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					Structured Kickbacks:
The Fraud Within
Structured Settlements
                         BY BOB FOIS           as a “service fee” or as an “administrative     money, while providing a plaintiff with a
                                               fee” is fraudulent but the laws don’t have      benefit worth more than the defendant
                 n a case where legisla-       the teeth to address this deception.            is spending by virtue of the tax break
                 tion has failed to fend off        Jacobson observed that many struc-         provided by the Internal Revenue Code.
                 internal fraud, the struc-    tured settlement companies are unable           Structured settlements can be funded
                 tured settlement industry     to make all of the representations of fact      with United States Treasury Bonds, annu-
                 is struggling with veiled     contained in CCI’s CORA certificate, an         ities or a blend of the two. He pointed
                 “rebating” in the guise of    illustration of how widespread these            out, however, that tighter regulation of
commissions and/or numerical manip-            veiled practices are throughout the struc-      the investments and reserves within the
ulation.                                       tured settlement business.                      life insurance industry over the last 5 to 7
    The sea of controversy finally                  Bridge Between Demand and Offer            years has raised confidence in annuities
prompted one settlement firm to self-               As a technique used to settle bodily       to a point where lower yielding T-Bonds
regulate itself more than two years ago.       injury cases for more than two decades,         are simply no longer utilized in these
    Martin Jacobson, vice president and        structured settlements have generated           settlements. Jacobson said, “The public’s
general counsel at Creative Capital, Inc.,     annual premiums in the range of $5-6            confidence in the strength of the life
(CCI) a nationwide structured settlement       billion for 25-30 firms with approximately      insurance industry is clearly justified.”
consulting company, explained that             500 agents nationwide.                               Jacobson noted that it had been
despite legal and regulatory prohibitions           “Structures can help bridge a gap          common knowledge that many struc-
on the state level to prevent rebating,        between plaintiff’s demand and defen-           tured settlement brokers have been
existing laws are being ignored.               dant’s offer,” noted Jacobson. “Structured      paying part of their commissions to their
    “If you are an attorney, you cannot        settlements can provide plaintiff with an       casualty insurer clients for years.
close your eyes to abuses which some           income stream that can neither be                    Such arrangements, although tied to a
claim are being perpetrated every day,”        squandered nor outlived.”                       percentage of commissions earned by
said Jacobson.                                      Jacobson said structured settlements       the broker, have been called service fee
    Structured settlements of bodily injury    offer advantages to both plaintiffs and         or administrative fee arrangements,
claims offer tax-free payments providing       defendants. A structured settlement             explained Jeffry Borow, CCI’s president,
a defendant with savings since plaintiffs      shields both the payment and interest           who warned that it was in the best
receive a benefit worth more than what         earned from taxation, while also pro-           interest of all honest structured settle-
the defendant is spending. But Jacobson
                                               viding such benefits as absence of invest-      ment brokers to expose this inequity.
warns the present system is fraught with
                                               ment risk, management-free income and                "There are defense oriented brokers
                                               flexibility in structured payments to fit       such as CCI who don't play funny games
    CCI has developed its own legal
                                               individual needs.                               with the numbers and give both sides a
instrument, its Certificate Of Reliability
                                                    Jacobson noted that it should also         square deal,” added Borow. “It would be
and Assurances (“CORA”) to assure
                                               provide protection of the plaintiff’s funds     a shame if CCI and other honest brokers
clients, under oath, that none of the
                                               against fraud and greed. Though such a          kept quiet just as the rebating scandal
financial abuses in manipulating awards
                                               settlement results in a larger payment          became public knowledge.”
to plaintiffs have been or will be taking
                                               to the plaintiff-victim, insurers don’t incur        CCI's stated position, however, is that
                                               the costs associated with an immediate          such commission/kickback arrange-
    Jacobson complained that a
                                               lump sum payout. Jacobson explained             ments amount to transparent and feeble
common practice of labeling the rebate
                                               that these settlements save a defendant         attempts to thwart the anti-rebating laws
Structured                                      placing the annuity to the casualty com-
                                                pany paying the premium, amounts to
                                                the payment of a rebate.
