At many property and casualty companies, structured settlements have gained a solid following. Yet, many claim professionals still hesitate to incorporate them into negotiations. This shuts off a viable settlement option, as an outside structured settlement consultant is, essentially, a free resource to help settle open cases.

Some of this hesitancy probably stems from a misunderstanding of structured settlements' role in the claim process. Typically, they are not substitutes for cash settlements, although there are exceptions. Rather, a structured settlement is most effective when used as a complement to cash, a replacement for that part of the settlement designed to compensate future needs.

For a casualty company, the greatest appeal of a structured settlement is the bottom-line impact. Because federal law allows claimants to take advantage of the time value of money tax-free, a structured settlement offers significant additional benefits over cash. By casting settlement discussions in terms of meeting specific future needs, a structured settlement approach helps focus attention on appropriate compensation, rather than on lump-sum demands that may be arbitrary. For insurers, that could mean faster closure of claim files, lower administrative costs, savings on legal bills, and, most significantly, reduced danger of runaway juries.

For the overworked claim professional, there is a more personal benefit. Bringing a structured settlement into negotiations means gaining the services of an outside specialist who also will analyze damages, tailor payment streams, and handle much of the closing paperwork. Because this individual is paid by the life insurance company that issues the structured annuity, there is no additional cost to the claim department.

Increasingly, plaintiff lawyers are receptive to structured annuities, often directly encouraging clients not to accept all-cash settlements. “It's a no-brainer in my view that a structured settlement for someone who's not a sophisticated investor is the right way to go,” said Fayrell Furr, president of the Southern Trial Lawyers Association.

Most importantly, structured settlements are purely financial transactions, but ones that provide built-in protection for injured parties and their dependents. When presented forthrightly, they can help overcome claimants' mistrust of something coming from “the other side.”

Since 1983, federal law has provided an incentive for parties in physical injury litigation to resolve their cases with structured settlements. The 1983 law and other IRS rulings allow all payments from structured settlements to be income tax-free to claimants if they compensate for physical injury or wrongful death.

Under a structured settlement, a claimant agrees to a series of payments that funds living needs, health care, lost income, children's expenses, and other future needs. The payments can be in varying amounts and incorporate occasional lump sums for identifiable future outlays, such as wheelchair replacement or nursing home fees.

Once both sides agree on a specific payment schedule, liability to make the payments is assigned to an affiliate of the life insurance company. The affiliate then purchases an annuity from its life company parent to fund these payments. The defendant and its casualty carrier receive a complete release from the claimant, which enables them to remove the liability from their books.

For the claimant, the federal laws governing structured settlements offer advantages over cash pay-outs. First, federal law specifies that the annuity must be funded by highly secure investments, typically life insurance annuities or United States Treasury bonds. With this financial security, the claimant need not worry about the economy or the next corporate scandal.

Second, because federal law establishes that the long-term payments from a structure are free from federal income taxes (and such payments usually are exempt from state income taxes, as well), the claimant's net return typically will be higher than realistic returns from taxable post-settlement investments.

Case Resolution

Because most casualty companies have computerized their loss reserve projections for open cases, it should be easy to identify cases with suffix loss reserves above a given amount, say, $50,000. Loss reserve projections should be included for both medical and indemnity, so that workers' compensation cases are not overlooked. Assuming that this information is computerized, however, it is a simple matter to run an open case report.

The claimant's age is extremely important. A casualty company that settles a minor's claim with cash to a parent or guardian risks future liability should those funds be dissipated early. That claimant may argue that the casualty company knew, or should have known, that the parent or guardian was not a suitable custodian of the settlement funds. A structured settlement with periodic payments linked to the child's future needs, for lifetime care if necessary, helps to ensure that will not happen.

As New York Yankee shortstop Yogi Berra once said, “You can observe a lot by watching.” The best way to explain the advantages of using a structured settlement is by example. In one case, a small damage claim with minimal need for up-front cash, a six-year-old girl was attacked in her own yard by a neighbor's pit bull. She was bitten several times, including two severe bites to the face. The neighbor's homeowner's policy specifically includes dog attacks and, therefore, liability was clear.

The child's father did not retain counsel; likely, because he believed that he could get a better final settlement without paying attorney fees. He demanded $100,000, claiming that his daughter would need at least one scar revision surgery when she turned 15. The medical report suggested that permanent facial injuries were unlikely.

You make an initial offer of $25,000. The father rejects it, emphasizing the cost of surgery and the child's future needs.

This case is ideal for a structured settlement because the girl's health insurance probably already has paid for her treatment. Therefore, the family likely does not need immediate cash. The entire settlement could be placed into a structure, allowing it to grow tax-free. Moreover, incorporating the structured settlement addresses the father's chief concern: how to pay for his daughter's future medical and living needs.

After internal discussion, you receive authority to make an offer in the low- to mid-$40,000 range. Consider the following payment stream:

At age 15, the daughter would receive a $5,000 lump sum to provide for a skin surgery, if needed.
At age 18, she would receive $12,000 per year, guaranteed for four years, to cover follow-up medical expenses, including therapy.
At age 22, she would receive $500 monthly for five years for post-college needs.
At age 30, she would receive a $10,000 lump sum for unexpected future medical or other needs.

