Structured Settlement (PDF)

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 Use Structured Settlement Adviser for Consultation
 in Mediation or Settlement Conference

        W                hat can we, as attorneys, expect to find when we
                         arrive for the much anticipated settlement confer-
                         ence or mediation of our seriously or catastrophi-
                         cally injured client’s case? Time and again,
                         whether announced or not, the defense will bring a
                                                                                  with the help of plaintiff’s own structured settle-
                                                                                  ment adviser or broker, or through study of the
                                                                                  realities of the structured settlement market. The
                                                                                  client should be advised of the many opportuni-
                                                                                  ties presented by structured settlements, as well as
                         structured settlement adviser to this event. It          the risks inherent within these opportunities.
                         should be no surprise to counsel that these
                         representatives are not independent. But what will           In preparation for the mediation or settlement
                         the client or client representative think? To            conference, counsel will need to assess whether
                         adequately prepare ourselves and our client for          the client or client representative truly under-
    By Timothy D.        such an event, we will most certainly benefit from       stands the future needs of the injuries in issue—
           Lange         having an independent structured settlement              and the attendant costs. Given the realities of ever
         Expert Editor   adviser/broker present, or at least readily available    rising costs of medical care and the static pay-
                         for consultation and analysis of defense proposals.      ments ordinarily proposed by the defense, such
                             When the defense has an opportunity to               numbers are unlikely to sufficiently provide for
                         directly address the client or client representative,    the injured person’s needs. The client or represen-
                         it will likely portray itself as sincere and desirous    tative will need a true grasp of the Life Care Plan
                         of “doing the right thing” for the injured person.       at issue in the case, as well as financing and
                         This will likely be qualified, of course, by the         attendant taxation/risk considerations involved
                         defense’s explanation of its self-diagnosed              with the structured settlement. Independent
                         “limited” risk of exposure in the case. In explain-      analysis is a must for the conservative practitio-
                         ing its benevolent and protective motivation, the        ner.
                         defense will then perhaps extol its altruism for the
                         injured person through an introduction of its            Analyzing the Defense’s
                         structured settlement representative. This conser-       Structured Settlement Proposal
                         vatively dressed individual’s priority will purport-         Opposing counsel, his or her adjustor, and
                         edly be to secure an investment vehicle for the          their structured settlement adviser, will arrive with
                         injured person that will protect his or her interests    pre-packaged proposals carefully providing a
                         into the future. This may, arguably, insinuate that      minimal amount of useful information to the
                         lump sum monies, primarily payable against               client. When the hard questions are ultimately
                         attorney fees and case expenses, are recovered           answered, we will often find that the annuity
                         contrary to the best interests of the injured person.    funding the defense’s structured settlement
                         Ah, the games people play.                               proposal is inferior to that which we could
                             In any event, then comes the offer—maybe             independently obtain. This is true unless specific
                         several thousand dollars each month, payable for         terms are obtained in negotiation from the
                         the injured person’s lifetime or beyond. The             defense’s annuity representative—not only
                         client’s eyes widen, and his or her heart pounds         haggling over the actual cost of the annuity, but
                         from the prospect of some much needed relief.            within the composition of the particular annuity
   Tim Lange is an       What happens next may depend on our prepara-             selected itself. Not surprisingly, we will also
                         tion for this particular moment in this representa-      likely find that the proposal is based upon an
       attorney with
                         tion.                                                    annuity rendered by an insurer that is a sister/
  Benson, Byrne &                                                                 related company of the carrier purchasing the
      Risch, LLP in      Preparing for the Mediation or                           settlement investment.
 Louisville, Ky. and     Settlement Conference                                        In light of our well-prepared opposition,
  sits on the Board          To protect the client’s interests, we will need to   following are a few pertinent questions for
   of Governors of       prepare ourselves, and our client, to confront the       consideration when evaluating a defense proposal
                         myriad of issues involved in the settlement of a         or any structured settlement contract.
      The Kentucky
                         serious or catastrophic injury case. Plaintiff’s             What is the actual cost of this investment to
  Academy of Trial       counsel should be able to evaluate specific              the defense? Ask and obtain in writing what the
          Attorneys.     settlement proposals in an informed manner, either       investment costs the defense (with disclosure of
SEPTEMBER/OCTOBER 2002                                                                                              THE ADVOCATE • 1
                                                                                                                      EXPERT ADVICE