                                                                                              mission is being returned to the casu-
                                                                                              alty insurer.

Kickbacks:                                          Labeling the rebate as a “service fee”
                                                or as an “administrative fee” is legally
                                                                                                  Jacobson said this omission hides a
                                                                                              reduction of the true cost.
                                                                                                  “Perhaps defense counsel does not
The Fraud                                       ineffective, he observed. Paying the
                                                rebate to a subsidiary of the carrier is
                                                                                              know that a rebate is being paid. Then
                                                                                              the misrepresentation is unintentional,
Within                                          also improper.
                                                    “Remember, if it looks like a duck,
                                                                                              but it is a misrepresentation nonethe-
                                                                                              less,” he said, adding that serious ques-
Structured                                      waddles like a duck, and quacks like a
                                                duck, it is a duck, regardless of what
                                                                                              tions should be raised by client and
                                                someone tries to convince you it is,”
                                                added Jacobson.
                                                                                                  Should defense counsel have
                                                                                              inquired? Did defense counsel turn a
                                                    Approximately 14 years ago, the           blind eye on a practice he or she sus-
                                                National Structured Trade Association         pected was occurring? Does the claim
on the books in most states. It devel-          (NSSTA) commissioned one of the
oped a new protection in its structured                                                       examiner know the truth? Is he or she
                                                nation’s leading law firms to look into       present, but keeping silent while
settlements, a Certificate of Reliability and   this issue. In a written report, this law
Assurances ("CORA") that consists of an                                                       defense counsel makes a misrepre-
                                                firm concluded that under the several         sentation to the court?
affidavit asserting the integrity of the        hypothetical scenarios posed, it would
process and the full disclosure of terms                                                          Has the claim rep misled both
                                                be illegal for a structured settlement        defense and plaintiff attorneys? Does
made under oath carrying all penalties of       broker to share commissions with a
perjury.                                                                                      this create a risk of the case being
                                                casualty company that settled a case
    CCI's CORA certificate is a series of                                                     reopened in the future when the true
                                                with a structured settlement and paid
affirmative representations and war-                                                          cost of settlement is learned? Does this
                                                the annuity premium.
ranties certifying that CCI does not pay                                                      create a risk of exposing the casualty
                                                    Jacobson also noted that it has been
any service, administrative or other rebate                                                   insurer to class action litigation if it later
                                                well known for years that some struc-
fees to any party or insurer; does not                                                        becomes known that the practice was
                                                tured settlement companies have
engage in post settlement medical                                                             widespread? Does plaintiff’s counsel
                                                entered into written ‘exclusive’ or ‘semi-
underwriting; always discloses the true                                                       bear any risk of overcharging for legal
                                                exclusive’ arrangements with casualty
cost of the structured settlements it                                                         fees if fees are based on an overstated
                                                companies to rebate as much as 25%
negotiates; never presents present value                                                      cost of settlement?
                                                to 50% of the commissions earned.
figures which might exaggerate the value            “Of course, the term ‘rebate’ is not      Misrepresentation of cost of
of a settlement; and is not an "in house"       used,” he added. “The arrangement             structured settlement to the
or captive broker owned or controlled           and the payments are called ‘service’or       defendant
by any insurer. "The CORA certificate           ‘administrative’ fees. However, it still
ends with a warranty section that would                                                           Jacobson         said      that       the
                                                waddles . . .”
