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.

NSSTA 2009 Annual Meeting - 1

To borrow a baseball analogy from Len Blonder, the National Structured Settlement Trade Association (NSSTA) "hit a home run" (or rather a series of home runs) during its 2009 Annual Meeting in Washington, D.C. April 28-May 1.

Blonder's comments to NSSTA attendees about "federal and state issues", which occurred near the end of an exceptional NSSTA program, served as a belated key note address for the entire NSSTA program.

Blonder was one of three NSSTA past-Presidents, along with Henry Strong and Chris Diamantis, whom NSSTA, and new NSSTA President Daniel Durbin, honored during its meeting.

Blonder, a two-time NSSTA President who continues to co-chair NSSTA's Legislation and Regulation Committee, spoke passionately about baseball and structured settlements. Blonder traced his involvement in structured settlements to the late 1970s when he helped organize a pre-NSSTA political coalition which formulated, and eventually helped to enact, the original structured settlement tax legislation in 1982.

With support from Blonder and its Legislation and Regulation Committee, NSSTA announced and introduced a new "D.C. two-step" political strategy: move one-step backward before moving two or more steps forward.

NSSTA's backward step:

• Re-focus on "protecting, preserving and promoting" structured settlement laws already enacted in the United States Internal Revenue Code and 47 state structured settlement protection statutes;
• Consolidate and transition NSSTA's administrative, financial and political strengths.

NSSTA's forward steps:

• Continue enhanced education about Medicaid and Medicare as cornerstones for growing the structured settlement market;
• Continue to define NSSTA's Internet strategy and online voice.

NSSTA's strengths were displayed during the 2009 Annual Meeting.

• Joseph Ricci, NSSTA's new Executive Director, summarized improvements in NSSTA governance.
• NSSTA announced:
  
  • New NSSTA voting bylaws;
  • Election of new Directors Betty Gregware and Daniel Finn; plus
  • A new NSSTA Channel on YouTube.
• NSSTA's program featured presentations from:
  • NSSTA lobbyist Eric Vaughn;
  • NSSTA marketing consultant Peter Arnold; and
  • NSSTA General Counsel Hogan & Hartson partner Craig Ulman.
• In addition to his "Washington Report" Vaughn organized an impressive delegation of congressional speakers for NSSTA:
  
  • Senator Richard Durbin (D) from Illinois;
  • Senator Charles Grassley (R) from Iowa;
  • Congressman Charles Rangle (D) from New York;
  • Congressman James Langevin (D) from Rhode Island;
  • Congressman Joseph Crowley (D) from New York;
  • Congressman Dave Camp (R) from Michigan;
  • Congressman Brian Higgins (D) from New York;
  • Congresswoman Allyson Schwartz (D) from Pennsylvania;
  • Congressman Joseph Courtney (D) from Connecticut;
  • Plus the Chiefs of Staff for four congressmen.

Among the political speakers, Senator Durbin, uncle of NSSTA President Daniel Durbin, was the most focused on structured settlement issues. Senator Durbin promised to:

• Support IRC sections 104(a)(2) and 130;
• Address structured settlement secondary market advertising as part of his proposed Financial Product Safety Commission.

Ricci, Vaughn and NSSTAPAC Chairman Brad Cantwell complemented NSSTA congressional presentations with a NSSTAPAC status report.

In addition to the congressional speakers, NSSTA's educational program featured exceptional structured settlement and settlement planning presentations:

• Industry Update and Looking Forward - Transitioning NSSTA Presidents Chris Diamantis and Dan Durbin offered their strategic analyses;
• "All Things Considered" - NSSTA's legal committee has upgraded the quality and scope of its educational contributions:
  
  • Michael Miller summarized Spencer v. Hartford;
  • Ilana Hanau spoke about the Fresno County factoring cases;
  • Craig Ulman re-introduced "Exemption of Structured Settlement Payments" as a sales and marketing enhancement to help grow structured settlements.
• Medicare and Medicaid - NSSTA's government benefits committee sponsored two panel discussions.
  
  • Roy Franco, Mark Popolizio, David Korch and Rafael Gonzalez spoke about Medicare and structured settlements;
  • John McCulloch, Timothy O'Driscoll and Dennis Mc Andrews spoke about Medicaid and structured settlements.

• 35W Bridge Collapse - Jerry Lothrop summarized structured settlement results and lessons learned from the Minnesota August 1, 2007 bridge collapse.
• Financial Strength Ratings - William Pargeans of A.M. Best emphasized strong fixed annuity sales trends despite low interest rates;
• Ethics - Mike Jones continued a revitalized NSSTA priority:
  • Asking the NSSTA audience: "why be ethical?" and
  • Challenging the NSSTA audience to identify and support ethical leaders within the structured settlement industry.

