Beyond Structured Settlements

S2P2J Release 53

Publisher Law Journal Press is currently distributing hardcopy supplements for Release 53 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J, which includes a searchable index, download capability and one-click access to cases and statutes, has already been updated to include Release 53 materials.

First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 53 Highlights

Release 53 continues S2P2J's comprehensive reporting of the Executive Life insolvencies with updates for both Executive Life of California (ELIC) and Executive Life of New York (ELNY). The ongoing ELNY liquidation threatens severe court-approved reductions for more than 1400 structured settlement recipients across the United States.

Certain prospective ELNY shortfall payees are appealing the ELNY liquidation and restructuring order. Their attorneys are appealing a related contempt order. The outcome of this courtroom drama will significantly impact not only the ELNY shortfall payees but also the structured settlement industry and state life insurance guarantee associations.

Other Release 53 topics:

• American Taxpayer Act of 2012 - updating when and how personal injury damage awards are taxed to a decedent's estate. 
• Non-qualified assignments - expanded analysis of this growing market.
• 2013 HIPAA omnibus final rule - how it impacts settlement planners and structured settlement professionals.
• The Smart Act - which sets new procedures for Medicare Secondary Payer (MSP) repayment and reporting.

As the structured settlement and settlement planning markets continue to experience unprecedented changes, S2P2J provides a comprehensive and up-to-date knowledge resource for industry experts and stakeholders.

If you do not already subscribe to S2P2J, or your subscription is out-of-date, review some of the recent S2P2J highlights to see what you are missing.

Affordable Care Act - 1

The Affordable Care Act (ACA) refers to two controversial laws enacted in March 2010, the Patient Protection and Affordable Care Act and the Health Care Education and Reconciliation Act, which restructure the fundamental relationship among government, health care providers and health care recipients and profoundly impact persons with disabilities.

Although some Republicans in Congress still threaten to repeal the ACA, the Supreme Court upheld almost all of the ACA's provisions in 2012, including the individual mandate and elimination of pre-existing condition restrictions, which will become effective nationally on January 1, 2014.

How will the ACA impact personal injury damage awards, settlement planning and structured settlements?

Professional associations whose members engage in settlement planning have already begun to address these issues:

• Speakers at recent Academy of Special Needs Planners (ASNP) annual educational conferences (Cynthia Barrett in 2011, David Lillesand in 2012 and Scott Solkoff in 2013) explored these issues in the context of special needs planning.
• The National Academy of Elder Law Attorneys (NAELA) devoted the Spring 2011 issue of its NAELA Journal to the impact of the ACA on Elder and Special Needs Law attorneys and their clients.
• The Society of Settlement Planners (SSP) will feature a presentation by Thomas Begley titled "The Impact of the ACA on Personal Injury Settlements, Structured Settlements and Special Needs Trusts", plus a related panel discussion, during its 2013 Annual Meeting.

Recent research papers and law review articles have further expanded analysis of these strategic ACA issues. One such research paper, titled "Potential Effects of the Affordable Care Act on the Award of Life Care Expenses" and written by Joshua Congdon-Hohman and Victor A. Matheson, was published September 2012 as part of the College of the Holy Cross, Department of Economics, Faculty Research Series (Paper No. 12-01).

Their paper argues: "the ACA may well have indirectly resulted in a great deal of tort reform" and, as a result, "awards in personal injury cases could be dramatically impacted" because:

• Future medical expenses represent a significant element of damages in many personal injury cases.
• When the ACA is fully implemented in 2014, all individuals will be required to purchase health insurance or pay a penalty.
• The ACA provides insurance premium subsidies for low income individuals who do not receive health insurance through the government or from a family member’s employer.
• The ACA prevents price discrimination based on health status and bans annual and lifetime expenditure limits.
• Most individuals will pay the same cost for health insurance before and after an accident.
• The legal maximum out-of-pocket expenses allowable under the ACA is $5,950 per year.
• The goal of tort law is to make the plaintiff "whole".
• Funding of health care through private insurance is a valid methodology for accomplishing this goal now that the ACA makes those markets available to injury victims.
• Therefore, the ACA:
  • Should simplify and reduce calculations of future medical damages;
  • By limiting those costs to "[health insurance] premiums and out-of-pocket limits less any pre-injury expected medical costs and penalties if uninsured."

What about the "collateral source rule"?

Congdon-Hohman and Matheson, who are economics professors, acknowledge a collateral source issue is "at play" and "remains of significant importance". They argue, however, "there is reason to believe the ACA changes the underlying reason of excluding collateral source compensation from inclusion in tort cases."

More specifically, the authors maintain: "removing existing health insurance coverage from exclusion under the collateral source rule would not significantly affect health insurance coverage rates reducing the economic rationale for having a collateral source rule in place for health insurance."

In their paper, Congdon-Hohman and Matheson highlight additional provisions of the ACA which they believe will impact many life care plans:

• ACA provisions limiting growth of premiums and medical costs:
  
  • Limits on insurers' non-care based expenses.
  • Formal requirements to justify rate increases.
  • New standards to lower administrative costs.
  • Funding for new wellness and prevention strategies.
• ACA provisions reducing the tax deductibility of medical costs:
  • Reductions in eligible expenditures and nominal limits for flexible spending accounts.
  • An increase in the deductible medical expense threshold from 7.5 percent of adjusted gross income to ten percent.
  • An an excise tax on “taxable medical devices.”