expose CCI to civil and criminal liability if                                                 assured/defendant is not always advised
any of the statements were false,"              Misrepresentation of cost of                  that its casualty insurer is receiving a
according to Jacobson.                          the structured settlement to                  rebate and that the assured/defendant is
                                                the plaintiff and some                        not receiving the benefit of the reduction
The Alleged Abuses:                             questions for insurers and                    in actual cost of the settlement. To be
Rebating of commissions                         attorneys to ponder                           also considered is that an assured/defen-
    Illegal as it might be for an insurance         The failure to disclose that a rebate     dant’s premium payments for its insur-
broker, agent or company to provide a           will be paid to the casualty insurer pur-     ance program in any given year might be
financial incentive to the purchaser of an      chasing the structured settlement             based on the claims experience of the
insurance product, such arrangements            means that the cost of the structure is       prior year.
do exist and in effect reduce the cost of       being overstated, CCI officials pointed           Has the assured been fraudulently
the premium paid for that annuity.              out.                                          overcharged for its insurance program,
    Jacobson pointed out that a partial             They noted that a misrepresentation       leaving it with a potential claim against
return of the premium paid, or the pay-         occurs when the defense attorney rep-         the carrier? Is the assured at risk of further
ment of some of the commission                  resents to the court that the total cost to   exposure to the original claimant of
earned on the placement of a structured         the defendant/insurer is X dollars --         having the original settlement set aside
settlement annuity from the broker              without disclosing that part of the com-      for fraud and misrepresentation?
Misrepresentation of cost of                     into account to determine the annuity                 He added that many jurisdictions
structured settlement to the                     rate to be applied to all life contingent         mandate that attorney’s fees be calcu-
reinsurer                                        payments.                                         lated based on cost. Ethical considera-
   Assume the reinsurer has not been                 CCI officials did not view this as a bad      tions cause many attorneys in jurisdic-
told and will not share the rebate, said         thing, as more benefit for the buck might         tions that allow present value to be used
Jacobson.                                        help settle the case, but they cautioned          to determine fees to nevertheless insist
   “Regardless of the percentage of rein-        there were minefields.                            on disclosure of cost so that cost can be
surance applicable, if the reinsurer is not          They raised the question of a broker          used to calculate fees.
given the benefit of the rebate paid to          representing the cost of the structured
                                                                                                   Inflated or Overstated Present
the insurer, then it is repaying too much        settlement at $100,000, even providing
                                                                                                   Value Figures
money to the insurer which has failed to         a quote to prove it, and subsequently
disclose and/or share the rebate,” he            having the case medically underwritten                CCI officials noted that Present Value
added. “Has a fraud been perpetrated on          to secretly reduce the cost -- instead of         or “PV” is a legitimate measure of the
the reinsurer?                                   increasing the benefit.                           real present day value of a future stream
                                                     “Regardless of who pockets the extra          of payments or of a single lump sum
Misrepresentation of cost to                     cash, a fraud has been perpetrated,”              payment payable in the future
co-defendants and their                          stressed Jacobson. “Both the plaintiff and
                                                                                                       How much is $1,000,000.00 payable
carriers                                         the defendant should benefit by the
                                                                                                   in thirty years worth today? How much
    If insurer “A” which insures one defen-                                                        money would I need to set aside today,
                                                 medical underwriting in the form of a
dant has entered into an agreement with                                                            growing at compounded interest, to pro-
                                                 greater benefit (to bridge the gap, etc.)
insurer “B” which insures a codefendant                                                            duce $1,000,000.00 in thirty years?
                                                 for the dollars being spent, with full dis-
whereby they will share the cost of set-                                                               Jacobson believed these questions
                                                 closure of the actual cost of the structure.”
tlement, but fails to disclose that it is get-                                                     underline the real reason behind struc-
                                                     Medical underwriting should be done
ting a rebate (thereby reducing the cost                                                           tured settlements and why such fraud
                                                 before settlement proposals are illus-
only to insurer “A”), it would seem that                                                           undermines the real value of “a stated
                                                 trated, he explained. In the rare case
insurer “A” may have committed a fraud                                                             or agreed upon cost” to a plaintiff.
