Beyond Structured Settlements

S2KM Reviews Jeremy Babener's QSF Paper - 2

While researching his paper "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper), Jeremy Babener interviewed many structured settlement industry leaders including Patrick Hindert, Managing Director of S2KM Limited.

This S2KM blog post features Jeremy Babener's research interview with Patrick Hindert - with emphasis (bold type) added subsequently by Patrick Hindert for this publication.

Prior S2KM blog posts about Babener's QSF paper:

• Single Claimant 468B QSF Update
• Jeremy Babener's QSF Paper
• S2KM Reviews Jeremy Babener's QSF Paper - 1

Secondary market

• Babener: How frequently do structured settlement consultants discuss the secondary market with injury victims?
• Hindert:
  
  • While some settlement planners may discuss the secondary market with their clients, most primary market structured settlement advisers do not.
  • Most structured settlement annuity providers and their agents are not qualified to advise anyone about "structured settlement transfers" (aka "factoring").

Anti-assignment clauses

• Babener: Do courts enforce anti-assignment clauses in structured settlement documents?
• Hindert:
  
  • Structured settlement anti-assignment clauses are generally enforceable but not self-executing.
  • A party to the related documents (eg. annuity provider) must act to enforce the clause.
  • Since IRC 5891 was enacted, relatively few annuity providers attempt to enforce structured settlement anti-assignment clauses except in unusual circumstances.

Annuity commissions

• Babener: What is the typical commission for structured settlement annuities?
• Hindert:
  
  • The "standard" structured settlement annuity commission is four (4%) percent of premium which is paid by the product provider to its agents (aka "consultants" or "brokers") .
  • Frequently, multiple agents share the four percent commission.
  • Such "commission sharing" creates conflicts of interests which are rarely disclosed to the structured settlement recipient or his/her attorneys.

Taxing structured settlement recipients

• Babener: Many structured settlement consultants believe the majority of structured settlement recipients pay taxes - or would otherwise pay taxes but for the structured settlement tax subsidy.
• Hindert: Where is the objective proof? Many structured settlement industry "beliefs" don't square with the facts or the law. Your dissipation and QSF papers help to prove this thesis.

Do defendants save money using structured settlements?

• Babener: Have defendants and their liability insurers historically saved money using structured settlements by negotiating based on nominal rather than present values?
• Hindert:
  • Many structured settlement agents and intermediaries proclaim defendants save money using structured settlements.
  • Where is the independent, objective proof?
  • If true, what are the reasons:
    
    • Misrepresentation?
    • Failure to disclose?
    • Unauthorized practice of law?
  • Most structured settlements are negotiated using lump sums which are subsequently transitioned into structured settlements.
  • Why would any informed plaintiff attorney ever knowingly accept a lower fee from his client for a structured settlement settlement costing defendants less than an alternative cash settlement?
  • Under current CMS rules for workers compensation Medicare set-aside agreements (WCMSA), annuities are valued more cost advantageously for defendants than lump sums because of the CMS required "set-off" method for calculating present value.
  • This CMS valuation method also means that annuities underfund WCMSAs because the annuities do not include any inflation provisions.

Defendant savings - 2

• Babener: How frequently would you estimate that defendants save money using structured settlements?
• Hindert:
  • If and when defendants save money today using structured settlements, the primary reasons are misrepresentations, failure to disclose, unauthorized practice of law and/or undue sales pressure to fund using affiliated companies and agents.
  • Plaintiff attorneys should be, and probably will become, more aggressive in discovery to elicit information from defendants about structured settlement compensation, conflicts of interest, and company policies as well as more accurate cost and present value calculations.
  • When calculating any cost savings from structured settlements, defendants should anticipate and factor in costs from potential lawsuits for bad business behavior resulting from their current structured settlement programs.

Defendant savings -3

• Babener: What is your estimate of the amount of money defendants save using structured settlements?
• Hindert:
  • I have never seen an independent study demonstrating or explaining whether, or more importantly why, defendants save money using structured settlements.
  • Any cost savings result primarily from:
    
    • Misrepresentations;
    • Failure to disclose; or
    • Negotiation pressure to direct annuity sales to affiliated companies.
  • One of the results of high pressure structured settlement sales in a claim management context is to increase the likelihood the recipient will subsequently attempt to sell their payment rights.
  • If you ignore profits from product sales and assume full disclosure of compensation and costs with no misrepresentations and no unauthorized practice of law (agents providing legal services to save defendants legal costs), how do defendants save money using structured settlements?