As a related result of the ACA, Congdon-Hohman and Matheson believe life care planners will play an increasingly important role in personal injury damage analysis. Prior to the ACA, life care planners were tasked with identifying medical and living expenses not otherwise required "but for" the accident.

Under the ACA, the authors maintain life care planners must also identify which health care and living expenses will, and will not, be covered by the ACA's minimum insurance requirements. And, despite certain minimum federal standards, these requirements may differ by state.

Cogdon-Hohman and Matheson's research paper provides a valuable educational resource for all personal injury stakeholders. For settlement planning professionals who are attempting to understand how the ACA impacts personal injury damage analysis, negotiation strategy, work product, and funding options, this paper should encourage expanded industry discussion and analysis.

For S2KM's complete reporting and continuing commentary about the ACA, see the structured settlement wiki. For a comprehensive analysis about structured settlements and government benefits, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments"(S2P2J).

SSP 2013 Annual Meeting

Since it was founded in 2001, the Society of Settlement Planners (SSP) has defined itself as an alternative to the National Structured Settlement Trade Association (NSSTA); and defined its membership as more than plaintiff structured settlement brokers. The resulting settlement planning business model features:

• Structured settlement annuities as a core funding product, but not as a singular funding vehicle or product, for personal injury settlement plans; and
• Settlement planners, as "claimant centric", multi-professional, advisers who collaborate as a team and offer injury victims and plaintiff attorneys complementary knowledge, skill sets and work product.

To support and expand this settlement planning business model, SSP has developed and promoted:

• Standards of Professional Conduct for Settlement Planners;
• The Registry of Settlement Planners certification program; and
• Annual educational conferences.

To improve and grow both the structured settlement and settlement planning markets, SSP President Charles Schell has proposed the following strategy:

• "Study and improve our business standards and practices.
• "Develop "customer centric" solutions that help injury victims.
• "Build collaborative business models by focusing on shared interests."

SSP recently announced the agenda for its 2013 Educational Conference which will take place May 5-7 in Las Vegas. Featured topics and speakers, organized by S2KM-suggested categories:

Motivation, Marketing and Perspective

• The Art of Significance - Dan Clark
• Overcoming Objections and Managing Opportunities - Frank Maguire
• Life Lessons from the Lottery - Don McNay

Affordable Care Act (ACA)

• Impact on Personal Injury Settlements, Structured Settlements and Special Needs Trusts - Thomas Begley
• ACA Panel - Thomas Begley; Pi-Yi Mayo; Karen Meyers

 Qualified Settlement Funds

• Update - Pi-Yi Mayo
• Panel - Pi-Yi Mayo; Don McNay; Andy Cook; Mark Wahlstrom.

 Settlement Planning Team

• Partnering with Ancillary Service Providers - Anthony Prieto; Dave Place
• Professional MSA Administration - Don Batchelor
• Tax issues - Jeremy Babener
• Partnering with Investment Professionals - Victor Wilkerson
• Working with Benefit Expert Attorneys - Peter Wayne

 Government Benefit Issues

• MSA Allocation Process - Michael Greco
• Social Security Disability Benefits - Omar Ortega and Kip Daniels
• Spend Downs - Kristen Behrens; Thomas Begley
• How to Fix the MSA Program - Doug Shaw

 Settlement Trusts

• Settlement Trusts - Karen Meyers
• Funeral Trusts - Scott Leonardi
• Pooled Trusts - Jason Lazarus

Settlement Planning Products

• Long-term Care Insurance - John Darer
• Guaranteed Index Annuities - David Salko and John O'Connell
• Defined Benefit Plans for Plaintiff Attorneys - Rosendo Zepeda, Jr.

 Related S2KM Resources:

• Spring 2013 Educational Conferences
• SSP 2012 Annual Meeting
• Settlement Planning in 2012
• Alternative Business Models
• ASNP 2013 Annual Meeting

Spring 2013 Educational Conferences

The following national associations have announced 2013 Spring educational conferences featuring settlement planning issues:

• Academy of Special Needs Planners (ASNP)
  • March 21-23 in Austin, Texas.
• National Structured Settlement Trade Association (NSSTA)
  • April 17-19 in Palm Springs, California (members only).
• National Alliance of Medicare Set-Aside Professional (NAMSAP)
  • April 25-26 in Baltimore, Maryland.
• National Academy of Elder Law Attorneys (NAELA)
  • May 1-4 in Atlanta, Georgia (members only).
• Society of Settlement Planners (SSP)
  • May 5-7 in Las Vegas.

S2KM has attempted to organize Spring conference settlement planning topics by category below without listing speakers. For additional information, check the links above. Note: SSP has not yet published a complete conference program description on its website.

