Structured settlements were created to benefit personal injury victims by giving them an exclusion from federal income tax on the implicit interest on periodic payments. Congress intended this to encourage people to take their settlements in a form that would be safe and difficult to dissipate. This was anticipated to contribute to their long-term financial security. However, defense insurers soon invented bullying tactics to turn the allure of tax-free, guaranteed money into lower claim cost. They use their most effective weapon, possession of the money, to force terms on litigation-weary plaintiffs. They act as if writing an extra check and inserting a little extra language into a settlement agreement is such a chore that the plaintiff must give something up to get their cooperation. The tricks set out below are rarely disclosed and most plaintiffs and their attorneys don't even know what happened behind the scenes.
Ways Defense Insurers Use Structures to Save Money
The next time the defense takes an unnatural interest in controlling your client's structured settlement, you can be sure one or more of the following tactics are motivating that interest.
1. Negotiating in terms of future payments. Simply put, future dollars are not as valuable as present dollars. The defense hopes that negotiating a settlement in terms of future payments allows them to focus on the "total value" of the settlement, rather than the actual value at settlement. Agreeing to a settlement in which the present value cost of an annuity is not disclosed can shortchange the plaintiff. Another favorite defense trick is to send structure quotes for the gross settlement offer instead of the amount net of attorney fee. This forces the attorney to explain his fee again.
2. Exclusive use of casualty company's life insurance affiliate. Many casualty companies have a wholly-owned life insurance company affiliate (Hartford, Allstate, State Farm, Liberty, AIG, etc.). They may insist that the annuity be placed with their affiliate, essentially switching the money from one pocket to another. This is sometimes called an "in-house program." Without access to the other companies, injured clients often have to settle for below-market rates or a poorly-rated company.
3. Annuity must be written by insurer on their "approved company list." Shouldn't the choice of annuity issuer be made by the plaintiff who will rely on the company to make the future payments and not a defendant that is about to get released from liability? They have nothing at stake and the plaintiff has everything at stake. A survey of the sixteen companies that write structured settlements often identifies a company that will pay significantly higher payments than the three to five companies on their approved list. A company gets on an "approved list" by agreeing to play ball with some of the tricks described here.
4. Defense-loyal "approved broker." When the defense insists on using their approved broker, watch out. It is very likely that the broker is rebating up to 50% of the annuity commission. This makes a little money for the insurer and distracts the plaintiff counsel from the real money the defense saves from some of the other tricks. A case in Connecticut alleges that due to this rebate and some other tactics, Travelers did not spend what it claimed it spent to purchase the annuity. The Connecticut Supreme Court labeled these two arguments the "rebating scheme" and the "shortchanging scheme." This case is now a class action against Travelers and is still pending. Remember that the settlement agreement will release that defense-retained broker, leaving the plaintiff attorney holding the bag if something goes awry with the annuity. It is never in the best interest of the client or the attorney to accept this. Combat their "corporate policy" with a corporate policy of your own - one of always retaining your own broker.
5. Undisclosed medical underwriting and re-underwriting. A recent case out of New York illustrates the problem of relying on a defense broker. In that case, the defense broker represented a cost of about $765,000 as shown on a quote from the insurance company. The plaintiff attorney based his contingency fee on that amount. The defense-loyal broker then submitted plaintiff's medical records and received a "rated age" lowering the cost of the annuity by almost $200,000. This was never disclosed to the plaintiff's counsel. The plaintiff found out and sued his attorney for over-billing and the broker and annuity company for their fraudulent behavior. This type of behavior is commonplace when the defense is allowed to push out the plaintiff broker. The court dismissed the claim against the defense broker and insurer because they found no duty since the plaintiff could have and should have verified the cost of the annuity with a broker hired to represent them. Another variation on this scheme is to submit only part of the medicals before settlement, reserving some to get a better rate after settlement when the plaintiff is no longer watching.
6. Use of "daily rates" or jumbo case discounts to lower cost of annuity. If a case is large enough (generally over $250,000) most annuity companies will quote the case based on the rates as of that specific day, which often are slightly better than the standard rates published on a weekly or monthly basis. When the defense-loyal broker is handling the transaction, the advantage of the lower rate goes to the casualty company, not your client. Especially large cases may also qualify for a jumbo case discount.
7. Conflicts of Interest. Many brokers traditionally loyal to the defense have recently marketed heavily to plaintiff attorneys claiming to represent both plaintiffs and casualty companies. There are several dangers from trusting these brokers. In order to get business of many casualty companies, brokers are required to guarantee a certain amount of annuity premium each year to that casualty company's life insurance affiliate. Also, they are much less likely to push for a carrier off of the defense approved list if they are trying to get the defense company as a client.