                                                 where medical reports are not available
against insurer “B” or may be liable to                                                                “Remember, the thing that makes a
                                                 at the time of initial quoting, but where a
insurer “B” for breach of contract, detailed                                                       good structured settlement a true win-
                                                 serious and potentially life impairing            win is the fact that a defendant can pay
                                                 injury is involved, the broker should state,      less for the benefit than the amount of
Misrepresentation of cost to                     on the proposal itself, that “this illustration   cash the plaintiff would need to buy the
excess insurer                                   does not take into account the plaintiff’s        same benefit stream for himself in a
                                                 medical condition which could enhance             comparable investment,” explained
    Failure to disclose to an excess insurer
                                                 the benefits for the amount of premium            Jacobson. “The tax break makes the dif-
which has agreed to allow the primary
insurer’s rebating broker to consummate          being spent” or other words to that               ference. The plaintiff would have to pur-
the transaction without knowing that said        effect.                                           chase a larger benefit stream because
broker will rebate part of the commission            The rated age, the age to which plain-        part of it would be lost to taxes.”
to the primary, Jacobson noted, seems to         tiff’s chronological age has been                     Since plaintiff’s net after tax benefits
give rise to an overpayment by the               increased to reflect his/her decreased            equal the tax-free benefits purchased by
excess insurer and the accrual of a claim        life expectancy, should be disclosed in           the defense as part of a structured set-
by the excess insurer against the primary        every case.                                       tlement, the structured settlement is
insurer.                                                                                           worth more in cash equivalent to the
                                                 Refusal to disclose cost
                                                                                                   plaintiff than the defendant has to spend,
Related Abuses:                                      Since 1983, the IRS has taken the             he added.
Rated Age Abuse i.e. medical                     view that disclosure of the cost of a struc-          “That is the beauty of a well-negoti-
underwriting after the                           tured settlement does not create any              ated structure and how it can bridge a
settlement                                       constructive receipt or other tax problem         gap between the plaintiff’s demand and
   Unlike most ordinary single premium           for a plaintiff who knows the cost.               the defendant’s offer,” said Jacobson.
annuities, the benefit provided by a fixed           “Yet, for the past 19 years, we have          “However, if the discount rate (that rate
amount of premium actually increases             heard stories of brokers who will state to        of interest that one assumes the present
the more seriously impaired the injured          a plaintiff, to his or her attorney, or even      day lump sum would grow at to pro-
plaintiff happens to be, since structured        to the court, that disclosure of the cost is      duce the future benefit being offered) is
settlement annuities take an injured             not permitted,” said Jacobson. “This is           understated, the PV will be overstated. If
plaintiff’s life impairing medical condition     simply not true.”                                 the discount rate is grossly understated,
Structured                                       to offer that life company’s product. The
                                                 captive broker is also under pressure to
                                                 place the annuity with the life company
                                                                                                       other payments to the carrier paying
                                                                                                       for the structure or to any subsidiary,
                                                                                                       affiliate, partner or friend will be paid.
Kickbacks:                                       owned by or affiliated with the casualty
                                                 carrier. The independent broker does not
                                                                                                     • The cost of the structure will be dis-
                                                                                                       closed in writing.
The Fraud                                        have that conflict of interest, according to
                                                 Jacobson. Additionally, there may be legal
                                                                                                     • The rated age assigned by the life
                                                                                                       company issuing the annuity will be
Within                                           prohibitions on the use of a broker affili-
                                                 ated with the casualty company.
