When an IOU Is a W-I-N

Smarter claims resolution through structured settlements.

By David Donaldson

Over the last 40 years in claims, many changes have occurred in how the business operates. First, the pressure on claims professionals at all levels has never been more intense. Second, fewer people are handling more cases while also trying to reduce the claims cycle time and avoid trial risk. Third, with more people working remotely, there is growing difficulty in scheduling professional education events. Combining these factors with a constant pressure to control and reduce allocated and unallocated expenses produces a challenging environment.

Against this backdrop, the prospect of having a free outside resource such as a structured settlement consultant to help nudge your claims to resolution has become too apparent to ignore. Some casualty companies—AIG, Liberty Mutual, Fireman’s Fund, and Travelers, for example—understand this and have placed significant emphasis on identifying types of claims that resolve faster or at least more efficiently with a structured settlement.

The mystery is why other company claims operations seem to ignore the obvious. When used effectively, a combination of cash and a structured settlement can result in faster claims closure and lower ongoing expenses driven by claims remaining open. Also, there is a good chance for reduced outside legal expenses.

In cases such as those involving self-funded future payments, a structured settlement offers your company better legal protection because of the qualified assignment. The National Structured Settlements Trade Association (NSSTA), a nonprofit designed to provide information for claims professionals, attorneys, and laypersons, sums it up this way:

“The assignment transfers full responsibility for all future payments to an independent third party. This removes from the defendant all future responsibility to the claimant for this case. Second, IRS rules are clear that with a qualified assignment, the defendant or insurer may deduct the entire settlement cost immediately to the extent otherwise allowed by the tax code. Moreover, the structured settlement and qualified assignment often result in open cases resolving faster and more efficiently than is possible with all-cash negotiations. For a claims office, this can reduce overhead costs, including outside legal fees.”

The bottom line for claimants is the opportunity to have secure payments tailored to meet their specific needs. Moreover, income from a structured annuity is completely exempt from federal and state taxes. For residents in high-tax states like California, New York, Illinois, and Maryland, tax exemption has a particularly clear appeal.

Settling Claims More Efficiently

The key to improving a claims office’s efficiency with a structured settlement program is to identify cases that are most likely to benefit from a combination of cash and annuity payments. Some are obvious, such as a claimant who is a minor or who has a severe brain injury. In those cases, a structured settlement not only could be recommended by a judge, but also could reduce the chance of a future bad-faith claim against the company. Here are a few examples of other types of claims that settle more efficiently with a structured settlement:

1. Claimants with Large Future Expenses. If a claimant’s medical liability and basic living costs stretch into decades, chances are high that his financial demands are based on outlandish life-care assumptions. If you approach this on a straight cash basis, your only alternative to a rejected offer involves more money. Moreover, a focus on cash takes away from a bigger issue: Is the settlement enough to support a legitimate life-care plan, and is it in the best long-term interest of the claimant?

If you have a catastrophic claim involving significant future costs for lost earnings or medical expenses, you should strongly consider using a substandard or rated age. This can help fund future needs at a far more palatable cost based on a realistic life expectancy, considering the claimant’s personal medical condition. The result will be a much faster claims resolution. Also, combining a structured settlement with a special needs trust often enhances the appeal to the claimant—again, nudging the case closer to closure at a level that is acceptable to your employer and the injured party.

2. Workers’ Compensation/Medicare Set-Aside Claims. In 1997, Congress changed the federal tax code to encourage defendants to use structured settlements to resolve workers’ compensation claims. Experience since then—especially during the past few years—shows how clear-cut the benefits are by incorporating structured settlements into workers’ compensation claims.

Start with the fact that liability and workers’ compensation carriers are required to report certain damage payments to Medicare. The Centers for Medicare and Medicaid Services (CMS), in turn, requires that settlements protect taxpayer interests. The Medicare Set-Aside (MSA) is the obvious solution, but if you fund the MSA solely with cash, you will lose a major financial advantage.

3. Third-Party Liability Claims with Medicare Set-Asides. A key point about MSAs is that they also have an important role in third-party liability claims. Using a structured settlement to satisfy an MSA can provide a mutually beneficial scenario because it satisfies the injured parties’ obligations to CMS for future medical and prescription costs, achieving this with less cash outlay by the carrier. Additionally, for claimants, it maximizes the overall cash in their pockets rather than having a significant portion tied up in funding the MSAs, which straight cash settlements would require.

Funding an MSA with an initial cash payment and then a structured settlement can reduce your outlay by a third or more, depending on the claim’s size and nature of the injury. That money then can be applied to addressing non-Medicare covered expenses, which often are major barriers to settlement.

For example, a case involved a carrier with a difficult third-party general liability claim that involved an MSA. It was a catastrophic claim with a significant comparative liability on the plaintiff. There was a need for an MSA, but its overall setup and funding costs were going to be a roadblock since there would be little cash left for the plaintiff.