Approved lists

• Babener: Have defendants and their liability insurers historically saved money on structured settlement costs by insisting on purchasing annuities from affiliates and particular life insurance companies?
• Hindert:
  • For the best evidence of defendant savings from affiliated programs, and the best explanation for such savings, review the allegations of misrepresentation and non-disclosure in the Spencer v. Hartford case.
  • When calculating "defense savings", it is important to differentiate:
    • claim savings - if any;
    • profits from structured settlement annuity sales; and
    • future liabilities resulting from structured settlement annuity sales.

Qualified Settlement Funds

• Babener: Assuming there are no defendant savings, do you think that structuring a settlement with a QSF is superior to structuring directly with a defendant?
• Hindert:
  • Yes, I believe structuring a settlement with a QSF is inherently superior to structuring with a defendant in a claim management model.
  • The objectives, processes and knowledge resources are completely different in these two settings.
  • Both the plaintiff and defendant receive judicial protection and a trustee/administrator whose role is to develop settlement solutions for all QSF beneficiaries.
  • QSFs permit and require allocation among claimant beneficiaries and lien holders - including Medicare and Medicaid.
  • Claimants and their advisers can objectively consider needs, resources and best interests.
  • The primary (only) negative of QSFs for plaintiffs is the cost.
  • Key questions about QSFs are the costs - and how to substantial decrease those costs as well as the time necessary for QSF disbursements and termination.

Spencer v. Hartford - 3

Spencer v. Hartford is a class action civil lawsuit potentially involving more than 9000 plaintiffs who received structured settlement annuities from Hartford insurance subsidiaries. The plaintiffs allege:

• Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program. 

The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .

Prior S2KM blog posts:

• Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
  
• Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.

This S2KM blog identifies and recommends:

• Questions;
• Lessons;
• A proposed solution.

Questions:

• Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
• How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
• Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
• Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
• Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
• Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
• Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
• How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
• Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
• Regardless of case outcome:
  • What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
  • What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
  • Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?

Lessons

• Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
• If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
• The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
• Structured settlement compensation arrangements and relationships generally are not disclosed.
• Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
• Structured settlement stakeholders are not capable of self-regulation.
• The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.

Proposed Solution

• Controlling criteria:
  • Judicial approval of structured settlements;
  • Standards and requirements:
    • Best interest test;
    • Due diligence;
    • Disclosure - compensation and conflicts of interest;
    • Informed consent;
    • Licensing;
    • Certification.
• Laws and regulations
  • Identify, preserve and promote existing structured settlement laws;
  • Improve state structured settlement protection statutes;
  • Apply the state protection statutes to the primary market;
  • Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
• New business models
  • Re-define the "claim management" structured settlement business model:
    • Defendants' first priority in structured settlement cases should be to obtain a full legal release.
    • If defendants want to participate in settlement planning, they should:
      • Study settlement planning;
      • Understand the laws, products, documentation and participants;
      • Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
  • Grow the "settlement planning" business model featuring:
    • Qualified settlement funds (QSFs);
    • Structured settlement annuities - qualified and non-qualified under IRC 130;
    • Settlement trusts;
    • MSAs;
    • SNTs;
    • New products such as tax-free disability funds;
    • Secondary life and annuity markets.
• Re-learn and re-market structured settlements
  • Re-study structured settlements from a settlement planning perspective;
  • Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
  • Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
  • Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
  • Schedule and require ethics classes focused on structured settlement and settlement planning business conduct;
  • Organize, promote and participate in community service activities with and for disability associations.

ASNP 2009 Annual Meeting

The Academy of Special Needs Planners (ASNP) hosted its Third Annual Meeting March 6-7, 2009 at the Rancho Bernardo Inn in San Diego, California. Titled "Special Needs Planning in an Era of Change", the program devoted one day of educational discussions to "special needs settlement planning" (SNSP) which ASNP characterized as a "new opportunity" for special needs attorneys.

