In July, the American Bar Association held its annual meeting in London to celebrate the “common bond” between the laws of the two great nations. For several days, the attorneys did their best to overcome Shaw's dictum that the British and Americans are “two peoples separated by a common language.”

Unfortunately, the outward festivity masked a serious issue looming over the meeting and, increasingly, the whole of the British legal system: the recent explosion in British litigation awards. Many in British legal circles view this as an unwelcome American import. Others see a domestic source, namely the method by which claimants (and even barristers) are compensated.

Regardless, the facts are clear. Personal injury claims are on the rise throughout Europe, and Great Britain is leading the way. Successive records have been set and broken in damage awards by British courts over the past two years, and despite increased public concern, no end is in sight.

As happened in the US when litigation awards began spiralling, this development has focused attention on the methods courts should use to calculate injury victim compensation for future pecuniary losses.

As a result, the British legal system seems increasingly to be adopting structured settlements as a resolution mechanism. This is occurring for many of the same reasons that drive the popularity of structures in the US - superior returns and security for the claimant and an effective way to clear liability (and potential liability) off the books for the defense.

The Chancellor report

This spring, The British Lord Chancellor's office published an interesting paper entitled, Damages: The Discount Rate and Alternatives to Lump Sum Payments (http://www.open.gov.uk/lcd/consult/general/damages.htm). Much of it dealt with formulae and rationales relating to lump sum damage settlements. The balance covered lump sum alternatives, such as structured settlements.

Though the paper frequently stops short of formal recommendations, it is still an important document for representatives of both the claimant and defense. As background, the paper offers three alternatives for damage payments:

1) lump sum awards;

2) periodic payments (“reviewable” or “non-reviewable”), and;

3) structured settlements.

The overall goal, the paper notes, is for a court (or the parties negotiating separately) to determine liability and, if so, the proper award to indemnify the claimant for his or her loss. In the typical dynamic, the claimant seeks the largest justifiable award to ensure sufficient funds to meet future needs, while the defense offers only what is necessary to cover quantifiable known losses.

The problem with lump sum payouts (as American federal law has recognized since 1983) is that the claimant may not take sound financial decisions; therefore, a sizable award to compensate future losses can be squandered.

British case law here is instructive. The landmark 1999 Wells v. Wells case produced a two-part ruling by the House of Lords. The Lordships unanimously concluded that Index-Linked Government Securities (ILGS), which are tied to the retail price index and therefore offer a hedge against inflation, are the most accurate way to calculate the present value of the claimant's future losses.

For insurers, this is a major issue. As the ILGS-based rate is lower than the previously used discount rates, insurers are faced with higher pay-outs (possibly considerably higher, depending on the age of the claimant and the seriousness of the injury).

The Lord Chancellor's report quotes insurance industry sources as estimating that “reducing the guideline rate of return from 4.5% to 3% [will increase] by about £115 million a year the sums needing to be paid out in damages as constituting the appropriate compensation laid down by the courts.”

The second part of Wells concerning present lump sum value could be problematic for the plaintiff. The Lordships held that the court should calculate damages on the assumption that the claimant is a cautious investor - without asking the court to reach any conclusion about whether this is the case.

As the Lord Chancellor's report notes: “The Lordships considered this irrelevant.”

As a strictly legal matter, that issue is debatable. From a public policy perspective, such a judgment is not. Persons with serious, long-term injuries who squander their settlement funds will wind up living hand-to-mouth for years, while burdening taxpayers.

As Lord Wolff, the Master of the Rolls, told a Welsh television audience last year, lump sums should be phased out and replaced with regular payments to meet ongoing needs. He said such practices might speed up some settlements and “take the bitterness out of what can become acrimonious and drawn-out litigation.”

To review or not to review

Unfortunately, not all systems of “regular payments” are created equal.

Take the “reviewable” payments system covered in the Lord Chancellor's report. This system allows claimants to accept periodic payments at settlement and then, if situations change, reopen negotiations on both the amount and timing of the payments.

Reviewable payment awards have historically been humbled by the lack of “clean break” - a principle vital to claims resolution. This system essentially creates a long-term (and inevitably taxing) relationship between the claimant and defendant that results in higher administrative and legal costs.

Legalities aside, reviewable payments do not serve the claimant, as they raise the prospect that claimants are more likely to squander their payments or incur debt if they believe they can always seek redress of their actions.

So-called “non-reviewable” payments streams are another option. Unlike “reviewable” payments, non-reviewables are fixed in time and amount. While they are an improvement over reviewable payments, they have an obvious Achilles heel - lack of security for the claimant.

Non-reviewables basically put the burden on the claimant to rely on the creditworthiness of the defendant/insurer with little recourse. More than 30 US states tried that idea in the early 1990s with periodic payment of judgment statutes. All failed.

Success through structuring

The ideal indemnification will take care of a claimant's long-term losses by providing payment as they are incurred. Discounted lump sums are frequently too unwieldy for people not accustomed to handling large sums. Periodic payments are better, but still have serious drawbacks, such as lack of financial guarantee and higher administrative cost.

The great benefit of a structured settlement is that it overcomes the problems with both lump sum and periodic payments. Structured settlements are the product of unfettered negotiation by both sides' counsel; the parties involved are fully aware of their rights and limitations under the law.

When the parties shake hands on a structured settlement, it may well be the closest we can come, under our system, to true indemnification of the loss coupled with high security. The claimant participates in the selection of the funding vehicle, and can make market-based choices based on the rates and creditworthiness of the annuity provider. The claimant can also build a contingency fund into the structure via periodic lump sums as a hedge against changing financial needs.

The defendant (or the insurer) can close the case once the necessary annuities are purchased and assigned to a third party. Moreover, structured annuities provide a higher yield than ILGS, without the burden of managing the investment.

On the issue of claim size, ISO's latest closed claim survey results confirm that the larger the claim and the more severe the injury, the more likely it is that a structured settlement will be used in resolving the claim. In settling claims involving losses of $75,000-$99,999, structured settlements were used less than 7% of the time.

In settling claims involving losses of $1 million and above structured settlements were used 29% of the time. The ISO survey concludes: “The average payment in claims involving structured settlements ... was more than 59% greater than the average payment for claims paid in a single lumpsum ...”

There are two ways to determine a structured settlement payment stream. A “top down” structure involves calculating a lump sum payment in the conventional way and then purchasing an annuity to provide serial payments.

A “bottom up” structure begins with an assessment of the claimant's future needs, then builds on this to calculate the value of the annuity necessary to fund the payments. It generally produces for the claimant the most realistic substitute for lost income.

The first structured settlements appeared in the US during the early 1970s, as a means of resolving birth defect cases involving thalidomide. Since then, as they have grown in popularity, they have repeatedly bridged the gap between plaintiff and defendant. In recent years, structures have attracted support from such disparate US groups as disability advocates, insurers, consumer activists and state trial lawyer associations.

This didn't happen by accident. Rather, structures have gained in popularity because the plain fact is that, when used correctly, and in the right cases, they represent a true “win-win” for everyone.

Randy Dyer is executive director of The National Structured Settlements Trade Association in Washington, D.C. For more information about structured settlements, please see the association's website at www.nssta.com.