Settlement Planning - General Issues

• ASNP: Settlement Planning Panel Discussion
• NAELA: Structured Settlements and Settlement Planning

Settlement Planning Participants

• NSSTA
  • Mediator Panel
  • P&C Company Panel
• NAELA: Representing Fiduciaries
• SSP
  • Marketing to Plaintiff Attorneys
  • Ancillary Service Providers
  • Benefit Analysis Experts
  • Retirement Solutions for Plaintiff Attorneys
  • Partnering with Trust Counsel

Legislative Updates

• ASNP: Affordable Care Act
• NSSTA
  • Structured Settlement Legislative Update
  • Tax Reform Update
• NAMSAP - MSA Legislative Update
• NAELA: Special Needs Law Update
• SSP: Affordable Care Act

Regulatory Updates

• ASNP
  • Special Needs Trust (SNT) issues at the Social Security Administration
  • Social Security SSI Update
• NAMSAP
  • Advanced Notice of Public Rule Making for Liability MSAs
  • CMS Update
• SSP
  • Investment Securities Compliance, Regulatory and Licensing Issues
  • Reforming the MSA Program

Case Law Updates

• ASNP: The Jimmo vs. Sebelius Medicare Settlement
• NSSTA: Legal Committee Case Law Update
• NAMSAP: Case Law Update
• NAELA: Case Law Update

Business Practices

• ASNP
  • Determining a Reasonable Fee
  • Establishing the Financial Needs of the Special Needs Beneficiary
  • Modifying Problem Trusts into Effective SNTs
  • Drafting SNTs
  • Administration of SNTs
  • Medicaid Third Party Liens
• NAMSAP: Lien Resolution
• NAELA
  • SNT Reviews
  • Competitive Compensation Packages
  • Positioning Practice for Changing Demographics
  • What Constitutes the Practice of Law?
  • Cultural Competency After the Repeal of the Defense Of Marriage Act
  • Impact of Medicaid Managed Care
• SSP
  • Professional MSA Administration
  • Settlement Planning Tax Issues
  • MSA Submissions
  • QSF Administration and Panel

Financial Needs, Products and Issues

• NSSTA
  • Structuring MSAs
  • Financial Security and Annuities
  • Special Needs Trusts
• NAMSAP - Medicare Advantage Plans
• NAELA
  • Long-Term Care Insurance
  • Future of Long-Term Care
• SSP
  • Funeral Trusts
  • Social Security Disability Benefits
  • Long Term Care Insurance
  • Trusts in Settlement Planning
  • Guaranteed Indexed Annuities

Technology Developments

• NSSTA
  • Virtual Structured Settlements and The E-Worker
  • Structured Settlement Podcasts
• NAELA
  • Protecting Digital Assets
  • Technology and Social Media Ethical Issues
  • Social Media Marketing
  • Technology Roundtable

Standards and Metrics

• NSSTA
  • Structured Settlement Facts and Figures
  • Structured Settlement Service Metric Survey
• NAMSAP: MSA Data and Development Update
• NAELA: Guardian Standards and Role of the Fiduciary

Medical Conditions and Issues

• NAMSAP: CMS Pharmacy Trends
• NAELA: Rehabilitation of Brain and Spinal Cord Injuries

For S2KM's past reporting of settlement planning conferences, see the structured settlement wiki.

Structured Settlements in 2012 - 2

Settlement Planning

Compared with the structured settlement primary market, which was characterized by continuing sales declines in 2012, the related settlement planning market appears to have experienced growth and vitality in 2012.

The primary evidence of this growth and vitality consisted of the increasing number of educational conferences addressing settlement planning topics during 2012. These included:

• Society of Settlement Planners (SSP) Annual Meeting
• Risk Settlement Planning Practicum
• Academy of Special Needs Planners (ASNP) Annual Meeting
• Qualified Settlement Fund Symposium
• Various National Academy of Elder Law Attorney (NAELA) Conferences - of which S2KM attended the 2012 Ohio NAELA Unprogram.

One of the challenges for measuring the growth of the settlement planning market is the lack of market metrics. For example, despite continuing market inquiries, S2KM has been unable to identify reliable national market metrics for qualified settlement funds, special needs trusts, settlement trusts, or Medicare set-aside arrangements.

Towers Watson Studies

The most valuable market research for settlement planning S2KM has identified has been the Annual Studies of United States Tort Costs published by Towers Watson (formerly Towers Perrin) since 1985. These studies:

• Calculate tort costs resulting from five insured plus uninsured business lines: 1) commercial multi-peril; 2) medical malpractice; 3) product liability; 4) other liability; and 5) commercial auto.
• Exclude: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs.
• In 2002, Towers Watson also translated overall tort costs for 2001 into the following categories and percentages: 1) administrative costs (21%); 2) defense costs (14%); plaintiff attorneys (19%); economic loss (22%) and non-economic loss (24%). Towers Perrin discontinued this portion of its analysis in 2002. It was "devilishly difficult" according to Russ Sutter, a Towers Watson principal and actuary who directs their annual tort cost studies, "primarily because we lack reliable information from plaintiff attorneys". These percentages therefore represented Tower Watson's "best estimate" in 2002.

Based upon Towers Watson's most recent 2011 Annual Study and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates, that at least since 2006, more than $160 billion of United States tort costs annually have represented payments to injury victims and their attorneys.

Settlement Planning Issues

Among many settlement planning issues, S2KM viewed the following as the most strategically important during 2012:

• The evolutionary relationship between structured settlements and settlement planning;
• Comparing these two business models;
• Improving settlement planning by expanding structured settlements;
• What we have learned about the settlement planning market;
• Settlement planning tax challenges - including stress-induced physical ailments;
• How the Affordable Care Act (ACA) impacts settlement planning;
• How states are reforming Medicaid programs to address budgetary shortfalls and the ACA;
• Whether a standard of practice exists for using Medicare set-aside arrangements in liability cases;
• The application of product suitability standards to settlement plans funded with structured settlements;
• The impact of Dodd-Frank's uniform fiduciary standard on settlement planning.