The ASNP speakers included leading special needs attorneys and plaintiff structured settlement consultants who provided detailed analyses of the following SNSP topics:

• Anatomy of a SNSP Case - Frank Johns, Kevin Urbatsch and Patrick Hindert;
• Structured Settlement Annuities in SNSP Practice - Jack Meligan and Michele Whitmore;
• IRC 468B Qualified Settlement Funds (QSFs) - Jason Lazarus and Richard Risk;
• Integrating SNSP with an Elder Law Practice - Tim Nay and Sandy Conley;
• Medicare Secondary Payer Compliance - Mark Popolizio;
• Lien Resolution Strategies - William Browning, Mark Popolizio and Sylvius von Saucken;
• Marketing to the Trial Bar - Frank Johns, Jason Lazarus, and Kevin Urbatsch.

The SNSP program highlighted three basic issues:

• What is SNSP?
  
• What changes are impacting SNSP?
• What new opportunities does SNSP create for special needs attorneys?

What is SNSP?

Surprisingly, none of the speakers attempted to specifically define SNSP. Hindert recommended web 2.0 knowledge maps, wikis and folksonomies as a strategy for defining and growing SNSP.

Meligan and Whitmore described the related topic of "settlement planning" as both a profession and a process. According to Meligan and Whitmore: "Settlement planning is a profession that helps recipients of settlement proceeds use their proceeds to achieve their post-loss goals and transition successfully into their post-settlement financial lives". Meligan and Whitmore recommended utilizing settlement planning professionals with: credentials; loyalty to plaintiffs; planning approach; and experience. Meligan and Whitmore also described "settlement planning" as part of a three-part process preceded by litigation and followed by financial planning.

von Saucken also described "settlement planning" as a process or "continuum" subject to changing rules that require adjustments in settlement planning prototypes. von Saucken presented a settlement planning timeline:

• Agreement on settlement amount;
• Lien reimbursement;
• Medicare/Medicaid preservation trust;
• Structured settlement paperwork;
• Disbursement.

By comparison, during his recent presentation at the NSSTA 2009 Winter Meeting, Joseph DiGangi defined "settlement consulting" as a four-stage process:

• Analysis
• Planning
• Implementation
• Monitoring

Most of the ASNP presenters identified and addressed "structured settlements" as an essential component of SNSP. As part of his 468B QSF comments, Risk reviewed several structured settlement definitions including the tax definition in IRC section 5891(c)(1). To S2KM's knowledge, Risk thereby becomes the first structured settlement primary market participant to review the IRC section 5891 tax definition for "structured settlement" during a national conference. By comparison, not a single NSSTA or SSP conference speaker has reviewed the IRC Section 5891 definition for "structured settlement" since IRC 5891 was enacted in 2001. Risk also becomes, to S2KM's knowledge, the first conference speaker to link IRC 468B and 5891 which S2KM views as a strategic SNSP construct.

Several ASNP speakers addressed various types of settlement trusts in the context of SNSP. Browning highlighted settlement trust "due diligence" as an increasingly important SNSP issue. Three settlement trust providers, but not one structured settlement annuity provider, exhibited at the SNSP conference.

What changes are impacting SNSP?

ASNP speakers identified and highlighted the following changes impacting SNSP:

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case;
• 468B qualified settlement funds (QSFs);
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Recent MSA rules promulgated by CMS;
• The structured settlement secondary market;
• State structured settlement protection statutes;
• Transition of knowledge and knowledge work to the Internet.

Additional changes referenced by ASNP speakers which deserve more detailed analysis in future SNSP discussions:

• Transitional SNSP business models:
  • How the claim management SNSP model differs from the 468B QSF SNSP model; and
  • How to develop multi-professional SNSP teams and knowledge networks.
• How the current financial crisis impacts SNSP;
• Proposed and/or needed SNSP legislative and regulatory changes.

What new opportunities does SNSP create for special needs attorneys?

Traditional special needs legal practice and education have focused on special needs trusts, estate planning, government benefits and probate. As the ASNP conference demonstrated, SNSP encompasses traditional special needs expertise, but also new fields of related legal practice.

Four leading SNSP legal treatises (listed alphabetically by title) define these new fields of SNSP legal practice:

• "Negotiating and Settling Tort Cases" - by Matt Garretson and Guy O. Kornblum;
• "Qualified Settlement Funds and Section 468B" - by Robert W. Wood;
• "Structured Settlements and Periodic Payment Judgments" - by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert;
• "Taxation of Damage Awards and Settlement Payments" - by Robert W. Wood.

