What happens, or should happen, to structured settlement payees when the owner of their structured settlement annuities becomes insolvent?
Reliance Insurance Company (Reliance), a liability insurer, is the most recent example where these issues are being adjudicated. Previous examples include Monarch Capital Corporation and First Executive Corporation, both non-insurance companies which, as "qualified assignees", owned structured settlement annuities issued by their subsidiary life insurance companies.
The Commonwealth Court of Pennsylvania (Liquidation Court) declared Reliance insolvent and issued an Order of Liquidation which appointed the Pennsylvania Insurance Commissioner as Liquidator in 2001.
The Reliance Estate, however, remains open and its current assets include approximately 3,400 structured settlement annuity contracts which the Liquidator estimates have a present discounted value of $95.1 million. The Liquidator further estimates:
- Over 85 percent of the structured settlement annuity contracts owned by the Reliance Estate are “qualified assignment” contracts and the rest are “buy and hold” contracts.
- Over 95 percent of the qualified assignment contracts owned by the Reliance Estate involve annuity contracts issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.
As part of the Reliance liquidation process, current Pennsylvania Insurance Commissioner Michael F. Consedine requested the Liquidation Court on September 10, 2012 to enter an Order approving transfer of ownership of these structured settlement annuity contracts to the annuity payees which, in many cases, now include factoring companies and investors who have purchased structured settlement payment rights from factoring companies.
On February 28, 2013, Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter ordered the Liquidator’s Application for Approval to Transfer Ownership (Transfer Application) “be held in abeyance until further order of this Court.”
As justification for the proposed transfer of structured settlement ownership, the Transfer Application provides in part:
- With the exception of several structured settlement annuities issued by Executive Life of California and Executive Life of New York (ELNY), all payments related to structured settlement annuities owned by the Reliance Estate have been paid by the annuity issuers.
- The structured settlement annuity payees will have the same right to receive payments from the annuity issuers assuming transfer of ownership to the payees.
- As owner of the annuity contracts, Reliance has the right to transfer ownership upon notice to the annuity issuers.
Liquidator has concluded that transferring ownership of the annuity
contracts to current payees under those contracts, with the simultaneous
discharge of Reliance’s related structured settlement payment
- Would be in the “best interest” of the Reliance Estate and represents “the only viable option”; and
- Would not create any federal income tax liability for Reliance.
that any asset transfer requires prior court approval, the Liquidator
“explored several other options” including transfer of the annuity
- A newly-formed entity such as a subsidiary corporation; and/or
- A trust owned by Reliance.
- The Liquidator, however, concluded that any and all such alternative options would fail to provide the Reliance Estate with finality and expense reduction.
The Liquidator’s Transfer Application provides the following additional comments about the Reliance structured settlement payees:
- Tax consequences – The Liquidator concluded “it is impossible and imprudent” for the Liquidator to make predictions or provide tax advice for the payees because each has unique circumstances. Accordingly, “payees may want to consult a tax advisor or accountant with respect to the [proposed] transfer.”
- Priority in liquidation – If any structured settlement annuity issuer fails to meet its structured settlement obligation (which the Transfer Application questionably refers to as “the primary obligation”), the Liquidator has determined a claim against the Reliance Estate under a “qualified assignment” contract “would warrant no higher than class (e) priority" under the Pennsylvania Insurance Company Act. The Liquidator, however, anticipates no Reliance creditors below class (b) priority will receive any distribution from the Reliance Estate.
- Notice – The Liquidator does not have a complete list of current names and addresses of Reliance structured settlement payees in part because Reliance did not retain copies of either the annuity contracts or other structured settlement documents issued by United Pacific Life Insurance Company when it sold the company in 1993. The Liquidator assumes Reliance structured settlement annuity issuers have the ability to furnish individual notice. In addition, the Liquidator plans to publish notice in multiple regional and national newspapers.
- For additional documents related to the Reliance Liquidation, see the Reliance Documents website.
- For additional information about the resolution of Monarch Capital Corporation structured settlements, see Section 5.04[b][ii] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
- For additional information about the resolution of First Executive Corporation structured settlements, see the structured settlement wiki and S2P2J Sections 3.05[11-13].
- For a discussion of alternative funding options ("qualified assignments" vs. "buy and hold") in the context of the ELNY liquidation, see "ELNY Qualified Assignments".