What Happens When You Violate an NDA in a Personal Injury Case?

An in-depth look at the consequences of violating the terms of a non-disclosure agreement in a personal injury settlement.

After many months of depositions, interrogatories, document requests, court appearances, and negotiations, your attorney has finally reached a settlement of your personal injury case with the other side's insurance company.

When the settlement paperwork arrives, however, you are dismayed to learn that the insurance company -- as a condition of the settlement -- wants you to agree to maintain the confidentiality of the settlement terms. Perhaps even more disturbing, the settlement agreement provides that in the event you violate the confidentiality requirement of the non-disclosure agreement, ("NDA"), you will suffer penalties that include repayment of all or a substantial amount of the settlement amount.

Is this really how it works? Read on to learn more.

NDAs and Personal Injury Settlements

First things first: Can the insurance company really compel you not to disclose the terms of your settlement? After all, it's not as though you can divulge some secret formula that gives the insurance company a competitive advantage in the industry, and you're unlikely to have any "dirt" to share with others that could harm the insurance company's reputation.

Rather, "disclosure" in the context of most settlements means simply telling a third party that you received the sum of X dollars from the other side's insurance company, as compensation for your personal injury damages (your injuries, expenses, and other losses). So why would the insurance company be allowed to silence you and then penalize you for speaking?

The answer lies in the fact that your agreement to enter into an NDA will almost always be viewed by the courts as an arms-length contractual undertaking that will be enforced as written, especially when you have been represented by legal counsel (your own personal injury attorney) in the negotiation of your settlement agreement.

Penalties for Violating an NDA

Common penalty provisions contained in NDAs often state that if the confidentiality agreement is violated, the violating party (the injured person in a personal injury settlement agreement) must either:

  • return the entire settlement amount, or
  • return a predetermined sum less than the full settlement amount, known as "liquidated damages".

In addition, NDAs typically provide that the violating party's failure to pay back the required sum upon demand will subject him or her to financial responsibility for the costs and attorney's fees incurred by the insurance company to recover this sum in further legal proceedings.

It's easy to see how the prohibited disclosure of the terms of your settlement to a third party -- regardless of its innocent nature or its failure to cause any real harm to the insurance company -- can end up costing you all of your settlement and then some.

How to Protect Yourself

While the consequences of violating an NDA in a personal injury case can be quite severe, there are some things you can do to protect yourself from liability and to soften the blow if a breach occurs.

First, if the insurance company is insisting on an NDA as part of the settlement, your attorney should attempt to negotiate additional consideration for including such a clause in your settlement agreement. For example, if you are settling the case for $50,000, your attorney might seek an extra $5,000 for the NDA.

Second, your attorney should try to limit the agreed-upon damages for violation of the NDA to a number that does not greatly exceed the extra compensation paid for the NDA as part of the settlement -- so if you agreed to the NDA in exchange for an additional $5,000, perhaps the liquidated damages clause would dictate a $7,500 penalty for violation. Under no circumstances should your attorney agree that violation of the NDA be penalized by return of the full settlement amount.

Third, the NDA should contain an exception that allows you to disclose the terms of the settlement to your attorneys, accountants, immediate family members, and others who might have a legitimate need to know.

And lastly, it is always a good idea to include a sentence in the NDA that specifies what you are permitted to tell third parties about your settlement when they inquire, for example: "The parties have mutually agreed to dismiss the case on terms deemed to be in their best interests." In this way, you can let people know that your case was satisfactorily resolved without having to worry that telling them so will subject you to financial penalties.

Bottom line: Bad things can happen when you violate an NDA, but there are ways to protect yourself from significant harm if you (and your attorney) address the potential pitfalls in a proactive manner.

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