any discount of the cost provided to the      annuity contracts can be funded by            Revenue Ruling 79-220, 1972-2 C.B.
defendant upon sale of the annuity to an      government pools in the event of failure      74. There is an important caveat,
affiliated entity).                           of an insurer, insurance against such         however. If the annuity payments extend
    What is the actual rate of return paid    failures has its limits. If the settlement    beyond the death of the plaintiff, his or
on this investment vehicle? This should       involves a significant amount of money,       her estate may face a significant tax
help you to compare what the defense’s        it may be feasible, and is advisable, to      burden on his or her death. Often this
investment is really buying as opposed        split the risk of failure of an insurer by    tax burden may force the sale of the
to what you can get from your adviser or      investing in two or more different            asset, with losses up to and including the
broker for the same amount. As with           annuity contracts.                            remaining benefits under the settlement
mortgages and other investments,                  What is the financial rating of the       annuity contract. The client should be
different companies, with different           insurer issuing the annuity contract?         advised of the potential for this tax
attendant risks, pay different rates of       There are a number of entities that rate      problem. You may also be able to
return.                                       the viability of annuity insurers. These      negotiate a “Commutation Benefit
    Should the annuity be contingent          include Standard & Poor’s, A.M. Best,         Rider” to provide a cash payment for
upon the life of the plaintiff? If such is    FITCH (previously Duff & Phelps) &            satisfaction of estate taxes, in the event
the case, we need to know the age rating      Moody’s. Each uses a different system of      of the death of the plaintiff.
provided of the plaintiff to calculate the    ratings, and it is recommended that you
actual cost of the annuity to the defen-      compare the ratings of at least two of            In conclusion, as always in your
dant, and consequently the true amount        these entities before choosing the            selection of the appropriate expert, be
for the fee to which we are entitled.         insurer(s) that will issue the investment     advised to seek references from fellow
    Is a “variable” return annuity a viable   contract in your settlement. Utilizing        KATA members or other counsel having
settlement structure? Some companies          your own broker will help to insure           previously employed the person under
are now offering variable rates of return     performance of due diligence in the           consideration. Request references and
on investment in an annuity contract.         selection of the insurer.                     background information on any struc-
These buy into the stock market but               Can the annuity investment contract       tured settlement adviser with whom you
have additional attendant risks. If your      be deemed as a secured obligation? In         are interested in working. One credential
client is interested in diversification of    the event of the failure of an insurer and    to look for is a membership or affiliation
assets, the risk of additional growth         bankruptcy, if you are able to obtain         with the National Structured Settlements
versus loss may lead him or her to place      “secured status” for the client’s invest-     Trade Association, though it does not
all or part of the settlement into such an    ment contract, he or she will be better       appear to be difficult to obtain a mem-
account.                                      insulated from loss. This may be avail-       bership with this association. If you
    What is the payment structure that        able from some insurers without addi-         simply desire information and do not
truly fits the anticipated needs of the       tional cost in the purchase of the            anticipate placing the investment with
injured person? When writing the              contract.                                     another insurer, confirm the adviser’s
structured settlement, the client can             What are the tax ramifications of the     schedule of fees and document pertinent
include benefit increases, periodic lump      proposal? Compensation received               terms concerning payment and billing
payments to cover anticipated life needs      because of personal injury or physical        before engagement. Conduct as signifi-
such as funding future medical proce-         sickness is not taxable as gross income       cant a background check as your
dures, purchase of a home, or increases       under IRC Section 104(a)(2). This is true     resources permit. Lastly, consider
simply to offset inflation.                   whether it is received in a lump sum or as    requiring a confidentiality agreement
    Can the risk be split between two         periodic payments. However, if the            from the expert. Remember, your experts
insurers or investment companies? Given       claimant invests the settlement dollars,      can make or break your case—in the
the realities of today’s market, consider-    the interest earned will be subject to tax.   structured settlement adviser’s case, they
ation should be given to splitting the        When the plaintiff has no control over        can make or break your client’s financial
risk of loss on this investment. As we        the assets that fund a periodic payment       future. Choose wisely.
have experienced recently in Kentucky,        stream, the interest earnings on the
insurers can, and with surprising fre-        investment will be excludable from
quency, do fail. While portions of certain    income under IRC Section 104, per

2 • THE ADVOCATE                                                                                           SEPTEMBER/OCTOBER 2002

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