Congratulations to NSSTA for an outstanding 2009 annual meeting in Washington, D.C. Future S2KM blog posts will offer commentary.

For S2KM reports about prior NSSTA meetings, see S2KM's structured settlement wiki.

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.

Spencer v. Hartford - 2

Spencer v. Hartford is a class action lawsuit currently on appeal to the U.S. Second Circuit Court of Appeals following a decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel on RICO and state-law fraud claims.

A prior S2KM blog post (Spencer v. Hartford - 1) summarized the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal. This S2KM post begins S2KM's commentary.

Plaintiffs' Allegations

• Plaintiff allegations are summarized in "Spencer v. Hartford - 1 ".
• The U.S. District Court has neither affirmed nor denied any of the plaintiffs' allegations against Hartford.
• Pending a decision by the U.S. Second Circuit Court of Appeals, the District Court Judge is holding all case deadlines in abeyance.
• Defendants' appeal is limited to the District Court Order granting plaintiffs' Motion for Class Certification and will not address plaintiffs' allegations.
• Even if the Court of Appeals rejects the defendants' appeal, the District Court may never address the plaintiffs' allegations against Hartford.
• As defendants state in their Petition to Appeal: "...putative class actions alleging financial fraud almost always involve extremely large claims for damages, and an order certifying a class therefore exerts pressure to settle whether or not the claims have merit."

Potential Damages

• The civil component of the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) allows for the recovery of damages in triple the amount of actual compensatory damages.
• Plaintiffs contend their two RICO subclasses ("cost" and "value") exceed 9000 persons and their damages total at least 15% of Hartford's applicable structured settlement premium from 1997 to the present.
• Using an assumed industry per case average structured settlement premium of $176,000, plaintiffs' potential RICO damages against Hartford in the Spencer class action case can be estimated as follows: $176,000 x 15% x 9000 cases x 3 = $712,800,000.
• The District Court's Class Certification Order also includes state-law fraud claims.

NSSTA Code of Ethics

• Hartford Life is a member of the National Structured Settlement Trade Association (NSSTA).
• NSSTA's Board of Directors and membership approved the NSSTA Code of Ethics May 9, 1997.
• Plaintiffs' Revised Second Amended Complaint alleges Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford to further the mission of Hartford's "Secured Benefit Services" (SBS) structured settlement program.
• Selected excerpts from the NSSTA Code of Ethics:
  
  • "This Statement of Ethics and Professional Responsibility (Statement) has been adopted by the Board of Directors and Membership of the National Structured Settlements Trade Association (NSSTA) to provide guiding principles to its members and member organizations."
  • "Implicit in the acceptance of this Statement is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services."
  • "This Statement applies to all NSSTA member companies, their employees and to individual members, regardless of their voting rights and responsibilities."
  • "The NSSTA member must exercise the utmost integrity when providing professional structured settlement services."
  • "The nature and extent of services rendered must be dictated by professionalism, honesty and candor which should not be compromised for personal gain or advantage."
  • "All persons engaged in the provision of any part of a structured settlement shall perform their duties in an honest, ethical and fair manner."
  • "Fairness mandates intellectual honesty and disclosure of relevant conflict(s) of interest."
    
  • "A NSSTA member should comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided." (emphasis added).
    

NSSTA 2009 Winter Meeting

• S2KM's Managing Director, Patrick Hindert, is a member of NSSTA and attended the NSSTA 2009 Winter Meeting.
• Plaintiff and Defense Panel
  • One of the educational programs at the NSSTA 2009 Winter Meeting was titled "Plaintiff and Defense Panel".
  • Program description: "There is a need for brokers on both sides to serve as their client's advocate and there should be mutual respect for what each broker contributes to the resolution of the claim and what they bring to the "settlement table". This session will cover some of those concerns."
  • Selected Hindert notes from the panel discussion:
    • "Most structured settlement brokers are 'Good People'."
    • "Our most important role is taking care of the plaintiff."
    • "IRC 468B is bad because it prevents defendants from initiating structured settlements."
    • "Our clients should have no right to dictate how we earn our living" - responding to a question about the need to disclose commission sharing.
    • "I will fight for my clients' right to spend their money the way they want" - responding to a question about approved lists of annuity providers.
    • "We are part of an adversarial system and must support our clients."
• Ethics Course
  • Father Oliver F. Williams, from the Notre Dame Center for Ethics & Religious Values in Business, taught an ethics course at the NSSTA 2009 Winter Meeting.
  • Selected Hindert notes from Father Williams' ethics course:
    • "NSSTA's Code of Ethics is as good as it gets in the structured settlement industry."
    • "Alan Greenspan (Chairman of the Federal Reserve from 1987 to 2006) expressed 'shocked disbelief' following the September 2008 financial crisis. What causes you (NSSTA members) to feel 'shocked disbelief' about the structured settlement industry?"
    • "The life cycle of social moral issues has six stages:
      • Stage 1 - changes occur;
      • Stage 2 - problems are recognized;
      • Stage 3 - organizations are established;
      • Stage 4 - policy agendas are set;
      • Stage 5 - solutions are formalized;
      • Stage 6 - social control becomes routine.
    • "There are three levels of analysis for social moral issues:
      • Individual;
      • Organizational;
      • Systemic.
    • "There are three types of social moral standards:
      • Utilitarianism - the greatest benefit at lowest cost;
      • Rights - protect entitlements set around individuals pursuit of interests;
      • Justice - distribute benefits and burdens fairly."
• Settlement Consulting
  • Joseph DiGangi spoke about "Comprehensive Settlement Consulting" at the NSSTA 2009 Winter Meeting.
  • In what he termed "a wake up call for the industry", DiGangi criticized the traditional structured settlement business model and knowledge standards.
  • S2KM summarized and analyzed DiGangi's NSSTA presentation in a four-part blog series titled "Settlement Consulting"
    • Settlement Consulting
    • Settlement Consulting - 2
    • Settlement Consulting - 3
    • Settlement Consulting - 4

