Jeremy Babener , a third year Juris Doctor candidate at New York University has completed a seminal structured settlement paper
S2KM introduced, summarized and reviewed, titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements", in two prior S2KM blog posts:
This S2KM post features an exclusive interview with Jeremy Babener about his dissipation paper.
S2KM: Jeremy, what are the principle conclusions of your paper?
Jeremy Babener: The structured settlement subsidy, or tax exclusion, is premised upon the belief that claimants prematurely dissipate lump sum settlements. This belief has long been held within the structured settlement industry, and is frequently cited as a proven fact. Anecdotal evidence from industry practitioners, representing a broad cross-section of interests, certainly suggests the belief to be true. However, the article explores the available empirical data. It concludes that the frequency of the dissipating claimant has yet to be proven, and that citations relied upon as evidence lack applicability, or sometimes any substance at all.
S2KM: What surprised you the most about your findings?
Jeremy Babener: The thesis itself is surprising. The use and citation of an unproven statistic by so many in an industry exposes how reliant we are on others’ accurate reporting. It also exemplifies how assertions consistent with one’s previous experiences can bypass criticism.
S2KM: How did you become aware of, and interested in, structured settlements?
Jeremy Babener: I clerked for the U.S. Department of Justice, in the Federal Tort Claims Act Section during the Summer of 2008. As some of the cases moved toward settlement, I was introduced to the concept of the structured settlement. Some commentators call it “a benefit to both sides.” I wanted to learn more.
S2KM: Why did you focus your first structured settlement paper on dissipation studies?
Jeremy Babener: Writing this paper was not planned. In my research for a different article on the single claimant qualified settlement fund issue, I repeatedly read that “90% of lump sum claimants squander their award within five years.” Though I attempted to track down the source of the statistic, I was most surprised to find that I could not. I thought it important for the structured settlement industry to know. Of course, nearly all those I spoke to in the industry believe that most lump sum claimants do prematurely dissipate their settlement, based on personal and anecdotal experience.
S2KM: Did you write the paper for a specific class or seminar?
Jeremy Babener: I wrote the paper during my year in the NYU Journal of Law & Business’ note-writing program, and also for a law course entitled “Tax and Social Policy.”
S2KM: Where and when do you expect to publish your paper and who is your intended audience?
Jeremy Babener: I will be submitting my article to an array of journals and law reviews in August. I wrote the article with those in the structured settlement and factoring industries in mind. However, I think it pertains to many areas where long-term care and financial stability are important, including Medicare.
S2KM: How can interested persons obtain a copy of your paper?
Jeremy Babener: The abstract and draft of the article are available on SSRN. I will also be launching a website with Patrick Hindert. It will provide ongoing posts addressing structured settlement issues, including those introduced by this article.
S2KM: How many dissipation studies did you review as part of this project?
Jeremy Babener: The article reviews twelve studies. Four are American, published between 1936 and 1971. The eight others come from Britain, Canada, Australia, and Scotland, between 1973 and 1994. The article also reviews reports by the Canadian Manitoba Law Commission (1987) and the Law Reform Commission of Ireland (1996).
S2KM: What additional sources did you utilize in your research?
Jeremy Babener: I learned the most about the industry by speaking with those that populate it, including settlement planners, attorneys, and insurance company representatives. The treatises and articles on structured settlements provided an invaluable list of references. I was also fortunate that inquiries to foreign libraries and governments resulted in the requested reports, enabling me to track down nearly every citation I came across.
S2KM: How does the secondary market for structured settlements impact your paper and your view of structured settlement dissipation?
Jeremy Babener: The ability of structured settlement payees to sell their future stream of income for a lump sum amount undermines the purpose of the tax subsidy (i.e. preventing premature dissipation of settlement monies). On the other hand, the flexibility inherent in the ability to factor encourages personal injury claimants to structure their settlements in the first place, which may decrease total settlement dissipation. The factoring industry has produced statistics suggesting that those payees who factor do so responsibly. The sources of such statistics should be analyzed. A modern study on structured settlement factoring may be needed to appreciate the nuances of the issue.
S2KM: What are the earliest and most recent references you located for the statistic that 90% of lump sum injury recipients dissipate their recoveries in 5 years?
Jeremy Babener: The Journal of Commerce reported the 90%-5-year statistic in 1978, quoting T.V. Mangelsdorf, a life insurance underwriter. Today, some commentators, like Paul Lesti, discuss the statistic without reporting it as fact. However, the statistic is cited as proven in articles, on broker websites, and even in Negotiating and Settling Tort Cases, a treatise available on Westlaw.
S2KM: Based upon your research, is the term "squander" an accurate or fair characterization of injury victims?
Jeremy Babener; Where lump sum recipients exhaust their settlement monies in a shorter time than the monies are meant to last, I believe a more accurate characterization would be "premature dissipation". the term "squander" carries a particularly derogatory tone. Though I am not sure I would put it in such strong terms, Washington & Lee School of Law Professor Adam Scales argues quite convincingly, "What is objectionable in the rhetoric of structured settlement enthusiasts is the unsubtle attribution to tort claimants of characteristics, values and habits that are generally held in contempt in American political discourse: a lack of self-control, and the concomitent propensity to wind up om welfare."
S2KM: Did you locate any evidence that injury victims have a greater propensity than other persons to spend money wastefully or foolishly?
Jeremy Babener: The strongest evidence of lump sum recipients’ propensity to prematurely dissipate their settlement comes from anecdotal evidence throughout the industry. A few studies make conclusions that lump sum recipients spend money irresponsibly. However, such studies often have substantial flaws, lack applicability, or provide conclusions based on subjective judgments. For example, some studies criticize the use of lump sum settlement monies on ordinary living expenses.
S2KM: Assuming injury victims do dissipate lump sums, what other explanations, besides a propensity to squander, might explain this occurrence?
Jeremy Babener: The “propensity to squander” addresses the post-settlement decisions of lump sum claimants. However, the settlement amount itself cannot be overlooked. It is important to note the fact that where claimants accept settlements they receive less than the value of their original claim. Once legal and other fees are subtracted, the leftover sum may simply be inadequate. Thus, the money will not last as long as originally intended. For example, a 1984 Australian study of 86 accident claimants found many examples of inadequate settlements, but only seven examples of mismanagement.
S2KM: Did you find any evidence that injury victims manage lump sums responsibly?
Jeremy Babener: Yes, though the studies are either old or foreign. The famed 1971 American “Widows Study,” which some cite to as the source of the 90%-5-year statistic, actually found unwise spending “very much the exception.” Foreign studies also suggest that lump sum recipients can and often do act responsibly, including studies from Scotland (1993), Australia (1992), and Canada (1983). Foreign law commission reports have made similar conclusions.
S2KM: In your opinion, why haven't there been any recent and relevant dissipation studies in the U.S.?
Jeremy Babener: The industry considered performing such a study in the mid-1990s. Then, a few years ago, at least one insurance company was contemplating the idea. Some believe the study would be very difficult to perform; others believe the industry is concerned that the results might not be entirely favorable. I think that there has been little need to prove the contention because so many in the industry, based on personal and anecdotal experience, believe it to be true.
S2KM: Are you planning to write any additional papers related to structured settlements?
Jeremy Babener: I have drafted an
article on the use of qualified settlement funds by single party
claimants. I will be sharing it with those in the industry prior to
submitting it to the NYU Journal of Law and Business this Fall.
Thank you, Jeremy for this interview and for sharing your dissipation
paper which has been long overdue in the structured settlement
industry. Good luck and future success with your studies, your writing
and your professional career.
For related S2KM blog posts, see: