by John Darer® CLU ChFC MSSC CeFT 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
Case where the Defendant or Insurer will not pre-fund structured settlements present unique challenges
Where there is a considerable time between negotiation of settlement terms, court approval and disbursement of funds
Examples:
- City of New York, up to 90 days from all documents in date
- New York Liquidation Bureau, 6-9months from all documents
- Nassau County Surrogates Court (NY)
- 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.
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
Payment date slide language is 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, 2027 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, 2026. If the actual funding occurs on December 15, 2026 (14 days late) , then in accordance with the fixed and determinable formula, his payments begin on January 19, 2027. 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 foster 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 a 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.
One consequence of not having considered and adopting pre-funding guidelines is the constant need to resubmit documents for review, with no guarantee that those reviews will be prompt. Such delays are more than just inconvenient; they needlessly create dissatisfaction among structured settlement stakeholders, and impair the funding carriers ability to benefit from using structured settlements. It’s an issue that needs to be addressed..
Let us consider a potential scenario. The current stance of the Defendant’s insurer is that it will not engage in pre-funding.
- I do not imply that anyone’s business decision is unjustifiable; it is a matter of personal choice, and each entity is entitled to make its own decisions. However, in order to utilize structured settlements effectively, it is essential to contemplate flexibility in pre-funding, provided that safeguards are established to ensure a refund of the pre-fund in the event that the settlement is not approved by the court.
- The imposition of tack on lock in fees when lock-in periods exceeding 90 days to 6 months or longer (depending on the annuity issuer), incurs lock-in fees. Furthermore, this process necessitates the execution of every document before funding and the addition of an extended timeframe, resulting in an unreasonable “date slide.” I was taken aback when the annuity issuer was unable to provide a timeline for their legal team’s review—an expectation they should have reasonably anticipated.
- I understand how frustrating this situation can be. Thankfully, MetLife stepped in to assist, but it’s disheartening to see the other carrier, whom I truly value, missing out on this opportunity.
- Moving forward, we feel it’s important to pause all dealings on such cases until they can enhance their processes. In the meantime, perhaps the uplifting spirit of Marcia Griffiths and her hit “The Electric Slide” from the 1980s can motivate them to embrace positive change!