Spencer v. Hartford - 1

This S2KM blog post summarizes the Spencer v. Hartford case to date. A subsequent post will offer S2KM commentary.

Status

Spencer v. Hartford is a class action lawsuit currently on appeal to the U.S. Second Circuit Court of Appeals following a decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel on RICO and state-law fraud claims.

Partial Chronology

• October 31, 2005 - Plaintiffs filed the Original Class Complaint in U.S. District Court, Bridgeport, Connecticut;
• May 1, 2006 - Plaintiffs filed an Amended Complaint;
• October 24, 2006 - District Court Judge denied Defendants' Motion to Dismiss;
• February 6, 2008 - Plaintiffs filed Second Amended Complaint;
• March 4, 2008 - Plaintiffs filed Revised Second Amended Complaint;
• March 10, 2009 - U.S. District Court Judge issued Orders:
  • Granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the RICO and state-law fraud claims;
  • Denying plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the state-law breach of contract and unjust enrichment claims;
  • Certifying two subclasses (based upon alleged "cost" and "value" representations) for both the RICO and fraud claims.
• March 24, 2009
  • Defendants filed a Petition to Appeal the District Judge's Orders to the U.S. Second Circuit Court of Appeals;
  • District Court Judge issued an Order:
    • Granting Defendants' Petition to Appeal;
    • Holding in abeyance further deadlines pending a decision by the Court of Appeals.

Participants

• Plaintiffs - Three named plaintiffs (Oshonya Spencer; Charles Strickland; and Douglas McDuffie) plus all other persons who:
  • Entered into a settlement with any of the Hartford Property and Casualty Companies between 1997 and the present;
  • In which some or all of the settlement amount was to be paid as a structured settlement funded with an annuity from one of the Hartford Life Companies; and
  • Who had a written contract that, or before entering into the contract had received a written representation that, made explicit or implicit reference to the "cost" (Subclass 1) or "value" (Subclass 2) of the settlement or portion of the settlement being structured or the "cost" or "value" of an annuity being used to fund the structure.
  • Excluded from each class of plaintiffs are persons who were represented by a plaintiffs' broker in connection with the settlement.
• Defendants
  • The Hartford Financial Services Group, Inc.
  • Hartford Life, Inc.
  • Hartford Life Insurance Company
  • Hartford Accident and Indemnity Company
  • Hartford Casualty Insurance Company
  • Hartford Insurance Company of the Midwest
  • Hartford Fire Insurance Company
• U.S. District Court Judge - Hon. Janet C. Hall
• Plaintiff Class Counsel
  • David S. Golub
  • Jonathan M. Levine
  • Peter R. Kahana
  • Steven L. Bloch
  • Carl S. Kravitz
  • Ellen D. Marcus
  • Richard B. Risk, Jr.
• Defense Counsel
  • Wilmer Cutler Pickering Hale and Dorr LLP
  • Wiggin and Dana LLP