Additional post in S2KM's blog series: "Structured Settlements in 2012":

• Part 1 - Primary market

• Part 2 - Settlement planning

• Part 3 - Secondary market

• Part 4 - Executive Life of New York

NASP 2012 Annual Conference - 2

Celebrating the 10th Anniversary of the enactment of IRC 5891, the National Association of Settlement Purchasers (NASP) hosted its 2012 Annual Conference last week in New Orleans.

The conference featured an ambitious and successful educational program highlighting prior NASP accomplishments and focusing on emerging issues that impact both the primary and secondary structured settlement markets. For the first time in NASP's history, conference attendance was open to primary market participants.

S2KM previously published an introductory blog post identifying NASP 2012 conference speakers and topics and providing links to S2KM reports from previous NASP conferences. Subsequent S2KM blog posts will recap speaker presentations.

This blog post offers S2KM's general observations and impressions of some of the broader structured settlement industry issues based upon NASP's 2012 conference.

Why Has Factoring Flourished?

Compared with the primary structured settlement market, both NASP and the secondary market appear to be flourishing. What explains this paradoxical success?

The groundwork for secondary structured settlement market success began in 1997 when NASP launched a strategic lobbying initiative resulting in the enactment of IRC 5891 and NCOIL's Model State Structured Settlement Protection Act (Model Act).

Although neither legislative development would have been possible without support from the National Structured Settlement Trade Association (NSSTA), the lobbying agendas of the two associations were markedly different. Ultimately NASP prevailed on several critical issues including:

• "Best interest" standard vs. NSSTA's preferred "financial hardship" standard.
• Denying annuity owners and providers the right to veto proposed transfers.
• Eliminating maximum discount rates.

In addition to NASP's lobbying success, NASP's members have achieved considerable, and controversial, marketing success utilizing aggressive television advertizing and sophisticated Internet techniques. As one measure of this marketing success, the primary market now claims the secondary market has "stolen the structured settlement brand".

Both the primary and the secondary structured settlement markets were devastated by the 2008 financial crisis which:

• Temporarily shut down asset-backed securities markets including securities backed by structured settlement payment rights.
• Created an industry liquidity crisis which resulted in:
  • J.G. Wentworth, the largest secondary market company, entering bankruptcy in 2009.
  • AIG, the largest primary market company, receiving a financial bailout from the U.S. government in 2008 and 2009.
  • Both Wentworth and AIG have subsequently recovered and regained their respective market leadership roles.
• Reduced interest rates to historic low levels causing a substantial reduction in primary market sales beginning in 2009.

As of the 2012 second calendar quarter, the secondary structured settlement market appears to have fully recovered from the 2008 financial crisis. The primary market has not yet recovered. Part of the reason is that interest rates, whether high or low, affect the primary and secondary structured settlement markets differently.

Other reasons, however, also help explain the growing success of the secondary structured settlement market.

• Structured settlement transfers improve the structured settlement product by addressing a critical need for many structured settlement recipients - a liquidity need that was not properly addressed in the original settlement plan or, alternatively, resulted from unanticipated developments.
• Continuing strong demand exists among some institutional and individual investors for recycled structured settlement payment rights.

Linked Markets - Same Customers

Having failed politically to end structured settlement factoring, NSSTA, and many annuity providers, have adopted alternative strategies which appear to be misguided attempts to create obstacles and impede the growth of the secondary structured settlement market.

NSSTA's 2006 bylaw amendments represent one such example. As NSSTA explained to its members: "because [the secondary market] activities [prohibited by the amendments] are inconsistent with the membership qualifications, engaging in those activities can lead to suspension or expulsion from membership and to denial of new membership applications." (emphasis added).

The increasing "administrative fees" annuity providers charge factoring companies, either as a condition to avoid "opposed transfers" or to allow transfers of life contingent payment rights, represents another example. Ultimately, the structured settlement recipients who transfer payment rights pay for those administrative fees which, for some annuity providers, now represent a new profit center.

How do these types of actions help the structured settlement customer or improve the structured settlement industry?

Both NSSTA and NASP, and their members, share a common existential interest in IRC 104(a)(2) and 130. Both NSSTA and NASP recognize the anticipated re-writing of the U.S. tax code expected to begin following the 2012 Presidential election represents a threat to those tax sections.

Arguably, the existence of IRC 5891, which not only links to IRC 104(a)(2) and 130, but also to the 48 state structured settlement protection statutes, has both expanded and strengthened the U.S. structured settlement legislative framework.

Having collaborated to help enact IRC 5891 and the NCOIL Model Act, shouldn't NSSTA and NASP also collaborate to defend and maintain IRC 104(a)(2) and 130 - and to identify additional shared interests for structured settlement industry improvement and growth?

Improving Industry Education

In his opening comments at the NASP 2012 conference, outgoing NASP President Matthew Bracy challenged attendees to make the structured settlement transfer business better: "better in the marketplace, better in the courts, and above all better for the customers who so need the service this industry provides."

One way NASP "walks the walk" of secondary market improvement is by inviting its critics to speak at NASP conferences. NASP challenges these critics not only to address secondary market problems but also to recommend improvements.

Critics who have spoken at past NASP conferences include: Jack Meligan, Stephen Harris, Peter Vodola, John Darer, and Richard Risk. Other critics, including NSSTA leaders, have been invited but have declined to participate.

Jan Schlichtmann, keynote speaker for the 2012 NASP conference, began by stating: "I don't like your advertizing". He then praised NASP for inviting and encouraging criticism to better itself and the secondary structured settlement market.

