Mythbusting Structured Settlements
Misconceptions abound, so what do claims professionals need to know?
Today’s settlement negotiation landscape has changed dramatically from the 1980s and early 1990s. With Medicare compliance issues, the Affordable Care Act, and needs-based governmental benefits—to name but a few of the many variables at play—it is wise to look beyond the traditional cash settlement approach to resolving personal injury disputes.
Creativity counts. If used correctly, structured settlements can be a powerful tool in your negotiation toolbox and can allow you to achieve results like nothing else.
Three decades ago, when the structured settlement industry was in its infancy, insurers, defense attorneys, and plaintiffs’ attorneys were all just learning about this alternative approach to cash settlements. The biggest myth of that era related to the misapplication of the Constructive Receipt Doctrine and knowledge of settlement costs. We have come a long way since then, but unfortunately, many misconceptions plague structured settlements. Disabusing claims professionals of these counter-productive myths is a necessary first step to understanding the value of them.
Myth #1: “The plaintiff is not interested in a structured settlement.”
This is perhaps the most common misconception. The reality is that an injured plaintiff and his family do not know whether or not they are interested in a structured settlement until they are presented with a proposal and understand how it addresses their specific financial needs.
Most plaintiffs’ attorneys seem to prefer to negotiate in cash terms as opposed to a combination of cash and structured settlement. This frequently is contrary to the best interests of their clients’ long-term financial security. We have seen great success when negotiations address future damages and needs by making offers in a structured settlement format, demonstrating that it does not take the amount of money being demanded to respond to the future needs of the injured person.
By looking at the settlement in terms of a structured settlement, plaintiffs’ counsel are able to show their clients what can be done to protect them financially and that the settlement offer is fair and equitable. It also can help the parties to bridge the divide that often exists because of various disputed issues, such as negligence or the cost of future care.
Remember that when you negotiate with cash, you can only negotiate with more cash. Using a structured settlement gives all parties an opportunity to maximize the value of settlement dollars that are offered. If the plaintiffs’ attorney prefers to negotiate in cash terms, he certainly can do so, but that need not dictate how you present your offer. The offer still can be made in a structured settlement format with the understanding that, if the plaintiff prefers, he may have the same offer in cash. This approach allows the plaintiff attorney to quantify and qualify the value of the offer.
Myth #2: “Interest rates are too low to structure a settlement.”
A structured settlement is not intended to build wealth. Its purpose is to preserve and protect settlement proceeds from premature dissipation. A well-designed settlement is carefully planned and balanced. It provides cash at the time of settlement to address immediate goals as well as a secure, risk-free, and tax-free structured settlement annuity that addresses critical future needs.
According to data from the Chicago Board Options Exchange, during the past 20 years, structured settlement annuities have provided an average rate of return of approximately 4.8 percent, tax-free (or about seven percent taxable, assuming a 28 percent tax bracket), tracking closely with the 30-year Treasury rate. It is worth noting the significant value that income tax-free structured settlement annuities offer. Injured recipients of cash settlements cannot purchase a tax-free annuity.
Remember that taxes and fees associated with private investments can reduce seemingly good returns. Consider a portfolio that projects a seven percent return over 10 years. After management fees and taxes, the real annual return is only about 3.5 percent. More importantly, if the economy weakens, long-term funding could fall behind and the plaintiff may have to make riskier investments to catch up.
To illustrate, assume that a plaintiffs’ attorney insists his client must have $2,500 per month for the rest of her life. The client is a 40-year-old woman with a remaining normal life expectancy of 42 years. The attorney demands $1 million to meet her monthly financial needs. The defense counters by offering a structure that is payable for her lifetime with a 30-year guaranteed payment period. If the plaintiff dies during the 30-year period, her beneficiary or estate will receive the remaining guaranteed payments. The cost of a structure that provides this benefit would be $680,000, or $320,000 less than the demand. It also is a better deal for the plaintiff because it provides guaranteed payments, regardless of future economic shifts.
Additionally, substandard rated ages can further stretch settlements in cases involving catastrophic injury or non-accident conditions, such as cancer, heart problems, or diabetes. The rated age provides significant added buying power because the person is assigned a reduced projected life expectancy. The age rating will reduce the cost of responding to the plaintiff’s needs and often makes the difference between settling a dispute and proceeding to trial.