Plaintiff Allegations

• Beginning in 1992, Hartford engaged in a uniform policy, pattern and practice of fraudulently, wrongfully and systematically retaining for its own benefit at least 15% of amounts it should have used to fund its structured settlements.
• Hartford called its program "Secured Benefit Services" (SBS) the purpose of which was to direct Hartford P&C companies to settle claims against their insureds using structured settlements funded with annuities from Hartford Life companies thereby retaining a substantial portion of the settlement funds and transforming claim losses into gains.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford to further the mission of the SBS program.
• If a participating broker could not arrange a structured settlement funded with a Hartford Life annuity, the broker was to arrange an all-cash settlement so Hartford would not lose annuity business to competitors.
• Instead of paying participating brokers an industry standard 4% commission, Hartford paid 3% and unjustly and fraudulently passed a 4% commission cost to the claimant while falsely portraying the brokers as independent.
• In return, the approved brokers provided Hartford with outside markets for structured settlement annuity sales through their relationships with other P&C insurance companies thereby helping Hartford generate record increases in annuity sales.
• Using SBS and BAP, Hartford executed a scheme to breach settlement agreements, defraud claimants and/or unjustly enrich itself by retaining 15% of the amount it had promised or agreed to use for its structured settlements and concealing it was illicitly profiting from each structured settlement.
• Internally, Hartford allocated the 15% as follows: 5% immediate profit to Hartford (in addition to future investment profit); 5% for Hartford's marketing and sales programs including brokerage commissions; 3% for Hartford's operational expenses; 2% to pay taxes on income derived from annuity sales.
• Representations by Hartford and its approved brokers to claimants and their advisers falsely indicated 100% of the amount Hartford promised or agreed to use to fund the annuities was in fact used for the annuities.
• Hartford instructed its SBS and BAP program participants:
  • Never to disclose Hartford was retaining 15%;
  • To affirmatively misrepresent that claimants were receiving their structured settlement annuities at "no cost" in contrast with other potential investments.
• Hartford required SBS and BAP participants to use standard and uniform sales presentations developed by Hartford plus a Hartford software program to generate annuity quotes that were inherently false and deceptive.
• By making affirmative statements, Hartford and its representatives assumed a duty to disclose all other information about the structured settlement annuities.
• Hartford changed portions of its SBS and BAP programs in 2005 in part because then New York Attorney General Eliot Spitzer had notified Hartford his office was investigating brokerage commissions.
  
• In 2005, Hartford began to disclose in writing that deductions would be made from annuity costs for brokerage expenses and to offset operating expenses but Hartford still did not disclose that it retained other amounts.
• Hartford's SBS and BAP programs constitute violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud, breach of contract and unjust enrichment.
  

U.S. District Court Decision - Judge Hall:

• Granted plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the RICO and state-law fraud claims;
• Denied plaintiffs' Motion for Class Certification and Appointment of Class Counsel for the state-law breach of contract and unjust enrichment claims;
• Certified two subclasses (based upon alleged "cost" and "value" representations) for both the RICO and fraud claims.

Defendants' Appeal

• District Court Judge Hall approved Hartford's Petition for Permission to Appeal to the U.S. Second Circuit Court of Appeals her Orders certifying plaintiffs' RICO and state-law fraud claims as class actions.
  
• Hartford's petition claims Judge Hall misread controlling precedent and "assumed away" the substantive elements of reliance and causation that ordinarily preclude certification of RICO and state-law claims based on allegations of fraud.
• Hartford's petition raises three basic issues:
  • Whether RICO cases require proof that someone relied on representations that allegedly caused plaintiff's injuries?
  • Whether "self-proving reliance" eliminates the need for individual proof of transaction causation in state-law fraud cases based upon alleged financial misrepresentations?
  • Whether the rule that "uniform misrepresentations" may be established by common proof extends to non-uniform but allegedly "similar" representations?

Settlement Consulting - 3

In prior posts about settlement consulting, S2KM:

• Reviewed Joseph DiGangi's discussion at the NSSTA 2009 Winter Meeting titled: "Comprehensive Settlement Consulting in the 21st Century". See: "Settlement Consulting".
• Continued DiGangi's discussion by asking questions and offering comments about "settlement consulting" definitions and scope. See: "Settlement Consulting - 2".

This S2KM post outlines settlement consulting history - from a structured settlement perspective.

S2KM's structured settlement history diagram (developed with graphic artist Keith Burtoft) concludes with the founding of the National Association of Medicare Set-Aside Professionals (NAMSAP) in 2005.

Beginning in 2005, S2KM has continued to monitor structured settlement history by attending and reporting about settlement consulting conferences addressing structured settlements.

For the past three years, S2KM has also published annual reports about structured settlement developments:

• Structured Settlements in 2008;
  
• Structured Settlements in 2007;
• Structured Settlements in 2006.

Using the same categories as S2KM's structured settlement history diagram, here are some of the more recent settlement consulting highlights:

Social Security

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case (2006) - see John Campbell's analysis of the Eighth Circuit's decision which the U.S. Supreme Court unanimously affirmed.
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Additional MSA rules for structured settlements (2008);
• New POMS for Special Needs Trusts (2009) - see David Lillesand's report;

Taxation - see related articles on the Wood & Porter website:

• Banks and Banaitis cases (2005) - attorney fees;
• Murphy case (2007);
• IRS Letter Ruling 200836019 (2008) - Non-qualified 130 assignments and attorney fees.