NSSTA also has permitted criticism as part of its educational programs. Examples include: Joseph DiGangi (see: "Settlement Consulting") and Dan Clark (see: "SSP and NSSTA 2010 Annual Meetings"). Whenever NSSTA has addressed strategically important and/or controversial issues (egs. IRC 468B and IRC 5891), however, NSSTA members generally hear only "politically correct" speakers and perspectives.

Because of the importance of issues such as qualified settlement funds (QSFs) and the secondary market for the future of structured settlements, NSSTA members increasingly must rely upon non-NSSTA educational programs and educational resources to interact with the people and ideas challenging and changing the structured settlement industry.

During 2012, these educational programs have included: the SSP conference, the ASNP conference, the Risk settlement planning practicum and the QSF symposium.

Fortunately for NSSTA members, as well as members of the Society of Settlement Planners (SSP), NASP has now opened an entirely new educational forum to challenge and expand their understanding of structured settlements.

S2P2J Release 52

Publisher Law Journal Press anticipates a late October 2012 distribution date for hardcopy supplements for Release 52 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated late October 2012 to include Release 52 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 52 Highlights

Documenting a structured settlement is generally more complicated than the paper work involved with a lump sum settlement. Structured settlement documentation can be further complicated depending upon the number of claimants and annuities, whether plaintiff attorneys defer their fees, the need to allocate damages, the degree of government benefit planning and the growing integration of annuities and trusts into blended products.

Increasingly, therefore, the parties to a structured settlement agreement must endeavor to implement complex settlement plans, using multiple funding devices, designed to address both the intent of the parties and compliance and accountability requirements from the public sector.

To assist structured settlement participants in achieving these objectives, S2P2J Release 52 features new sample structured settlement forms with suggested alternate clauses for use as circumstances change. The new sample forms include a model Structured Settlement Agreement, with a Supplemental Schedule to more conveniently address funding details, plus an optional Advisory Disclosure document specifying the involvement, services and commission sharing (if any) of structured settlement consultants used by the claimant, defendant and liability insurer(s).

The Supplemental Schedule provides a useful, alternative format for specifying the funding details of the settlement, including:

• The amount of up-front payments and their recipients.
• The cost to purchase funding for the periodic payments.
• A provision if the claimant’s attorney will receive periodic payments.
• Allocations by the parties between tax-free and taxable payments.
• Amount of monthly payments and whether they will extend for the claimant’s lifetime or for the greater of claimant’s lifetime or a set period of time.
• Any deferred lump sums to be paid.
• Contingent payee provisions in case payments remain due after claimant’s death.
• Provisions needed for minor’s or protected person’s settlements.
• Specific payee designations, including post office addresses or account information for electronic deposits.
• Designation of attorneys to be paid and at what address or to what account number.
• Language used to permit or disallow later transfers of periodic payment rights.

To help explain these new structured settlement forms, the authors have added extensive related commentary discussing how to create enforceable structured settlement agreements that minimize the risk of post-closing issues.

Release 52 also features a comprehensive update of the Executive Life of New York (ELNY) liquidation plus new and/or expanded analyses for the following structured settlement industry issues and case developments:

• International use of structured settlements.
• Whether defendants save money, historically and currently, using structured settlements.
• New Treasury regulations for IRC section 104(a)(2).
• Allocating settlement proceeds between taxable and tax-exempt elements.
• How special needs trusts can prevent private health care organizations from obtaining subrogation reimbursements from SNT beneficiaries.
• New case law addressing structured settlements for minors issues.
• Bankruptcy court decisions analyzing whether and when a bankruptcy trustee can access structured settlement benefits.
• New cases addressing differences between state periodic payment of judgment statutes that do and do not include termination provisions.
• The State of Washington's new Claims Resolution Structured Settlement Agreement for workers compensation cases.
• The new CMS Medicare Secondary Payer Recovery Portal offering authorized users access and the ability to update pending case information.
• Secondary market case update including:
  • Approval and denial of transfers based upon the "best interest" and "fair and reasonable"  tests.
  • Whether a structured attorney fee is subject to the state structured settlement protection statutes.

For highlights of prior "Structured Settlements and Periodic Payment Judgments" updates, see the structured settlement wiki.

QSF Symposium 2012 - 1

Evolve Bank and Trust will host the first Annual Qualified Settlement Fund Symposium September 27-28, 2012 in Memphis, Tennessee.  Dedicated exclusively to the advancement of qualified settlement fund (QSF) professionals, the purposes of the Symposium are to stimulate dialogue among QSF industry leaders and experts and to help shape industry thinking on QSF issues.

QSF Symposium Speakers and Topics

• Sylvius von Saucken - "Establishing the QSF: Account, Fund or Trust / Drafting Considerations"
• Kevin Urbatsch - "Petitioning the Court for Approval"
• Andy Cook - "Investment Policy and Fiduciary Investment Options"
• Peter Wayne - "QSFs and Government Benefits Preservation"
• Will Shapiro - "Lien Holdbacks and Claimant Distributions"
• Jeremy Babener - "QSF Taxation: Filing, Payments, Withholding and Reporting"
• Chris Lordan - "Accounting and Reporting Best Practices"
• Patrick Hindert - "How Structured Settlement Transfers Impact QSF Planning"
• Roundtable Discussion - moderated by Pi-Yi Mayo and Bryn Poland

Defined in Treasury Regulation 1.468B-1(c),  QSFs represent an important settlement planning tool and provide benefits for both defendants and plaintiffs. Defendants can use QSFs to resolve complex claims in exchange for a release and immediate tax deduction. Plaintiffs and their advisers can use QSFs to marshall assets, determine which plaintiffs and counsel receive which amounts, satisfy government benefits and other lien obligations and engage in thoughtful settlement planning without the pressures that accompany negotiations, mediations and litigation.

