Should structured settlement "consultants" be held to some "product suitability standard" when they recommend structured settlement annuities to resolve personal injury lawsuits? If the answer is "yes", to what standard should they be held accountable and by whom?
A prior S2KM blog post discussed these issues in the context of the Code of Ethics of the National Structured Settlement Trade Association (NSSTA), the Standards of Professional Conduct of the Society of Settlement Planners (SSP) and the Suitability in Annuity Transaction Model Regulation promulgated by the National Association of Insurance Commissioners (NAIC).
NSSTA's Code of Ethics does not directly address product suitability standards. It does, however, direct NSSTA members to: "…comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided."
SSP's Standards of Professional Conduct utilizes the words "appropriate" and "informed consent". In the event of a conflict between SSP's Standards of Professional Conduct and any "laws, court rules, licensure requirements or other standards imposed on any regulated profession", SSP's members are directed to "abide by the laws or professional standards imposed on the members discipline."
Although the NAIC Suitability Regulation applies "to any recommendation to purchase, exchange or replace an annuity made to a consumer by an insurance producer, or an insurer ...", the Model Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process" which presumably encompass structured settlement annuities.
What other legislation or regulations could impact whether a structured settlement annuity is suitable for a specific personal physical injury claimant - and why should it matter?
Several additional laws and regulations could be relevant to these questions including:
- Minors' Statutes
- State Structured Settlement Protection Statutes
- The Uniform Prudent Investors Act
- Dodd Frank Legislation
This blog post considers minor statutes and state protection statutes. A subsequent S2KM blog post will discuss the Prudent Investors Act and Dodd Frank.
Texas attorney Phillip McCrury addressed the topic "What Judges Look for When Approving a Minor's Settlement" during the SSP 2009 Annual Meeting. McCrury surveyed existing state legislation and concluded that most state minors' statutes require court approval but few, if any, specifically address structured settlements. Various states have adopted two alternative standards for judicial approval of minors' settlements: the "best interest" standard and the "fair and reasonable" standard. McCrury, however, did not identify a single state minors' statute that defined either "best interest" or "fair and reasonable".
Both McCrury's SSP presentation and the 2011 Hancock v. Share case highlight the potential for conflicting judicial interpretations when structured settlement annuities are part of a proposed minor's settlement. Assuming a structured settlement "binds the assets" of a minor beyond the age of majority:
- Under what circumstances is a structured settlement in a minor's best interest - or fair and reasonable under some state minors' statutes?
- Should it matter whether or not a minor has a debilitating injury?
- What justification should be required from a guardian who recommends a structured settlement for a minor?
- When a judge evaluates whether a proposed structured settlement transfer meets the "best interest" test, what importance should be given to the fact that a proposed transferor was a minor when he/she received the structured settlement and therefore never personally approved or consented to the structured settlement?
In addition to minors' statutes, the state structured settlement protection statutes provide an application of the "best interest" and "fair and reasonable" standards with which structured settlement consultants and settlement planners should be familiar. Both IRC section 5891 and the Model State Structured Settlement Protection Act (Model Protection Act) require a transfer to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents" as a condition for judicial approval.
Some state protection statutes require that structured settlement transfers also meet an additional "fair and reasonable" test. For example, under New York's structured settlement protection act, a judge must "determine whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable" (emphasis added) in addition to meeting the "best interest" test.
Neither IRC 5891 nor the Model Protection Act, however, define "best interest". California's revised structured settlement protection act, however, includes the following list of factors that California judges "shall consider" when deciding whether to approve a proposed transfer:
- The payee's age, mental capacity, legal knowledge, and apparent maturity level;
- The stated purpose for the proposed transfer;
- The payee's financial and economic situation;
- The terms of the proposed transfer, including the discount rate and transaction fees;
- Whether the payments are intended to pay for future medical care related to the payee's original injuries;
- Whether the payments are intended to pay for necessary living expenses;
- Whether the payee is likely to require future medical care for the payee's original injuries, and, if yes, whether the payee has other resources, including insurance, to pay for those expenses;
- Whether the payee has other income to meet his/her obligations to support dependents;
- Whether the payee has any court-ordered child support obligations;
- Whether the payee has attempted or completed prior transfers;
- Whether the payee or his/her family is facing any financial hardship;
- Whether the payee has received or should receive independent professional advice about the transfer; plus
- "Any other factors or facts that the payee, the transferee, or any other interested party calls to the attention of the reviewing court or that the court determines should be considered in reviewing the transfer."
Various courts have also identified factors to be considered when determining whether a proposed structured settlement transfer meets the "best interest" test. For example, a New York Supreme Court considered the following factors before denying a proposed 2003 transfer: the payee’s age; mental and physical capacity; maturity level; ability to show sufficient income that is independent of the payments sought for transfer; capacity to provide for the welfare and support of the payee’s dependents; the need for medical treatment; the stated purpose for the transfer; and the demonstrated ability of the payee to appreciate the financial terms and consequences of the proposed transfer based upon truly independent legal and financial advice. (In re Settlement Capital Corp.)
What relevance, if any, do state structured settlement protection statutes have for primary structured settlement product suitability standards?
Neither IRC 5891 nor any of state structured settlement protection statutes apply their "best interest" test to primary market structured settlement sales. Only four of the state statutes (New York, Florida, Massachusetts and Minnesota) establish any primary market sales standards, each requiring certain mandatory written disclosures.
The secondary market "best interest" test, however, does raise important issues for the primary structured settlement markets. Most importantly, If structured settlement transfers are required to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents", why shouldn't a "best interest" test apply to the original structured settlement sale? And, what impact would a "best interest" test have on primary market business standards and practices?
In a subsequent blog post, S2KM will consider whether, when and how the Uniform Prudent Investors Act and Dodd Frank require primary structured settlement sales to meet a "best interest" test and/or otherwise impact structured settlement business standards and practices.
For additional commentary and analysis of structured settlement business standards and practices, see the structured settlement wiki and Section 6.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).