State Legislation (2005-2008) - see Release 45 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

• Structured settlement protection statutes;
• Uniform Trust Code;
• UCC Article 9 anti-assignment provisions;
• Medicaid annuity rules.

Other Developments

• Academy of Special Needs Planners (ASNP) founded (2007);
• AIG receives $150 billion U.S. Government bailout (2008);
• Joseph Ricci replaces Randy Dyer as NSSTA Executive Director (2008);
• SSP publishes its "Standards of Professional Conduct" (2008) and begins its Registered Settlement Planner (RSP) certification (2008);
• American Association of Nurse Life Care Planners (AANLCP) founded (2008);
• Several annuity providers depart the structured settlement market (2005-2008);
• Structured settlement annuity premium remains level at $6 billion per year (2001-2008);
  
• Structured settlement surveys identify a larger market (2006-2008);
• Settlement consulting bloggers and podcast providers emerge (2004-2009).

For reasons why S2KM views 1982, 2001 and 2008 as strategically important for structured settlements, see "Structured Settlements in 2008 - 1".

Robert Wood and 468B Funds

Robert W. Wood has written an important new legal treatise titled "Qualified Settlement Fund and Section 468B" published by the Tax Institute and available for purchase on the Tax Institute website.

Professionals who work with QSFs will immediately recognize the value of Wood's new 468B book which:

• Promotes the benefits of QSFs;
• Maps the technical landscape;
• Addresses strategic and controversial issues.

Wood is a preeminent tax attorney whose specialties include structured settlements and settlement planning.

• Wood also authors "Taxation of Damage Awards and Settlements Payments" plus many valuable articles accessible from the Wood and Porter website.
  
• Wood writes and speaks frequently about QSFs including this January 5, 2009 article about single claimant issues.

Wood's new book offers the first "dedicated guidebook about QSFs".

Wood's target audience (amended listing by S2KM on 02152009)

• Litigators - plaintiff and defense lawyers;
• Judges who approve QSFs;
• Settlement trustees and administrators for:
  • QSFs;
  • Special needs trusts (SNTs);
  • Medicare set-aside arrangements (MSAs).
• Guardians;
• Mediators;
• Settlement planners;
• Settlement allocators;
• Structured settlement annuity providers;
• Structured settlement intermediaries;
• Life care planners;
• Legislators and regulators.

Wood's book provides significantly more QSF information and resources than any previous publication. The book includes 13 chapters plus extensive footnotes, an Appendix, Forms, Glossary, Tables and Index.

Wood's compendium of QSF topics:

• Establishing, drafting, administering, transferring, distributing, and terminating QSFs;
• Tax calculations, payments and penalties; 
• Structured settlements and deferred attorney fees;
• Designated settlement funds (DSFs);
• Other non-QSFs.

Although his new 468B book is comprehensive, Wood acknowledges his analysis "clearly enters unchartered ground". QSF unchartered ground includes:

• Structured settlements;
• Single claimants;
• Structured attorney fees;
• Definitions for claims and claimants.

Both proponents and opponents of single claimant 468B will be disappointed (for different reasons) with Wood's conclusions about single claimant issues.

Wood acknowledges the most obvious interpretation of "one or more" is "one or more". Also that, "the 'one or more' language in 468B [regulations] would seem to trump economic benefit concerns". Wood further states he has not found any tax authority (cases; rulings) denying QSFs for single claimants in otherwise qualifying 468B cases.

Wood also reports "some believe that Revenue Procedure 93-34 leaves unanswered the question whether the economic benefit doctrine will attribute income to a single claimant" thereby potentially disqualifying a subsequent IRC section 130 qualified assignment.

Wood concludes "the foregoing concerns have led some practitioners to seek further guidance from the IRS". To date, according to Wood, "the answer remains unsettled".

Wood recommends avoiding the single claimant controversy by establishing a QSF with multiple claimants - until the single claimant issue is addressed with rulings or case law.

Wood raises the issue of plaintiff attorneys qualifying as separate 468B claimants and offers drafting advice to help achieve that objective.

Although Wood's 468B book does not address non-tax government benefits, other commentators have argued that lien holders with claims against an injury recovery, including Medicare and Medicaid, qualify as 468B claimants.

Wood's analysis of the single claimant controversy highlights "the political and business underpinnings that surround the single claimant controversy" - or to utilize Wood's section title: the "Control and Commissions" of structured settlement annuities.

Wood's discussion of how commissions help drive the single claimant controversy does not pick sides or criticize conduct. His focus is case specific as opposed to debating competing business models and policy disagreements.