Revenue Procedure 93-34

One QSF advantage is the unlimited time QSFs allow for claimants to consider multiple investment options - including structured settlements provided the QSF satisfies rules set forth in Revenue Procedure 93-34 to qualify as a "party to a suit or agreement":

1. Claimants must agree in writing to the assumption by a IRC 130 qualified assignee of the QSF's obligation to make periodic payments.
2. Each qualified assignment must relate to a claim “on account of personal injury or sickness (in a case involving physical injury or sickness)”.
3. Each qualified funding asset purchased by each qualified assignee must relate to a liability to make periodic payments for damages to a single claimant.
4. No qualified assignee can be “related” to the QSF.
5. No qualified assignee can be controlled by nor control, directly or indirectly, the QSF.
6. Each transaction must meet all other section 130 requirements.

Single Claimant QSF Controversy

Whether a QSF can be established for a single claimant remains controversial - especially among structured settlement and settlement planning stakeholders.

The arguments in favor of allowing single claimant QSFs include the language in IRC section 468B and, more specifically, in the 468B regulations. These regulations, which also define a QSF (see above), allow a QSF to be “established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability". (emphasis added)

The Society of Settlement Planners (SSP) requested a ruling from the U.S. Department of Treasury on this single claimant issue in 2004. To date, however, the Treasury has not provided definitive tax authority for the single claimant QSF issue.

The National Structured Settlement Trade Association (NSSTA) historically opposes the issuance of guidance by the Treasury Department or the Internal Revenue Service on the single claimant QSF issue. NSSTA’s position appears to be that broad approval of single-claimant 468B funds would undermine and diminish the use of structured settlements. NSSTA maintains structured settlements are best created when both plaintiffs and defendants actively participate.

For more detailed information about QSFs, see:

• Robert Wood, "Qualified Settlement Funds and Section 468B"
• Hindert, Dehner and Hindert, "Structured Settlements and Periodic Payment Judgments" - Section 3.08B
• Jeremy Babener, "Structured Settlements and Single Claimant Qualified Settlement Funds"

ELNY Periodic Payment Obligations

More than 1400 structured settlement annuity payees are expected to suffer payment shortfalls under the Executive Life of New York (ELNY) Liquidation Plan approved by New York State Supreme Court Judge John Galasso on April 16, 2012. The average individual shortfall is estimated to exceed $600,000 present value.

Under what circumstances, if any, will defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?

Recent Motion

This issue was highlighted in a recent Motion by liability insurers asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. Judge Galasso denied the Motion on July 23, 2012.

The Motion attempted to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."

In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.

As S2KM has previously written, those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.

Three Funding Choices

As more fully explained in Section 3.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J): with a structured settlement, each defendant and/or liability insurer has three choices regarding its obligation to fund future periodic payment obligations to the claimant (1) to have no obligation; (2) to assume or share the obligation; or (3) to assume and then transfer the obligation without recourse. In general:

• "No obligation" means either a claim is paid on a lump sum basis or a structured settlement occurs and all parties agree that the particular defendant or liability insurer shall have no duty to make any future periodic payments.
• “Assume the obligation” means that a particular defendant or liability insurer ("obligor") assumes a legal obligation to pay future periodic payments. This obligor may be solely, jointly, or jointly and severally liable for the payments and, by assuming the obligation, accepts certain risks. One such risk is the potential insolvency of the financing company (e.g. ELNY).
• "Transfer the obligation" means "novation" as defined in Section 280 of the Restatement (Second) of Contracts (Restatement): "A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty." Comments to Section 280 further provide:
  • "Effect of novation. A novation discharges the original duty, just as any other substituted contract does, so that breach of the new duty gives no right of action on the old duty.
  • "Consideration. A novation is subject to the same requirements as any other contract, including that of consideration.... [C]onsideration to support the discharge of the original duty can usually be found in the promise to undertake a new duty….Assent of the obligee of the original duty and of the obligor of the new duty is always necessary."
  • "Substitution of obligor. ….[A] mere promise by a third party to assume the obligor’s duty, not offered in substitution for that duty, does not result in a novation, and the new duty that the third party may owe to the obligee as an intended beneficiary is in addition to and not in substitution for the obligor’s original duty."
  • Illustration: "A owes B $1000. B promises C that he will discharge the debt immediately if C will promise to pay him $1000. Intending to benefit A, C so promises. There is a novation under which B’s and C’s promises are consideration for each other, and A’s duty to pay B is discharged. A is the intended beneficiary of B’s promise …and can by disclaimer render the transaction, including the discharge, inoperative from the beginning."

Qualified Assignment

The most common method for transferring a structured settlement obligation is a "qualified assignment" as defined in IRC Section 130(c). For purposes of understanding "transfer of obligation" in the context of structured settlements, however, the Section 130 definition of "qualified assignment" presents two significant problems:

• IRC section 130 does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• Section 130 incorrectly uses the term "assignment" when it should have utilized the term "delegation".

