Experience in the US, Canada and the UK has demonstrated the bottom-line benefits to insurers that structured settlements offer. Randy Dyer reports.
Dallas Booth faced a quandary. The general manager of the Motor Accidents Authority in New South Wales, Australia saw the problems of auto injury victims who dissipated their settlements through waste, fraud, or unwise investments. In case after heart-wrenching case, these victims lost their money, yet their medical and basic living needs remained undiminished. As a result, they faced a potential lifetime on welfare or living hand-to-mouth.
With no obvious solutions, Mr Booth decided to look across the ocean and see how other nations solved these dilemmas. He ultimately found his solution in a practice that enjoys unique stature in the United States, the UK and Canada. Mr Booth's answer is the structured settlement, which has gained support from plaintiffs, defendants, insurers and public officials.
The specifics of structured settlements vary from nation to nation, taking into account each country's unique tax system. Still, regardless of national border, there is growing consensus concerning the benefits of using structured settlements to resolve costly tort cases or cases involving serious injury.
* In early 1998, the Standing Committee on Law and Justice of the Upper House of the New South Wales Parliament proposed changes to the motor vehicle insurance system. Central to the recommendations was that the system shift from lump-sum compensation to structured settlements. The report notes: "Too often, lump sums are squandered, forcing beneficiaries to scavenge what support they can from the public health and welfare systems."
* In November 1997, an automobile insurance reform law went into effect in Canada. That law requires (Section 267) that periodic awards "are to be mandatory" when two of the following four conditions exist: The award is more than $100,000 (Canadian); the plaintiff is under 18 or has no other funds for future care or is not likely to manage the award "in a prudent manner".
* In August 1997, US President Bill Clinton signed a bill that facilitated the use of structured settlements in workers' compensation cases. That law built upon legislation passed in the early 1980s that provided substantial tax incentives for plaintiffs who opt for structured settlements.
What is a structured settlement?
At its heart, a structured settlement benefits all parties. It may help to think of a structured settlement, as implemented in the US, as a quid pro quo between the injured plaintiff and the government: The plaintiff has the right to receive a tax-free stream of payments for years, even decades or life. These tax-free payments come from an annuity and may also include periodic lump-sum distributions. The amount and schedule of payments are determined by the plaintiff and defendant, through their counsel, in consultation with the settlement broker and, often, other experts. Moreover, the full amount of annuity payments, including the interest, is tax free. Taken together, these benefits offer plaintiffs considerable financial advantage over lump sum settlements.
The "quo" is that the plaintiff is typically forbidden from owning or exercising control over the payment stream or the annuity. For example, US federal law is very clear: Once the plaintiff and his/her attorney agree to a payment schedule, the plaintiff may not "accelerate, defer, increase or decrease" the payment stream. In this way, the victim can be assured of receiving regular payments, often for life, in accordance with an agreed-upon payment schedule.
To understand fully the benefits of structured settlements over a single, lump-sum payment, one need only look at the human side. Consider the case of Kyle Melnick*, an undergraduate at the University of Texas who was rendered a quadriplegic in an auto accident when he was a teenager. His parents feared for what might happen to him had he taken a large sum of money. Not only were there the immediate temptations of spending it, but as Kyle's father put it: "There was no guarantee of my son's financial security after we're gone." Kyle took his benefits in the form of a structured settlement, which has provided him a steady stream of funds ever since. In June 1998, he graduated from Texas and is on track to become a football coach and high school teacher.
Why insurers and defendants benefit
Experience in the US, Canada and the UK has demonstrated the bottom-line benefits to insurers that structured settlements offer. There are several reasons:
First, structured settlements should not be looked at as financial instruments, but as a proven tool to bridge the gulf between plaintiff and defendant. Every insurance company is aware that as more cases close, there is less risk and uncertainty. Settling a case without a trial eliminates "jury lottery" - the chance that a runaway jury, seized with sympathy for a plaintiff, may award excessive damages.
Second, insurers must also consider the substantial in-house savings in both allocated and unallocated expenses to be had from pre-trial settlements. This includes not only the obvious savings in lawyers fees, but also attendant trial costs such as locating, evaluating and transporting witnesses, and other standard claims investigation activities.
Third, cases that are most likely to be resolved through the use of structured settlements are typically those that carry the largest loss reserves. Insurance industry surveys in the US have repeatedly shown that the absolute number of cases settled with structured settlements may not be large - in fact, is usually less than 20%.
Importantly, however, these cases are far more likely to involve major injuries and thus, significant settlements. Surveys by ISO Data, Inc., a US insurance industry research organization, bear this out: A 1995 closed claim survey for commercial general liability concludes: "Structured settlements are generally used when loss-payments are very large. . . . The average payment in claims involving structured settlements . . . was more than 59% greater than the average payment for claims paid in a single lump-sum. . . ." The study noted that of the 253 claims involving structured settlements, 71% arose from major injuries.
Clearly, these are the cases tying up the largest amount of an insurer's overhead and investigation costs; accordingly, increasing pre-trial settlements in these cases through use of structured settlements is a viable cost-saver for the insurer.
Making structured settlements work for you
Despite advantages in security and financial return, not every insurer has been able to make good use of structured settlements. Why have some companies succeeded while others have not? The answer lies in the qualities that are necessary for a successful structured settlement broker.
In the United States, the broker is most frequently brought in by the insurer. One of that broker's most critical and immediate goals should be to shift the negotiation's focus from money to the plaintiff's needs. That is where structured settlements can really shine - because they can be tailored in so many ways.
The broker, acting on behalf of the insurer, should begin consulting with the plaintiff's attorney at the outset. In that way, the insurer avoids a common problem - losing momentum by ceding management of the case to the plaintiff's attorney.
In terms of experience, good structured settlement brokers must be good negotiators. A claims negotiating background is particularly helpful, as these people will likely have negotiated more, larger and more complex claims than counterparts in the claims department of a typical insurer.
Brokers must also have significant knowledge of "needs analysis". That is, they must understand a variety of medical and rehabilitation costs and options. They also must have a broad awareness of (and the ability to employ creatively) the array of medical, rehab and economic resources available for the injured.
Technical education is also a vital foundation. A law degree can be very useful, but is not a requirement. Extensive claims and casualty background is also important, as is some knowledge of accounting and tax principles.
Experience in the US shows that, given the range of legal and tax issues involved with structured settlements and the critical function performed by brokers, it is highly desirable to have a certification process through which aspiring brokers have to demonstrate proficiency. Such a certification process must involve the industry itself. The National Structured Settlements Trade Association (NSSTA) is an organization of more than 500 members who negotiate and implement structured settlements. One of our earliest charges, in addition to representing our members' interests before public officials, was to create just such a certification process.
In 1992, in co-ordination with faculty at the University of Notre Dame, NSSTA created the Certified Structured Settlements Consultant (CSSC) designation. CSSC was designed to provide specialized training in structured settlements to the broker/consultant community.
Experience with structured settlements in America, the UK, and Canada has shattered one long-held notion of tort law: that it is a zero-sum game in which one side can only gain at the expense of another. There are win-win situations in tort law and structures are an integral part of them.
Simply put, there are tens of thousands of Kyle Melnicks in countries that allow tax-free schedules of periodic payments to settle physical injury claims. They are saving ordinary taxpayers money by having a financially guaranteed future.
Randy Dyer is executive vice president of The National Structured Settlements Trade Association.
Those wishing further information about structured settlements may contact: NSSTA, 1420 16th Street, NW Washington, D.C. 20036. Tel: 011 1 202 797 5108. Website: www.nssta.com
* Name changed to protect privacy.