The ASNP presentation by speakers Johns, Lazarus and Urbatsch titled "Marketing to the Trial Bar" offered valuable advice for special needs attorneys as well as other SNSP stakeholders. S2KM's structured settlement transaction diagram, developed in 2005 with graphic artist Keith Burtoft, may help special needs attorneys identify other potential SNSP clients and roles. In addition, as S2KM's blog post "Structured Settlement Surveys" demonstrates, further market research would be useful to define and grow the SNSP market.

Congratulations to ASAP and SNSP program Chairperson Tim Nay for the timely and educational SNSP program. Prior S2KM blog posts about ASNP:

• 2008 ASNP Conference;
• 2007 ASNP Conference.

For additional information about settlement consulting, see S2KM's four-part blog series "Settlement Consulting".

Settlement Consulting - 4

This post continues S2KM analysis and commentary about "settlement consulting" as an alternative business model for structured settlements introduced by Joseph DiGangi at the NSSTA 2009 Winter Meeting.

DiGangi characterized structured settlements as a fundamental settlement consulting product and featured structured settlements in a settlement consulting case example.

DiGangi's discussion identified four stages within the settlement consulting process:

• Analysis - including needs assessment;
• Planning;
• Implementation; and
• Monitoring.

DiGangi raised the issue of whether settlement consulting includes "litigation support" services.

Prior S2KM posts about settlement consulting have:

• Reviewed DiGangi's NSSTA presentation;
• Discussed business definitions and boundaries; and
• Outlined settlement consulting history - from a structured settlement perspective.

This S2KM post republishes and analyzes a structured settlement transaction diagram S2KM developed in 2005 with graphic artist Keith Burtoft. The purposes of the transaction diagram:

• Demonstrate the complexity of structured settlements:
  • In the context of settlement consulting; and
  • From the perspective of an injury victim.
• Provide an analytic framework to:
  • Study the role of structured settlements in settlement consulting;
  • Compare alternative structured settlement business models:
    • Settlement consulting (or planning); and
    • Traditional claim management.
  • Discuss the roles, expertise and work product of various settlement consulting stakeholders;
  • Define "due diligence" and discuss potential professional liabilities;
  • Identify settlement consulting legal entities and improve legal documentation;
  • Improve settlement consulting business standards and performance metrics;
  • Highlight the importance of IRC 468B QSFs;
  • Demonstrate linkage between various settlement consulting components: including
    • Primary and secondary structured settlement annuity markets;
    • Structured settlement annuities and settlement trusts;
    • Settlement trusts and the secondary annuity and life markets.
  • Prioritize legislative and regulatory issues and develop lobbying strategies.

In comparison with 468B QSF settlement consulting, traditional structured settlement analysis (the claim management model):

• Focuses more narrowly on the IRC 130 qualified assignment transaction;
• Assumes structured settlement payees are injury victims - as opposed to trustees and custodians;
• Ignores:
  • IRC 468B qualified settlement funds (QSFs);
  • The secondary structured settlement market;
  • Non-qualified structured settlements.
• Attempts to construct planning strategies and solutions as part of the litigation and negotiation process;
• Encourages "early involvement" by plaintiff and defense structured settlement agents who:
  • Represent the same annuity providers;
  • Collaborate to maximize shared annuity sales;
  • Provide similar "value-added" services (including litigation support) to justify commissions;
  • Lack licensing and training to sell non-annuity products;
  • Fail to disclose their conflicts of interest or their compensation-sharing arrangements.
  • Assume, but fail to address, the "best interests" of injury victims and other structured settlement stakeholders.

Settlement consulting occurs, and will continue to occur, in both the claim management (defense) structured settlement model and the settlement planning (468B QSF) structured settlement model.

• S2KM believes the 468B QSF settlement consulting (and/or planning) model is "vastly superior" to the claim management model for the vast number of settlement consulting stakeholders.
• Settlement Consulting Stakeholders:
  • Injury victims and their families;
  • Federal and state governments including regulators;
  • Judges;
  • Mediators;
  • Guardians;
  • Trustees;
  • Custodians;
  • Defendants and their insurers and re-insurers;
  • Plaintiff trial attorneys;
  • Special needs attorneys;
  • Medicare set-aside professionals;
  • Financial and insurance advisers and intermediaries;
  • Life care planners; and
  • Allocators.
• "Vastly superior" should be (and hopefully will be) defined and demonstrated by industry metrics (including time and money metrics) comparing the claim management and settlement planning models and developing the best alternative with continuing improvements.
• S2KM further believes the 468B QSF settlement consulting model will substantially grow the structured settlement market.

