid for treatment and its contract gives it a lien, Civil Code 3040 limits it. For care not paid on a capitated basis, the lien is limited to what the plan actually paid the treating provider. On top of that, if you had a lawyer, the lien cannot exceed one-third of what you receive under the settlement or judgment; if you did not, it cannot exceed one-half.

The same section reduces the lien when a judge, jury or arbitrator found you partly at fault, by the same percentage your recovery was reduced, and it reduces the lien pro rata for your reasonable attorney's fees and costs under the common fund doctrine. Section 3040 does not cover Medi-Cal, hospital liens or workers' compensation, and plans that are governed by federal law may follow different rules.

What happens if Medi-Cal paid for my care?

When Medi-Cal paid for treatment of an injury someone else caused, the State has an interest in the recovery. A settlement, judgment or award is not final or satisfied until the Director of Health Care Services gets notice and a reasonable opportunity to perfect and satisfy the lien (Welfare and Institutions Code 14124.76). If you file a lawsuit or claim, written notice to the Director is due within 30 calendar days of filing (Welfare and Institutions Code 14124.73).

The State can recover only from the part of the settlement that represents payment for medical care. If the State and the injured person cannot agree on that part in advance, the statute sends the question to a court. Our guide on who pays medical bills while a car accident claim is pending explains how these payers come into a case in the first place.

What changes the answer?

Whether you had a lawyer. The health plan lien cap is one-third of your recovery with a lawyer and one-half without one (Civil Code 3040(c) and (d)).

Your share of fault. If you were found partly at fault, a health plan's lien is reduced by the same percentage (Civil Code 3040(e)). Our guide on who pays when several drivers caused a crash explains how fault percentages work.

The injury happened at work. Workers' compensation is reimbursed under its own rules (Labor Code 3856), and Civil Code 3040 does not apply to that lien. See workers' comp and a claim against the other driver.

The injured person is a minor or has a disability. A court must approve the settlement (Probate Code 3500), and unless it approved the fee agreement in advance, it applies a reasonable fee standard to the attorney's fees paid from the child's money (California Rules of Court, rule 7.955). Our guide on injury claims for children covers that hearing.

A family member has died. In a wrongful death case, the money is shared among the heirs, and liens and fees come out before it is divided. Read how a wrongful death settlement is divided.

Part of the award is interest or punitive damages. Those parts are generally taxable even when the rest is not (IRS Publication 4345).

What could this look like? An example

For example, imagine a $60,000 settlement for a cyclist hurt by a driver in Santa Rosa. Her health plan paid $9,000 for treatment, and the hospital that treated her in the emergency room sent a lien notice for an unpaid balance of $4,000.

The health plan's lien starts at the $9,000 it actually paid, which is well under one-third of her recovery, and is then reduced by a share of the fees and costs under the common fund rule in Civil Code 3040(f). The hospital's $4,000 lien is within the 50 percent limit and is paid from the settlement, though the amount can still be discussed. The fee and costs come out as her written agreement sets them, and she receives a statement listing every payment before the balance is sent to her. Because the money is for a physical injury and she took no medical deduction for it, none of it is taxable income under IRS Publication 4345. This example is made up to show how the rules fit together; it says nothing about any real case.

What mistakes do people make with settlement money?

Judging an offer by the gross number instead of what will be left after liens, fees and costs.
Ignoring letters from a health plan or lien company, which then shows up at the end and delays payment.
Not telling Medi-Cal about the claim, which can keep a settlement from becoming final.
Assuming a lien must be paid in full, when the statute caps it or it can be negotiated.
Paying a medical bill twice: once directly, and again through a lien on the settlement.
Signing a release before the lien amounts are known.

What should I do this week?

List every source that paid for your care: health plan, Medi-Cal, Medicare, auto Med-Pay, workers' compensation.
Gather every letter that mentions a lien, a "right of recovery" or reimbursement, and note who sent it.
Ask each provider for an itemized bill and a statement of what has been paid.
Find your health plan card and member handbook, which say how the plan handles injury claims.
Read your fee agreement again, especially the part about costs.
Read our guide on how pain and suffering is valued, since that part of an award is not tied to any bill.

Frequently asked questions

Can a lien be reduced?

Often, yes. Civil Code 3040 caps health plan liens and reduces them for fault and for a share of fees and costs, and the Medi-Cal claim is limited to the medical part of the settlement (Welfare and Institutions Code 14124.76). Other liens can be negotiated with the holder.

Do I have to pay my medical bills out of the settlement?

Bills that remain unpaid, and valid liens from those who paid, are usually resolved from the settlement before the balance is released. That is why it helps to know every amount owed before agreeing to a number.

Is my injury settlement taxable?

Under IRS Publication 4345, a settlement for personal physical injuries or physical sickness is generally not taxable, unless it repays medical costs you deducted in an earlier year. Interest and punitive damages are taxable. Ask a tax professional about your own situation.

What happens if the hospital never sent a lien notice?

Under Civil Code 3045.3, a hospital lien is not effective unless the written notice was delivered or sent by registered mail before payment. The hospital may still have a bill you owe, but not a lien on the settlement.

How long after a settlement do I get paid?

It depends on how quickly the release is signed, the insurer sends payment, and the liens are confirmed. Cases with Medi-Cal, a minor's court approval, or a workers' compensation lien usually take longer.

Where can I find free or low-cost legal help with other money problems?

Our article on legal services for low-income families in California lists organizations that can help.

If you have an offer and want to know what it would leave you with, contact Young Law Group today at (707) 343-0556 or through our contact page for a free consultation.

What comes out of a personal injury settlement in California before I get paid?