                                                                                                     • No post settlement medical under-
Structured                                       Prohibition on captive
                                                                                                       writing will be engaged in to secretly
                                                                                                       reduce the cost of the structured
                                                     “When I obtained my insurance
                                                                                                     • Legitimate, realistic and reasonable
                                                 license, I had to certify that I would not            assumptions will be used to calcu-
the PV will be grossly overstated. If the        place more than 10% of my total annual                late present value and these will be
period of years of a lifetime benefit pay-       production on insurance products pur-                 disclosed. Present value will only be
ment is overstated, as where a normal            chased by my company,” said Jacobson.                 used when actual cost is also dis-
life expectancy is used in the PV calcula-       “This certification must be made with                 closed.
tions, but the plaintiff has a severely          every license renewal.”                             • The firm certifies that it is neither an
diminished life expectancy, the PV will               To avoid paying commissions to unli-             in house, captive, affiliated or exclu-
be overstated. It is essential, therefore, for   censed entities, which is illegal in its own          sive broker of the carrier paying for
PV to be compared to actual cost. If the         right, some structured settlement bro-                the structured settlement.
PV seems too good to be true, well . . .         kers have advised casualty companies                Jacobson has challenged other struc-
you know the rest.”                              to form or use subsidiary companies --         tured settlement brokers to adopt such
    Jacobson emphasized that honest              which obtain a life and annuity license for    standards to create a level playing field
and accurate PV figures, alongside cost,         the very purpose of receiving commis-          within the industry and protect the plain-
may be just what it takes to settle the          sions on business of their parent or affil-    tiffs.
case. “$1,050,000 in honest PV that cost         iate.                                               The affidavit carries penalties for per-
the defense $950,000 on the case that                Using this approach, 100% of the           jury, making it not only a legal tool for
was worth $1,000,000 means that the              commissions received by these compa-           present agreements but holds firms
defense saved $50,000 and the plaintiff          nies are “earned” on captive business,         accountable for past actions.
got an extra $50,000 worth of value,”            the NSSTA report found nearly 14 years              Jacobson has proposed changes in
he noted. “That’s a win-win.”                    ago, specifically in regards to New York.      New York, Insurance Law Section 4224
                                                     The report detailed Insurance Law,         (c) and New Jersey Rev. Stat. 17:29A-15,
In House or Captive Broker                                                                      but he isn’t waiting for the state legisla-
                                                 “in this case, the life insurance agency is
    Independence is crucial in a broker.                                                        tures.
                                                 a wholly owned subsidiary of the casualty
Being tied in to a single family of life                                                             “If you work for an insurer that does
                                                 insurer. If the subsidiary agency has
companies does not afford the opportu-                                                          not engage in these abuses, you must
                                                 received in the previous twelve months
nity to truly broker the structure. Price                                                       insist on the highest standards of pro-
                                                 or will receive in the ensuing twelve
comparison of rates as among the var-                                                           fessional practice. Your reputation and
                                                 months more than 10% of its aggregate
ious life markets available, comparative                                                        perhaps your insurance license (or your
                                                 net commissions on risks of the casualty
                                                                                                employer’s license) also depend on it,”
medical underwriting, etc., all become           insurer, its license may be revoked or
                                                                                                stated Jacobson. “Structured settlements,
less likely, if not impossible, when the         suspended.”
                                                                                                when honestly and ethically negotiated
“in house” broker must be used. This is
                                                 Settlement Solution:                           are good for all parties involved in the lit-
especially true since some of the most
                                                 CORA Certificate.                              igation. Whoever you are; whomever
respected life companies and other
                                                                                                you represent; accept nothing less, for
structured settlement provider compa-                Jacobson is finding a growing
                                                                                                your client, for your company, for your-
nies will not appoint in house or captive        demand for CCI’s CORA certificate and
                                                                                                self.” And for those companies engaged
brokers to offer their products. Obtaining       the realization that many companies
                                                                                                in any of the various forms of structured
the best structured settlement for each          have already violated its guidelines.
                                                                                                settlement fraud, “the CRACKDOWN is
case becomes difficult or impossible. Per-           The certificate contains the following
haps an annuity from a prestigious life          stipulations:
                                                                                                coming”, said Jacobson.       !
company is unavailable because the in                • No kickbacks are paid. No rebates,       Reprinted with permission as first appeared in
house or captive broker is not appointed               service fees, administrative fees, or    Crackdown, Premier Issue 2002.

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