For additional S2KM analysis:

• Structured Settlement Surveys
• Structured Settlement Credo
• Settlement Trust Due Diligence
  
• Knowledge Management and Structured Settlements
  

Settlement Trust Due Diligence

One of the strategic developments distinguishing the settlement planning structured settlement business model from the claim management model is the interaction of annuities (insurance products) with trusts and custodial accounts (banking products). All structured settlement and settlement planning professionals should understand and utilize settlement trusts.

S2KM has written previously about settlement trusts:

• Settlement Trusts Revisited - 2008
• IRC 468B Funds Revisited - 2008
• Special Needs Trusts X - 2008
• Medicare Set-Aside Update - 2008
  
• Settlement Trusts - 2004
• Selecting a Settlement Trustee - 2004

Releases 44 and 45 of "Structured Settlements and Periodic Payment Judgments" (Section 3.07A), co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert, feature expanded S2P2J analysis of settlement trusts and structured settlement annuities.

With input from, and thanks to, Benjamin Malsch of First Capital Surety and David Cover of Peoples Bank, S2KM has compiled the following questions and information requests for settlement planning advisers to assist their due diligence about specific settlement trustees. S2KM welcomes additional questions and recommendations.

Trust Company

• What type of company is the trustee?
• How long has the trustee been in business?
• Where is the trustee incorporated?
• Does the trustee have a federal banking charter?
• Where is the trustee qualified to do business?
• Where is the trustee currently doing business?
• Who owns the trustee - or for whom does the trustee work?
• Have ownership changes occurred during the last 5 years?
• Does the trustee have ownership interests in other companies?

Products and Services

• What settlement trust products does the trustee sell or service?
• What non-settlement trusts and/or non-trust products does the trustee sell or service?
  

Legislation and Regulation

• What laws and regulations apply to the trustee's settlement trust products and services?
• What legislative and regulatory authority supports the trustee's settlement trust products?
• Who regulates the trustee?
• How frequently does the regulator audit the trustee?
• When did the last regulatory audit occur?
• What were the results?

Business Conduct

• Obtain and review copies of:
  • Trust company's operating charter;
  • Latest financial, investment and regulatory audits;
  • Internal audit (SAS70);
  • Marketing materials targeting investment returns;
  • Complete information about fees and expenses;
  • References from clients similarly situated to actual or anticipated clients.
• Which bank(s) share custody of the trustee's funds?
• What lawsuits, if any, have involved the trustee during the past 5 years?
• How many trust accounts does the trustee administer?
• How many of these trust accounts are settlement trusts?
• What amount of assets does the trustee manage?
• What type of insurance coverage does the trustee maintain and in what amounts?

Business Policies

• What are the trustee's policies for:
  • Structured settlement annuities;
  • Annuity funding of attorney fees and other non (IRC 130) qualified assignments?
  • IRC section 468B;
  • The secondary life and annuity markets;

• What professional associations does the trustee support?

Performance and Fees

• Review the trustee's most recent audited financial and investment reports;
• Confirm all fees paid to the trustee, the trustee’s affiliated companies and outside vendors and partners.
• How do mutual fund providers compensate the trustee?
• If the trustee utilizes proprietary mutual funds, will management fees be offset against trustee fees?
• Does the trustee assess any penalties, redemption fees, check processing fees, tax preparation fees, termination fees or fees for extraordinary expenses?

Sales and Distribution

• Who sells the trustee's products?
• What licensing is required to sell the products?
• Who regulates the sellers of such products?
• What consumer protections exist for malfeasance or poor performance?
• What insurance do the trustee and its sales network maintain to protect purchasers?
• What educational programs does the trustee provide and/or support for settlement trusts and settlement planning?
• Does the trustee support structured settlement annuities and integrate annuities with  settlement trusts?
• Does the trustee have an “approved list” of structured settlement annuity providers and/or producers?