Wood nonetheless makes clear his enthusiasm for the benefits and advantages of QSFs which he describes as "an important dispute resolution vehicle possessing remarkable tax efficiency". The benefits of a QSF "seem to be of staggering proportions", according to Wood, and "QSFs are definitely not tax shelters".

Wood asks his 468B readers: "how could one not do handstands over a simple trust that essentially abrogates the fundamental tax concepts of constructive receipt and economic benefit"? Settlement planning professionals who read Wood's new 468B book will agree and benefit from Wood's valuable and timely analysis.

Wood's readers (and settlement planners generally) should continue to expand Wood's strategic QSF discussion:

• Why doesn't "one or more" encompass single claimants?
• Does public policy support single claimant QSFs?
• How does 468B, as a potential settlement planning "standard", impact settlement negotiation, planning and funding?
• Why don't plaintiff attorneys and settlement planners utilize QSFs in more cases?
• How best can QSF performance metrics be defined and improved?
• How can QSFs improve and grow the structured settlement and settlement planning markets?
• What are the most important QSF educational priorities and opportunities?

Related S2KM commentary:

• Robert W. Wood
• 468B QSFs

Structured Settlement Credo - 2

If the structured settlement industry is experiencing  "transition", what exactly is changing and why?

Structured settlement industry transition:

• Internet technologies - their impact on business models, strategies, tools and skill set requirements.
• Legislation and regulations - the secondary market; Medicare; Medicaid; and IRC 468B;
• Financial meltdown - the impact on AIG, J.G. Wentworth and others.
• New U.S. President - expected legislative and regulatory change.
• Aging industry leadership - the need for a new generation of younger and more intelligent industry leaders.

How will the structured settlement "transition" impact industry:

• Credo
• Ethics
• Values
• Standards 
• Public policy?

And vice versa?

When and where will these "transition" issues be addressed?

Assuming ability to adapt is critical for survival, how will the structured settlement industry "adapt" its historic structured settlement credo to the new settlement planning landscape?

NAMSAP 2008 Annual Meeting

The National Alliance of Medicare Set-Aside Professionals (NAMSAP) hosted its 2008 Annual Meeting October 2 in Washington, D.C. One hundred and thirty-six members attended including attorneys, insurers, life care planners, MSA administrators and structured settlement professionals.

Founded in 2005, NAMSAP is a non-profit organization devoted to improving Medicare set-aside arrangements (MSAs) and to facilitating compliance with Medicare conditional payment recovery. NAMSAP has over 600 members who are responsible for the vast majority of MSA submissions to the Center for Medicare and Medicaid Services (CMS). CMS is the Federal agency within the U.S. Department of Health and Human Services responsible for enforcing the Medicare Secondary Payer (MSP) rules.

Historical Summary

Although the MSP rules were enacted by Congress in 1980, CMS did not begin to enforce the MSP statute until 2001. Beginning July 2001, CMS has enforced the MSP statute by recommending MSAs for certain categories of workers compensation (WC) commutation settlements. Since 2001, CMS has issued a series of policy memoranda for WCMSAs, several of which address structured settlement issues. These CMS WCMSA policy memos are available for download on this CMS website.

On December 29, 2007, President George W. Bush signed into law the "Medicare, Medicaid and SCHIP Extension Act of 2007" (MMSEA). Beginning July 1, 2009, Section 111 of MMSEA requires liability insurers (including self-insurers, no-fault insurers and workers compensation insurers) to:

• Determine Medicare status for all claimants; and
• Report all claims involving a Medicare beneficiary to CMS when those claims are resolved.

If the reporting for any claimant is not done in a timely manner, MMSEA authorizes CMS to enforce a civil penalty of $1000 per day per claimant. These information requirements and penalty provisions provide the basis for expanded enforcement by CMS of the MSP statute.

CMS stated recently that it currently receives, on average, 1550 WCMSA submissions per month - and this number appears to be increasing. According to NAMSAP leaders, the vast majority of WCMSAs are self-administered and a high percentage of WCMSAs are funded with structured settlement annuities. Because of the "set-off" method CMS requires for determining present value, structured settlement annuities currently have a cost advantage over lump sum alternatives.

CMS also accepts rated ages from annuity providers to determine the funding period for WCMSAs unless state law specifically limits the length of time that workers compensation (WC) covers work-related conditions. CMS most recently addressed age rated annuity rules in its August 20, 2008 policy memorandum. The August 20, 2008 CMS policy memo states in part:

"Unless a submitter furnishes acceptable proof of a Rated Age for a claimant, CMS will estimate the claimant's remaining life expectancy using Actual Age. Acceptable proof of Rated Ages includes independent rated ages on the letterhead of an insurance carrier or settlement broker and a statement from the submitter that all rated ages obtained on the claimant have been included."