Restatement of Contracts

Comments to Section 316 of the Restatement explain both the difference and the significance of these two terms:

• "Assignment and delegation. In this Chapter rights are said to be 'assigned'; duties are said to be 'delegated' ….. 'Assignment' is the transfer of a right by the owner (the obligee or assignor) to another person (the assignee)."
• "Comparing delegation to assignment. A person subject to a duty (the obligor) does not ordinarily have such a power to substitute another in his place without the consent of the obligee; that is what is meant when it is said that duties cannot be assigned. 'Delegation' of performance may be effective to empower a substitute to perform on behalf of the obligor, but the obligor remains subject to the duty until it has been discharged by performance or otherwise."

Comments to Section 318 of the Restatement further differentiate "delegation" and "novation" as follows: "An obligor is discharged by the substitution of a new obligor only if the contract so provides or if the obligee makes a binding manifestation of assent, forming a novation….Otherwise the obligee retains his original right against the obligor, even though the obligor manifests an intention to substitute another obligor in his place and the other purports to assume the duty. The obligee may, however, have rights against the other as an intended beneficiary of the promise to assume the duty."

NSSTA Model Agreements

After ELNY entered rehabilitation in 1991, the National Structured Settlement Trade Association (NSSTA) published Model Qualified Assignment Agreements (with and without a Release) which documents were updated following the enactment of IRC 5891 in 2001. Both versions of NSSTA's current Model Qualified Assignment Agreements reference IRC section 130 and utilize "assignment" to describe what the Restatement more properly characterizes as a "delegation".

Here is the relevant comparative language from current paragraphs 1 of the NSSTA Model Agreements:

• With Release - "Assignment and Assumption; Release of Assignor. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments. Each Claimant hereby accepts and consents to such assignment by Assignor and assumption by Assignee. Effective on the Effective Date, each Claimant hereby releases and discharges Assignor from all liability to make the Periodic Payments."
• Without Release - "Assignment and Assumption. Assignor hereby assigns to Assignee, and Assignee hereby accepts and assumes, all of Assignor’s liability to make the Periodic Payments."

Impact for Defendants and ELNY Victims

How does this discussion impact whether defendants/liability insurers have the legal responsibility to make up the difference in ELNY structured settlement shortfall payments?

• NSSTA's Model Qualified Assignment Agreements did not exist during the time period (1985-1990) when ELNY was selling structured settlement annuities.
• Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis.
• Whatever language parties used to describe and/or label their transactions (e.g. annuity financing; buy and hold; qualified assignment; novation; transfer; etc.) is not by itself determinative of the rights and responsibilities set forth in the actual language of the settlement documentation.
• Some common industry practices, at least during the 1985-1990 time period, could create problems for defendant/liability insurers.
• For example, in the paper he delivered at the Society of Settlement Planners (SSP) 2012 Annual Meeting, attorney David Higgins pointed out how some defendants and liability insurers have attempted "to collapse the creation of the liability with the assignment of the liability to the assignee."
• Higgins, who drafted the text of the 1982 structured settlement law introduced in the House and the Senate, warned that "such a collapse is to be avoided if the definition [of a qualified assignment] is to be met."
• Under U.S. common law, whether a novation has occurred is a question of fact, and the burden of proving it is generally upon the party asserting it.
• The Restatement identifies potential defenses for ELNY structured settlement shortfall victims who attempt to void a novation including misrepresentation (Sections 159-162) and disclaimer (Section 306).
• All ELNY structured settlement shortfall payees, as well as defendants and/or liability insurers who purchased the related ELNY structured settlement annuities, should retain qualified legal counsel to review their settlement documentation.

For S2KM's complete reporting about the ELNY liquidation, see the structured settlement wiki.

Settlement Planning Market - 1

Following three 2012 settlement planning conferences, what have we learned, and what do we still need to know, before settlement planning can be recognized and analyzed as a business and professional market?

The settlement planning conferences provided:

• Definitions for Settlement Planning - Joseph Tombs, Director of the Registered Settlement Planner (RSP) certification program, defined settlement planning as "a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life. Settlement planners represent a blend of several professionals: part tax lawyer, trial lawyer, special needs lawyer, financial planner, annuity specialist, social worker, and medical case worker."
• Descriptions of an Emergent Profession - Several conference speakers described settlement planning as a larger and more complex successor business and profession for structured settlements. For example, Jack Meligan stated: "SSP and its members have been promoting the practice of Settlement Planning as a more comprehensive solution for the financial issues facing personal injury victims and their families, and the profession of Settlement Planning as the next evolutionary step for members of the financial and legal communities that serve these injured Americans."
• Product Introductions and Descriptions - In addition to structured settlement annuities, conference speakers discussed multiple financial and insurance products in the context of settlement planning including: settlement trusts; blended structures; alternative asset management options; market linked CDs; long term care insurance; life insurance; and reinsurance.
• Government Benefit Updates - Integrating financial and insurance products with available government benefits represents one of the most important settlement planning priorities and requires effective interaction among multiple settlement planning participants. The conferences highlighted settlement planning roles for special needs attorneys as well as financial and insurance professionals. In addition, government benefit developments related to settlement planning were discussed including new requirements for liability Medicare Set-Asides (MSAs) and special needs pooled trusts as well as the Patients Protection and Affordable Care Act.
• Tax Law Updates and Improvements - In addition to integrating tort settlement proceeds with government benefits, settlement planning requires careful tax planning and specialized document drafting. The SSP conference featured Robert Wood and Jeremy Babener, who provided tax law tips and updates for settlement planners, as well as David Higgins, who proposed a potential tax law alternative to expand the use of structured settlement annuities in settlement planning.
• Business Standards and Practices Discussions - The SSP's "Standards of Professional Conduct for Settlement Planners" (SSP Standards) represents a significant accomplishment and valuable industry resource.  Professor Carl Pierce, who helped review and draft the SSP Standards, continued his analysis of related settlement planning issues as part of the Risk Settlement Planning Practicum. Karen Meyers, Director NSSTA's Certified Structured Settlement Consultant (CSSC) program, led a discussion about product suitability during the SSP Annual Meeting.

