by John Darer® CLU ChFC MSSC RSP CLTC
Although not yet legally obligated to pay consideration for the settlement of the legal case against them or their insured, some insurers, or self-insured defendants, elect to pre-fund structured settlements prior to receiving a fully executed release. Those that do greatly simplify matters in a wide variety of cases such as:
- Structured settlements involving minors or incompetents which require court approval, where a court approval date cannot be reasonably predicted and the court needs to consider the actual benefits to be received by the minor.
- Structured settlements from a wrongful death case requiring court approval, where a court approval date cannot be easily predicted, and the court and guardian ad litem needs to consider the actual benefits to be received by a minor or incompetent. In one extraordinary case that I was involved with, the structure was pre-funded in or about 2009, but for various reasons, final Surrogate approval in Kings County New York was not obtained until March 2013! Setting aside that the Court and guardian ad litem needed actual benefits to review, had the structure been funded in 2013, the minor payees would have collectively received about $160,000 less!
- Structured settlements from a case that also involves the creation of a special needs trust or supplemental needs trust
- Structured settlements in a volatile interest rate environment where there is a need to protect the rate.
- Any combination of the above
Cases where the defendant or insurer will not pre-fund the structured settlement present some unique challenges
Examples:
- City of New York, up to 90 days from all documents in date
- New York Liquidation Bureau, 6-9months from all documents in
- Many self-insured defendants
- Major insurers such as GEICO, State Farm
- United States Department of Justice
- Insurers who don't regularly do structured settlements,who do not have a trusting relationship with a credentialed structured settlement consultant
- Attorneys who don't regularly do structured settlements, who do not have a trusting relationship with a credentialed structured settlement consultant, who influence whether or not a client pre-funds a structure
Combine that with
- Structured settlements involving minors which require court approval
- Structured settlements from a wrongful death case involving court approval
- Cases where a structured settlement has been determined but the case is being held up by factors unrelated or tangential to the structure, such as lien negotiations.
WHAT ARE THE POTENTIAL SOLUTIONS?
Pre-Fund Refund Letter
Most life insurance companies that issue structured settlement annuities will issue a "contingency refund letter" which states that the annuity issuer will refund premium if the court doesn't approve the settlement or, in some cases, if other settlement conditions are not satisfied. This removes the risk to the Defendant or insurer.
Extended Lock-ins
One can make a best estimate of when all the requirements will be satisfied for release of the funds necessary to fund the structured settlement. The drawback is that is just an estimate and failing to address the contingency of an earlier or later funding can be problematic. In some cases it could result in lock in fees, or additional lock in fees, or even a possibly intolerable requote altogether.
Floating Benefits
An offshoot of the way the payments for treasury funded structured settlements and variable structured settlements are expressed in settlement documents. Benefits are defined as to date , mode and duration, but benefit amounts "float" based on the purchase date. Once the structured settlement funding amount is delivered to the qualified assignment company, if assigned, or the annuity issuer, if unassigned the benefit amounts become fixed. In a downward interest rate environment this would be the least popular option.
Payment Date Slide Language in the Release and Qualified Assignment
A provision in the Settlement Agreement and Release and the qualified assignment which serves to preserve locked in benefit amounts by rolling the payment dates forward or backward in relation to the time lapse between the actual and anticipated funding dates.
Example
Clarence Over, a 45 year old pilot, is to receive $7,500 per month starting January 5, 2017 for the next 25 years, and his lifetime thereafter, as damages for physical sickness sustained from ingesting bad fish in an airplane meal. No special needs. The structure is locked in with an anticipated funding date of December 1. If the actual funding occurs on December 15 (14 days late) , then in accordance with the fixed and determinable formula, his payments begin on January 19, 2014. There is no change in the benefit amount.
Generally when such language is used, the parties expressly authorize the annuity issuer to make the date adjustment and include it in the annuity contract. At least one of the carriers issues a letter with the delivery of the annuity and fully executed qualified assignment agreement to memorialize the changes and tie them back to the express authorization in the documents.
It really is heads up play. One of the goals of our industry should be to develop processes that make sense and foment a belief that structured settlements are no more work, or a de minimis amount more work, than a cash settlement.
While companies in our industry have made efforts to streamline documentation through cookie cutter documentation, some cookie cutters are not flexible enough to accommodate a wide variety of common case scenarios. Frankly such scenarios should have been anticipated by canvassing brokers and been considered when the cookie cutter documents were created.
There certainly needs to be more consistency among carriers in dealing with this common issues that become increasingly likely on larger cases where diversification of annuity issuers is prudent.
The unfortunate byproduct of the lack of anticipation is that this necessitates having to repeatedly submit documents for review and reviews may not be timely. These delays cause dissatisfaction for structured settlement stakeholders and need to be improved upon. In one such recent case, , where an insurer would not pre-fund and required all documents executed to fund, thus needing a "date slide", I was told that the annuity issuer could not give me a timeframe when their legal department would have the time to deal with the review (of something that could be have been easily anticipated). In my opinion that is simply unacceptable. Fortunately in that case MetLife swooped in and rescued the day. Unfortunately for the other carrier, which I highly respect but am disappointed with, they face a lost business opportunity and going forward, all of our business involving cases of the above types until they improve their processes. I have spoken with one of their representatives and suggest they have a broker advisory committee. In the meantime perhaps the inspiration can be drawn from 1980's crooner Marcia Griffiths' "The Electric Slide" to fire them up.