The total guaranteed benefit payments equal $93,000, all free from federal income taxes and guaranteed to be paid to the claimant, or her beneficiary if she is not alive when benefits are due. At current interest rates, the cost to fund the annuity that would make these payments is about $44,000.

In the end, the father in this case may prefer to take that settlement in cash. However, by directly addressing his greatest concern, his daughter's future needs, the chances of settling the case improve dramatically.

A Serious Damage Claim

A 45-year-old male laborer, making about $30,000 a year, fell off a scaffold, resulting in multiple injuries to the shoulder, back, and legs. He is likely to be out of work for about three years. The medical report suggested that future medical bills would average $5,000 annually for 10 years.

The accident took place in California, which has expensive workers' compensation costs, meaning that disability, wage loss, and medical claims must be addressed. The plaintiff, represented by counsel, made an opening demand for $1 million. Your initial offer was $200,000, which was rejected outright.

Given the worker's injuries, his immediate financial needs, and his attorney's fees, this claim, inevitably, will begin with a large cash pay-out, say, $200,000. The difficulty in settling this claim, however, involves the worker's future needs.

Consider two options, both costing $400,000. In an all-cash settlement, the worker would see half the lump sum go to his attorney, debt settlement, and other immediate needs. That would leave him and his wife $200,000 to make up for future wage losses, pay medical expenses, and help with retirement.

A good structured settlement broker could produce a payment stream with that remaining $200,000. At current interest rates, the worker would receive:

Basic living payments of $1,000 per month tax-free when he goes back to work in three years. These payments would continue for 15 years.
Medical expense payments of $5,000 per year for 10 years beginning a year after settlement.
A $50,000 lump sum at age 65 to assist with retirement.
A $100,000 lump sum payment at age 70 to help with medical expenses and future nursing care.

An extended payment stream can work in tandem with other benefits. For example, the $1,000 monthly payments would conclude after 15 years, because the worker then would be 63 and eligible for Social Security.

Either way, the cost to settle is $400,000, but incorporating a structured settlement for half that amount could produce a more attractive pay-out. The $200,000 placed into a structured settlement annuity would produce a tax-free revenue stream of more than $380,000.

A Catastrophic Claim

A truck that your company insures failed to yield to a pedestrian in a crosswalk. The accident left the pedstrian a paraplegic. Your liability includes his medical bills, lost wages, and loss of job and livelihood. He will need a wheelchair for the rest of his life and his house will have to be refitted for wheelchair access. He has continual pain and will need significant medication and therapy. The victim is 34 and has been given a rated age of 46, meaning that his life expectancy matches that of a typical 46-year-old. His 33-year-old wife, who will be his care giver, also has filed a claim for loss of consortium.

The plaintiffs' initial demand was for $6 million. Your initial offer was $1.2 million.

A case this large could drag on for months. After extensive negotiation and internal discussion, your company agreed to propose a settlement total of $3.4 million. As with the example above, any settlement will involve an initial lump-sum payment. In this case, assume $1.4 million for attorney fees, lien settlements, and cash for the claimant's immediate medical and other living needs, such as fitting the house for a wheelchair.

That leaves about $2 million for future needs. Because structured settlements are funded with life insurance annuities, if a plaintiff's life expectancy is reduced, life-contingent annuity payments will increase. Leveraging the claimant's age rating of 46 allows creation of an attractive payment stream for the claimant to secure a settlement within your budget authority.

For basic living expenses, the claimant and spouse/care giver will receive $4,000 per month for the rest of their lives, with the first 30 years guaranteed. This means that if the claimant passes away within 30 years, one or more beneficiaries will be entitled to receive the remaining payments. Alternatively, the settlement can include a commutation that, upon death, pays a lump sum to the beneficiaries based on the value of the unused payments.
For major medical expenses, the structure will provide $40,000 annually for the rest of the claimant's life, perhaps to be directed to a trust for the administration of future medical bills. The claimant may be able to gain further benefits by choosing a special-need trust funded by a structured settlement.
For wheelchair replacement and servicing, repeating lump sum payments of $40,000 are provided every 10 years for the rest of the claimant's life, compounding at 3 percent per payment, again directed to a medical trust.

This offer directly addresses the claimant's biggest concern, ensuring long-term financial stability. For two people facing years of therapy, this could be highly attractive and conducive to settlement.

As claim professionals know, there is no such thing as a typical case, even among cases of similar settlement size. The above examples are illustrations of possible outcomes using structured settlements. However, with the inherent flexibility of a structured settlement, you and an outside broker have latitude to design financially appealing payment streams.

The key is preparation. It is very important to involve the structured settlement consultant early in the case so that he can begin creating sample payment plans for the claimant. That helps focus attention on how best to compensate specific future needs.

In the end, the decision to accept or reject is solely the plaintiff's. By providing tailored funding, however, claim handlers can focus the plaintiff's attention on his specific future financial needs. That often is the first step in closing a case successfully and within budget authority.

Raymond Blanchfield is claim director for American Re-Insurance Co. in Princeton, N.J.

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Structured to Succeed

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