Another great value that structured settlements offer is the ability to arrange for payments to be made when the money actually will be needed. Consider a 30-year-old male paraplegic who needs a new wheelchair every five years for the rest of his life. The cost of the wheelchair today is $5,000, and the historical inflation rate for durable medical equipment is four percent, compounded annually. During his lifetime, it is projected that he will need 10 replacement wheelchairs, the last of which would cost in excess of $35,000, due to inflation. The total expected cost for these replacement wheelchairs is $140,000. By funding this with a structured settlement annuity, the cost would be $45,000, and only $35,000 if you assume a rated age of 40 was provided due to the paraplegia. If the plaintiff had to invest his settlement dollars and be guaranteed the same series of payments, he would need $80,000 in cash at the time of settlement.
Although these are simple examples, you can appreciate the power behind income tax-free benefits, time value of money, rated ages, and creative settlement design—all of which amplify the “win-win” nature of structured settlements.
Myth #3: “It might send the wrong message if I bring my broker/consultant to the negotiation.”
In most instances, having a settlement consultant attend settlement conferences and mediations can add substantial negotiation flexibility. While the consultant does not become involved with the assessment of case value or of legal issues, they can be valuable when considering how to strengthen offers so that they respond to the unique needs of the injured plaintiffs and their families, and the demand as presented by plaintiffs’ counsel. This also provides mediators with invaluable tools to use when communicating offers that respond to demands.
In most cases, mediation would not be taking place if there was no intent to settle the dispute. Having a structured settlement specialist present only emphasizes the defense’s willingness to use all resources at their disposal to maximize the strength of an offer and to settle the claim. It does not mean that the other side assumes you are there to spend big money to resolve the dispute.
Ideally, using a structured settlement consultant during the negotiation strategy development phase allows for the creation of an approach that is most responsive to all of the parties’ needs and issues. This is the stage when a broker can help carve a path to settlement.
Myth #4: “The plaintiffs’ attorney has his own broker, so I don’t need one.”
Plaintiffs’ brokers are becoming more involved in settlements than in past years. This trend should be viewed as encouraging news, as typically it allows for the use of a structured settlement to facilitate a constructive settlement dialogue.
When a plaintiffs’ attorney involves his own structured settlement expert, be sure to contact your preferred structured settlement specialists so that they can properly support your settlement efforts and protect your interests and that of the insured or self-insured client. Everyone has a role to play, but relying solely on the plaintiffs’ expert to help finalize the settlement can put you and your client’s interests at risk. The plaintiffs’ broker serves to properly protect the interests of his client. Likewise, the defense broker has a fiduciary duty to protect the insurer and the insured’s interests.
Keep in mind that structured settlement annuities are legal contracts entered into by the defendant/insurer and the life insurer and, thus, require careful handling. The plaintiff is a payee, and has no ownership interests or rights in the annuity contract. There are many subtle but critical nuances involving the Internal Revenue Code, annuity provider underwriting guidelines, and your own guidelines that need to be considered when arranging a structured settlement. Your broker can be an enormous help to you as you navigate through your settlement. Indeed, the broker will do most of the heavy lifting where the structured portion of the settlement is concerned.
For instance, let’s consider a situation in which the plaintiffs’ broker wants to “lock in“ the annuity on behalf of the insurer, even though they do not represent the insurer or insured. If you are representing the defendant who will fund the structured settlement, you will want to be sure that you are not bound to any financial transaction or contract by anyone other than your own structured settlement consultant, who will analyze the proposed settlement and discuss the intended terms with you in the context of your requirements. It’s highly unlikely that you would allow the other side to represent your interests or the insured’s interests in any part of the settlement transaction, so a structured settlement should be handled in the same way. This situation is easy to address. Simply contact your preferred broker and he will get in touch with the plaintiffs’ broker to coordinate the settlement details with your requirements in mind. The structured settlement broker community typically is cooperative in order to facilitate the best possible settlement for its respective clients.
Beware of the myths surrounding structured settlement. Over the years, defense attorneys and claims professionals seem to have lost sight of how to incorporate structured settlements into their negotiations. By employing needs-based negotiation techniques, better settlements can be achieved while controlling the cost of settlement and overcoming areas that are legitimately in dispute, thereby avoiding the uncertainty and risks associated with trial.