Unanswered Questions

Despite continuing educational progress, however, certain questions about the settlement planning market still need to be prioritized and addressed before settlement planning becomes a recognized business and profession. Among the most fundamental and important:

• What types of settlements comprise the settlement planning market?
• How large is the settlement planning market?
• Is the settlement planning market increasing or decreasing?
• What informational resources exist to help answer these questions?

Towers Watson Updates

Beginning with the last question, S2KM recommends the Towers Watson updates on "U.S. Tort Cost Trends" as a starting point for discussing the settlement planning market. Since 1985, Towers Watson (and its antecedent Towers Perrin) have published 15 such updates with the most recent 2011 update analyzing U.S. tort costs from 2010. Each study:

• Consists of three components: 1) losses paid to third parties; 2) defense costs; and 3) administrative expenses.
• Calculates tort costs resulting from five insured plus uninsured business lines: 1) commercial multi-peril; 2) medical malpractice; 3) product liability; 4) other liability; and 5) commercial auto;
• Excludes: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs - example: tobacco litigation.

Highlights from Towers Watson's "2011 Update on U.S. Tort Cost Trends"

• The tort costs in 2010 ($264.6 billion) were the highest in U.S. history and represent a 5.1% increase from $251.8 billion in 2009. Towers Watson estimates the 2010 U.S. tort system cost approximately $857 per person, versus $820 per person in 2009.
• Towers Watson attributes the increase to the April 2010 Deepwater Horizon drilling rig explosion and resulting oil spill in the Gulf of Mexico. Absent the costs from this event, Towers Watson estimates 2010 tort costs would have decreased 2.4% from 2009.
• Since 1984, tort costs as a ratio of U.S. Gross Domestic Product (GDP) have ranged from a low of 1.70% to a high of 2.30% with relatively rapid increases in the ratio during the mid-1980s and early 2000s offset by intermittent and multi-year declines in the ratio.
• Since 1950, even adjusting for inflation, increases in U.S. tort costs have far exceeded U.S. population growth. However, inflation-adjusted tort costs per capita were 16% lower in 2010 than in the peak year of 2004.
• The weak U.S. economy has had a notable impact on commercial auto insurance claims. 2010 tort costs were the lowest since 2000 and 19% lower than 2004.
• Although medical malpractice costs have increased at an average annual rate of 9.7%, versus 7.5% for all other tort costs, since 1975, growth in medical malpractice costs from 2005 to 2010 averaged only 0.3% per year.
• Looking ahead, Towers Watson:
  • Anticipates employee practices litigation to be significant in the future despite the U.S. Supreme Court's 2011 ruling in favor of Wal-Mart in the sexual discrimination and civil rights class action case Wal-Mart Stores Inc. v. Betty Dukes et al.
  • Identifies "fracking" (a natural gas drilling process that extracts natural gas from shale by using water and chemicals which could result in contaminated drinking water) as a new area of litigation where defense costs are beginning to mount.

Up until its 2002 update of "U.S. Tort Cost Trends", Towers Watson also translated annual tort costs into the following cost categories (with 2001 percentages): 1) administrative costs - 21%; 2) defense costs - 14%; 3) plaintiff attorneys -19%; 4) economic loss - 22%; and 5) non-economic loss - 24%.

Note: Towers Watson discontinued this latter portion of its analysis in 2002, according to Russ Sutter, a Tillinghast principal and actuary who directs the Towers Watson study, "primarily because we lack reliable information from plaintiff attorneys". These percentages therefore represent Towers Watson's "best estimate" in 2002.

S2KM assumptions: lacking alternative estimates of tort cost payment categories and percentages, Towers Watson's "best estimate" in 2002 for 2001 U.S. tort costs continues to represent the most reliable annual analysis of U.S. tort dollars paid to claimants and their attorneys.

Applying Towers Watson's percentages for 2001 to the results of Towers Watson's analysis of 2010 U.S. tort costs ($264.6 billion total), produces the following assumptive results: 1) administrative costs - $55.6 billion; 2) defense costs - $37.0 billion; 3) plaintiff attorneys - $50.3 billion; 4) economic loss - $58.2 billion; and 5) non-economic loss - $63.5 billion.

Utilizing both Towers Watson's 2011 update of its "U.S. Tort Cost Trends" plus S2KM's assumptions based upon Towers Watson's additional 2002 "best estimate" for 2001 produces the following assumptive results for 2010:

• Economic loss of $58.2 billion plus non-economic loss of $63.5 billion (both amounts presumably paid to claimants) equals $121.7 billion of tort-related dollars paid to claimants.
• $121.7 billion plus $50.3 billion paid to plaintiff attorneys equals $172 billion of tort-related dollars paid to plaintiffs and their attorneys.

S2KM will reference and utilize these 2010 annual assumptive "tort cost results" in subsequent blog posts while continuing to discuss the settlement planning market. For additional S2KM reporting about settlement planning, see the structured settlement wiki.