A Minnesota court recently stepped in to prevent a woman who suffered lead poisoning as a child from selling $299,000 of her personal injury award for just $19,000. The $299,000 of future payments were a part of a larger "structured settlement" she received for her injuries when she was a minor. In two prior deals shed already swapped $352,000 worth of future payments for $77,000 upfront.
- Structured settlements offered in many personal injury cases
- Structures intended to secure future replacement income for injury victims
- Selling a structure for immediate cash should be a last resort
This womans troubles reveal the good, the bad and the ugly of a structured settlement. Financial problems usually dont have legal solutions, but its a story that anyone whos been seriously injured and is set to receive significant compensation for those injuries needs to consider.
Whats a Structured Settlement?
In simplest terms, a structured settlement is an alternative to a lump sum payment for a person whos suffered bodily injury or death. In settling a personal injury claim or arranging payment of a trial verdict, the plaintiff agrees to accept a series of future payments in place of all or part of an immediate lump sum. These arrangements can be fine-tuned somewhat to meet the unique needs or desires of the plaintiff.
The future payments are funded by an annuity, which is an investment contract. The annuity is provided by an insurance company. The defendant purchases the annuity. In purchasing the annuity and making whatever other payment is required by the settlement, the defendant is relieved of any further debt to the plaintiff.
Structured Settlements a Big Business
Structured settlements play a significant part in the compensation for personal injury or wrongful death. Its estimated that about 12 percent of liability claims involve structured settlements. Twenty-five percent of claims over $300,000 involve structured settlements. Each year between $5 and $8 billion of new structured settlements are issued.
Why a Series of Future Payments Instead of a Single Immediate Lump Sum?
Most people realize that a dollar today is worth more than a dollar next year and a lot more than a dollar in 30 years. So the benefit of a structured settlement to a plaintiff must lie elsewhere.
The best answer lies perhaps not in economics or finance, or dollars and sense. It lies in common sense.
Experience suggests that many if not most people who take lump sum payments as compensation for injury spend it unwisely and run through the money sooner than they expect. The structured settlement is intended to combat this problem by holding back at least part of that compensation for future years.
Of this problem, Dr. Chris Coyne, Associate Professor of Finance at Saint Josephs University in Philadelphia, says, "The vast majority of people are unprepared to handle what is likely to be the largest pot of money they will ever see in their lives." He points out this applies almost equally to persons regardless of financial sophistication. He notes that even professors of finance can fail to walk the walk of prudent financial management.
"Compensation for physical injury is not the lottery," says Coyne. "The compensation is intended to replace earnings that the injured party is no longer able to earn. Its not a supplement to income, its a replacement of income. For many people whove been injured, this is a hard fact to accept." Coyne points out that for persons incapable of working after injury, the incapacity can seem like retirement. So they shop, they yearn for things, and they may spend the money thats really intended for living and medical expenses prematurely and unwisely. Its human nature.
Have a Structured Settlement and Need Cash Now? Youll Have to Pay for It
This benefit of structured settlements that the future income is locked away for the plaintiffs future needs does have one obvious drawback. Those future payments arent available to meet necessary, unexpected, emergency needs. As many as ten percent of plaintiffs who opt for structured settlements end up regretting this decision to the point of selling some or all of their future payments for a lump sum. They pay dearly for this.
Discount rates what the buyer of a stream of future payments uses to decide how much to pay for them can be very high. These rates may be as high as 19 percent, according to the National Association of Settlement Purchasers, a trade group of companies that buy structured settlement payments in whats called the "secondary market." Other sources point to rates of 25 percent or more. Such high rates of discounting explain how $299,000 of future payments may translate to as little as $19,000 today.
The biggest player in the secondary market for structured settlement purchases is recognizable for its notorious television commercials. In one, indignant people demand, "Its my money and I want it now!" In another operatic spoof, a busload of commuters sing, "I have a structured settlement and I need cash now." The first makes one wonder why anyone would choose to be bound to a structured settlement in the first place. The second shows the foolishness of putting all ones award into a structure and not leave a rainy day fund to tap without taking a haircut sometimes more resembling decapitation.
Making Sure Structured Settlement Sales Are Fair
The Minnesota judge who reviewed that deal for the lead-poisoned woman found it abusive. Laws in 46 states and the District of Columbia require court approval for the resale of all or part of a structured settlement. The vast majority of petitions get court approval. Though the court must decide if the transaction is in the sellers best interest, this does not guarantee that the seller is getting the best deal.
Eugene Ahtirski is a California attorney and an expert in present day secondary market evaluation of assets involving future payments, including structured settlement annuities. Ahtirski recognizes that the secondary market is subject to abuse, and offers advice on ensuring any transaction is fair to sellers. According to Ahtirski, the three areas most likely to risk abuse are:
- Transactions by young people. "Adults who are just 18 or in their early twenties and had structured settlements as minors may have little education or experience in financial matters. They must be very careful in selling part of their structures."
- Multiple transactions. "Prior sales should be disclosed. This should be required by law. Judges cant make correct decisions without knowing what other transactions a seller has engaged in."
- People with cognitive injuries. Structures are frequently set up for persons whove had brain injury and mental impairment, and their ability to fully understand a sales transaction is compromised.
In Ahtirskis view, the best way to ensure that a secondary market transaction is fair to the seller is to require an independent third party to solicit and evaluate offers for the seller. He points out that as an asset class, structured settlements are in great demand by investors. So much so that even a highly motivated seller meaning someone in dire straits can obtain a fair result if an expert options the structure to a number of different companies to get the highest possible price.
While Chris Coyne is convinced of the benefits of structured settlements in appropriate cases, hes also concerned by secondary market sales like the Minnesota case. He feels that purchasers have a fiduciary responsibility to sellers and that some are failing this duty. No one should be led to think that selling a structured settlement means easy money. It comes at the direct expense of ones future financial security.
"Check and Recheck" Your Settlement Options
Emery Ledger is a personal injury attorney in California. His clients include victims of the 2008 Metrolink rail disaster. His firm does not make specific recommendations of or facilitate structured settlements for clients. He echoes the belief that personal injury awards arent lottery winnings.
Indeed its almost always the defense that proposes a structured settlement to the plaintiff. Thats because the defendants, and the insurance company(ies) funding the settlements and providing the annuities, gain a lot from them. Defendants and their insurers can pay less out of pocket to fund an annuity than to pay its equivalent in a lump sum. This side also benefits from the significant tax breaks structured settlements enjoy.
Ledger believes structured settlements may be appropriate in certain cases involving incapacity and disability. But he cautions strongly in favor of making an informed decision.
"Receiving a personal injury award calls for sophisticated financial thinking," says Ledger. "My advice is for clients to check and recheck their options of how to take the award." He always advises clients to obtain competent and trustworthy financial advice in making this decision. "These clients have already been victimized. I dont want them to be victimized twice."
Art Buono co-authors the Lawyers.com blog.
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