Utilizing a rated age, the carrier structured the MSA funding cost for about half of the cost of a straight cash funding option. This freed up a significant amount of money that could then go to the plaintiff. Ultimately, it was a significant factor in allowing the case to settle without the risk and expense of trial.

4. Burn Injuries. Burn injuries can be particularly problematic in terms of long-term care. When skin is badly burned, it loses its elasticity and the capacity to grow. That’s a major problem for anyone and an especially big problem for someone still growing. The only medical option is skin-graft surgery, which is expensive, but the procedure’s timing can be planned with a fairly high degree of certainty. This makes it an ideal candidate for structured settlement funding.

One of the best testimonials for structured settlements in burn accidents came from a congressman. Rep. Joe Courtney (D-CT) was an attorney before going to Congress, and in a moving speech on YouTube, he describes how a friend approached him after her eight-year-old daughter was badly burned in a fireworks accident. He represented the family, setting up the daughter with a structured settlement to fund her surgeries. Rep. Courtney said that it works for the life insurance industry, is an “intelligent, smart” way of making sure that clients are going to be compensated, and “works for all of us as Americans.”

5. Claimants Feeling Threatened by a Spouse or Friend. Under the federal tax code, a structured settlement beneficiary does not “own” the future payments or the annuity. In tax parlance, they may not have constructive receipt. Forget tax advantages, this security can be a key advantage for some claimants.

An industry colleague who spent many years handling major accident claims shared the following story. After months of going back and forth, he was making decent headway in resolving a claim involving a traumatic brain injury. The claimant was a construction worker with a wife and two children.

Suddenly, progress stopped, and the case hung in limbo. It turned out that the worker became convinced that his wife planned to divorce him and take some of his settlement. Not knowing what else to do, he delayed. The claimant ultimately agreed to a settlement involving a small cash payment and a large structured settlement that would begin paying in about four years. Sure enough, the wife filed for divorce. She was able to get some of the cash settlement but was unable to lay claim to the structured settlement.

Management Support Is the Key

No matter how skilled the frontline claims staff or how specific the structured settlement plan is, no claims organization can sustain a successful structured settlement initiative without long-term management support. This must consist of more than a single or even periodic management statement. It must be an integral part of management’s long-term vision and plan for mitigation and control of claims financial outcomes.

Here are a few techniques to maintain such a program, which, when managed correctly, is in the claims department’s best interest:

1. Establish Clear Objectives. The old saying “What gets measured, gets done,” has never been more appropriate. As noted, a structured settlement can help resolve many types of claims faster and more efficiently. It also can reduce outside legal expenses and overhead. A good manager can promote these efficiencies by encouraging everyone from field office leaders (local, on-site claims management) to first-line claims handlers to utilize structured settlements to meet overall strategies for resolving open claims.

Management should set “stretch” objectives geared to the carrier’s financial objectives. Whether these measurable objectives are developed with the assistance and involvement of the local claims staff (bottom up to engage staff better in ownership of the outcome) or delivered to the staff by senior management staff (top down) should be determined by the culture of the claims organization. Either method will work as long as adequate goals are in place and clearly articulated to the involved claims staff with an appropriate statement of what is expected by senior management.

2. Recognize Progress. A good manager must be clear about recognizing and reinforcing claims professionals who successfully meet overall goals. If claims offices find that using structured settlements in certain types of cases helps to make a settlement more attractive to the claimant and this helps close the claim faster, this lesson needs to be shared. (One obvious but important disclaimer: It is imperative that this sort of process is cleared through counsel.)

The key is that there are many nonfinancial ways of encouraging and achieving a claims department’s desired results, and recognizing best practices can be remarkably successful. This can involve recognition at the office level or recognition of individual claims handlers. Bottom line: If a claims professional finds a way to make a better offer through a structured settlement, it deserves to be recognized.

3. Document Success. Senior management should recognize offices that use structured settlements suitably to improve the claims process and resolve contentious cases. Depending on the corporate culture, this recognition could be visual or in written documentation, which could be a letter to a superior or inclusion in a company newsletter.

Public acknowledgements for making use of a structured settlement program successfully to improve efficiency in a claims organization will demonstrate its importance to both local and senior management. The leading claims organizations can and should tailor their success stories to their organizations’ needs and, as appropriate, adopt them as part of their internal communications.

A favorite expression states, “Don’t watch their lips; watch their feet.” In the claims world, it’s easy to talk about improving efficiency and speed in case closure. But it’s quite another thing entirely to take actions that encourage professionals at all levels to move out of their comfort zones.

By setting goals, rewarding achievement, and documenting success, senior management can show an entire claims organization that a structured settlement program can work to the clear benefit of all parties to a claim, and that certainly includes the company itself and the injured party.

David Donaldson spent more than 40 years in claims at Aetna, Highlands Insurance Group, and Chartis/AIG. He retired in 2014 after nine years as executive vice president of claims at Chartis/AIG. He has been a CLM Fellow since 2014 and can be reached at davidcdonaldson47@yahoo.com.

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