NAMSAP Meeting Highlights

NAMSAP Accomplishments - NAMSAP President Rob Lewis summarized NAMSAP's 2008 accomplishments:

• Increasing membership
• Increasing revenues
• Funded participation on the MARC coalition steering committee
• NAMSAP position paper for CMS
• Active listserve and committees
• NAMSAP ethics statement
• MSA educational resources including:
  • Annual meeting
  • Webinar series
  • Updated certification program
  • National training program for structured settlement consultants

Medicare Action Recovery Coalition (MARC) - Roy Franco, Director of Safeway's Risk Management Strategies and Acting Chairman of MARC spoke about "Medicare and Liability Claims - Turmoil in the Trenches".

• In discussing the MMSEA requirements for liability cases, Franco said "the issue is not just about reporting". He asked "what will the government do with the data" and predicted a "claim freeze" as liability insurers and self-insureds wait for resolution and approval before they pay claims.
• Franco characterized the MMSEA MSP rules as an attack on traditional best practices for liability claim management. He predicted legal challenges and criticized MMSEA rules for:
  • Required consent;
  • Immediate reporting;
  • No safe harbor for liability insurers;
  • Lack of time limits, due process, or reimbursement mechanism;
  • Disregard for state tort laws;
  • Disenfranchisement of senior citizens;
  • Legal impossibility to report all settlements and awards
• Franco outlined MARC's Action Plan priorities for MMSEA including:
  • Change the law - or, alternatively, obtain an injunction to stop its July 1, 2009 implementation;
  • Raise public and legislative awareness;
  • An October 8, 2008 Steering Committee meeting;
  • Increased MARC membership.

H.R. 2549 and WCMSA Reform - Douglas Holmes, President of UWC, spoke about WCMSA reform focusing on pending U.S. House of Representatives bill H.R. 2549.

• Holmes summarized H.R. 2549's goals including:
  • No CMS review where the MSA cost is less than the MSA benefit;
  • Streamline CMS approval process;
  • Establish an MSA appeal process;
  • Consistent and efficient MSA procedures;
  • State WC laws define the primary obligation;
  • Medicare shares the cost of protecting its own interests;
  • Creating clear legal authority for MSAs.
• Holmes stated CMS is not cooperating with Congress. He cited CMS' failures to respond to:
  • Congressional requests for data to determine whether H.R. 2549 is revenue neutral;
  • Supplemental Congressional letters and requests for meetings.

Ethics and Multi-Disciplinary Approach - A panel discussion of NAMSAP members addressed ethical issues that arise when attorneys, nurses and structured settlement consultants collaborate on MSA cases. Participants included: Aaron Frederickson; Robert Brown; Karen Cofield; and Christine Phillips. Although this discussion was important and valuable, the topic deserves and requires more time and would benefit from a comparative analysis of existing standards of professional conduct as well as hypothetical case studies.

NAMSAP Committee Reports - NAMSAP currently has four committees whose chairpersons provided summary reports:

• Membership - Ann Major
• Government Affairs - Henry Kohnlein
• Education - Leslie Schumacher
• Ethics and Standards - Tom Spratt

Additional Presentations - The following presentations completed the NAMSAP educational program:

• Pharmacy Trends - Robert Esgro
• Coding - Jason Beans
• CAT Claims - Jon Gice
• Mandatory Insurer Reporting - Mark Popolizio and John Williams

Congratulations to NAMSAP, especially President Rob Lewis and Education Chairperson Leslie Schumacher, for a valuable and well-organized educational program. Lewis closed the meeting by announcing the election of Robert Brown and David Korch as new NAMSAP Directors.

For additional information about:

• MSP Rules and MSAs - see this S2KM blog post;
• NAMSAP - see this S2KM blog post.

Release 44 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) will include an update on Medicare set-aside arrangements.

Structured Settlements in 2007

Happy holidays from S2KM Limited. Thank you for reading S2KM's blog during 2007. This final 2007 S2KM blog post highlights some of this year's important structured settlement developments and issues.  For additional background information, see:

• S2KM Mid-2007 Structured Settlement Report
• Structured Settlements in 2006

Industry Growth and Development

• Industry insiders are predicting final 2007 structured settlement annuity sales (qualified and non-qualified) will match or slightly exceed total 2006 production of $6.1 billion.
• Membership growth in 2007 for the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP), the primary structured settlement trade associations, also appears flat. Neither of these associations has articulated a strategy for growing the structured settlement industry.
• NSSTA replaced long-time Executive Director Randy Dyer in 2007 with association management company Smith Bucklin. NSSTA has announced it will continue a business relationship with Dyer. However, NSSTA has not yet announced Dyer's new role or responsibilities.
• Annuity provider Mass Mutual exited the structured settlement industry in 2007 joining other recent industry departures such as Genworth, Travelers and Aegon. No new annuity providers entered the structured settlement market in 2007.
• The secondary life and annuity markets continued to be controversial within the structured settlement industry in 2007. Semetra resigned from NSSTA in 2007 based in part on their disagreement with NSSTA's Bylaw Amendments related to structured settlement factoring. Neither NSSTA nor SSP allows factoring companies to join their associations.
• Although the secondary structured settlement market continues to grow in 2007, the overall pace of its growth appears to have leveled off for many, but not all, participants.
• Preliminary strategic recognition and some consolidation continued during 2007 within these overlapping markets:
  
