Was Sued, Guy Said I Hit Their Car From Behind But There Was Never Any Accident

Guy stopped me, said I hit him, asked me for cash, I denied and told him I’ll wait for police... long story but I provided videos and images that showed that there wasn’t any scratches to either car, insurance denied their claim and so those fraudsters filed a personal injury claim. I got a letter stating that my insurance wants to offer a “compromised offer up to 5 k to attempt early resolution” because this guy failed to provide evidence of said serious/perm injury. I‘ve never been involved with a lawsuit but I’m shocked that there’s a possibility of this guy actually getting money for something so fake! I read that it’s better to just settle in most cases (even with likelihood of insurance premium increases) is this the case? It angers me because there was never any accident. I wanted to file a report with the insurance fraud line but they said the case has to have actually gone to trial for me to file a report.