  • Structured settlements;
  • Personal injury settlement planning;
  • Litigation funding;
  • Special needs planning;
  • Secondary insurance and annuity markets.

Legislation and Regulations    

• New York Governor Eliot Spitzer announced a $750 million "agreement in principle" for Executive Life of New York in 2007. The agreement is designed to continue paying all ELNY annuitants 100% of their benefits. The announcement represents a public relations victory for the structured settlement industry. Many questions about the agreement, however, remain unanswered. For example: the amount of contributions from indemnity (casualty) insurers who own or have assigned structured settlement annuities.
• State Medicaid Agencies are continuing to adopt annuity provisions from the Deficit Reduction Act into their state Medicaid Plans. Interpretations and applications of these new annuity rules remain inconsistent creating process bottlenecks and denials. The impact of the secondary annuity markets on Medicaid qualification remains unclear in 2007. The Social Security Administration (SSA) announced in 2007 that it will draft POMS for annuities in 2008. For additional information about the Deficit Reduction Act, see:
  • Release 41 of "Structured Settlements and Periodic Payment Judgments";
  • Inconvenient Questions; and
  • NAELA Annuity Policy White Paper.
• 48 states have enacted structured settlement protection statutes. Overall, these statutes appear to be accomplishing their purposes and functioning with increasing certainty and efficiency. Pennsylvania's judiciary adopted Pennsyvania Rule 229.2 in 2007 tightening some rules and processes within that state's protection statute.
• The U.S. Treasury has not ruled on single claimant 468B funds in 2007.

Case Law - some of the significant 2007 cases:    

• DOJ Sovereign Immunity Defense - see "Drinker Biddle's Structured Settlement Update" for analysis of two DOJ sovereign immunity cases: Transamerica v. Settlement Capital and Continental Casualty v. United States.
• Primary Market Disclosure Case - "Pullman & Comley's Structured Settlement Insights" provided the first Internet analysis of Joseph v. The City of New York which Pullman & Comley characterizes as ""the first court opinion to analyze the requirements in structured settlement protection acts that disclosures be made when negotiating a structured settlement."
• Rapid Settlements cases challenging secondary market laws and business practices including:
  
  • Rapid v. Symetra; and
  • CNA v. Rapid Settlements

• Murphy v. IRS - Eleven months after ruling that taxing damage awards for nonphysical compensatory damages violated the United States Constitution, the United States Court of Appeals for the District of Columbia Circuit has reversed itself in Murphy v. IRS by holding that the United States can tax awards for emotional distress and injury to reputation.
• Macomber v. Travelers - the parties agreed to a confidential settlement in 2007.  It is unclear what legal precedents, if any, the earlier Connecticut State Supreme Court rulings in this case will hold for current or future structured settlement litigation.
  

Educational Programs and Resources

• Both NSSTA and SSP offered certification programs in 2007.    
• S2KM attended educational programs for the following trade associations in 2007 and wrote blog posts (see links) evaluating their structured settlement educational programs:          
  
  • National Structured Settlement Trade Association (NSSTA).          
  • Society of Settlement Planners (SSP)          
  • American Association for Justice (AAJ)          
  • National Academy of Elder Law Attorneys (NAELA)          
  • Academy of Special Needs Planners (ASNP)          
  • National Association of Settlement Purchasers (NASP)    
• The structured settlement industry continued to offer various additional educational resources in 2007:          
  
  • Blogs, podcasts, wikis and concept maps;          
    
  • Digital and hardcopy newsletters;          
    
  • Hardcopy legal textbooks.

Business Standards and Practices

• 2007 developments
  
  • Broker Relations Initiative - status report provided in this S2KM blog post.
  • SSP Ethics Project - status report provided in this S2KM blog post.
• 2007 issues:
  
  • Structured settlement public policy
  • Claim management vs. settlement planning
  • Consumer and investor protection including:
    
    • Compensation disclosure;
    • Informed consent;
    • Single claimant 468B funds;
    • Unfair claim practice legislation;
    • Fiduciary responsibilities for professional advisors.

• Additional compensation issues:
  • Rebating
  • Affinity programs
  • Secondary market transactions
• Unauthorized practice of law.