Beyond Structured Settlements

An ELNY Nightmare

While almost 1500 Executive Life of New York (ELNY) structured settlement shortfall payees await the outcome of continuing ELNY litigation, it is worth remembering how seriously Judge John Galasso's ELNY liquidation order and related restructuring agreement will impact some of these unfortunate individuals assuming his order and the restructuring agreement are ultimately upheld and implemented.

Glenn Arensdorf 

Glenn Arensdorf is one such individual. Glenn is a 49 year old Florida resident who is permanently and totally disabled. He cannot work in any capacity. Glenn's ELNY structured settlement payments are scheduled to be reduced by 58 percent which places him among the most drastically reduced of all the ELNY shortfall payees. 

Significantly, Glenn's structured settlement was funded in 1984 with two "buy and hold" annuities issued by ELNY and owned by Lumbermens Mutual Casualty Company, then known as Kemper Insurance Company, ("Lumbermens") one of the liability insurers in Glenn's personal injury case.

"Buy and hold" annuities, whereby an underlying insurer (in Glenn's case, Lumbermens) retained the liability for future periodic payments, and funded that liability through its ownership of qualified funding assets (in Glenn's case, two ELNY annuities), might appear advantageous compared with ELNY qualified assignments.

With qualified assignments, defendants and their liability insurers often seek to transfer their future liability for periodic payments to a qualified assignee which for ELNY annuities is First Executive Corporation. Unfortunately for ELNY qualified assignee payees, First Executive Corporation ceased to exist in 1991. 

Lumbermens, however, was ordered into rehabilitation July 2, 2012 so its financial and legal ability to fulfill its structured settlement obligations to Glenn are uncertain.

To add insult to injury: although Glenn has an application pending with the ELNY Hardship Fund, the fund specifically excludes applications for which the underlying insurer may still be responsible. To date, Glenn has not received any notification of an award or a rejection by the ELNY Hardship Fund.

Glenn, therefore, appears to face a "Catch 22" which he refers to as "my ELNY nightmare". Glenn's attorneys expect he will qualify under the Illinois Life and Health Guarantee Fund (Lumbermens' home state) where the combined coverage for both of Glenn's ELNY annuities appears to be $168,750.

Glenn's Personal Injuries

Three days after he began college in 1981, Glenn was a rear seat passenger in a one car accident in which a friend and driver lost control, hit a tree and died. Glenn was admitted to the hospital in an unconscious condition and was not expected to live. Although he survived, Glenn sustained traumatic brain injury, multiple fractures, and broken teeth among other injuries. He remained in a coma for five weeks. Glenn has no memory of either the accident or his first days in college.

Due to his brain injury, Glenn has subsequently developed permanent double vision and partial paralysis of facial muscles resulting in disfigurement. His left arm and hand are virtually useless. Glenn walks with a limp following 11 surgeries to his left leg. Both his left arm and left leg are noticeably smaller than his right as a result of muscle atrophy. Glenn also suffers psychological issues, neurological limitations, motor function impairment, cognitive limitations, impaired problem-solving skills, poor short-term memory, a short attention span and slow information processing speed - all as a result of his personal injuries.

Before his accident, Glenn played guitar and was a member of a rock 'n roll band - or, at least, that is what Glenn has been told. He cannot remember playing his guitar. After his accident, when Glenn finally returned home, he found a huge guitar amplifier and a Fender Stratocaster guitar. Having lost both his sense of rhythm and use of his left hand, Glenn became so depressed, he sold his amplifier and guitar "for pennies".

"Glenn's World"

With support and encouragement from his family, Glenn has learned to adapt to his handicapped status and has made progress toward living independently. Glenn lives in a gated community attached to a plaza with a grocery store, several restaurants, and various professional offices. He refers to his community as "Glenn's World" where he serves as an inspiration to other disabled persons who endeavor to live an independent life style.

Every morning, Glenn rides his three-wheel bike to his favorite restaurant, Pete's Place, where he eats breakfast and socializes with the staff and regular customers "by telling them bad jokes". He visits a chiropractor three times each week for treatment of the scoliosis he developed from accident-related injuries. Everyday, Glenn also visits his other favorite restaurant in the plaza, Duffy's, where he helps the staff set up for a busy lunch hour by folding napkins and telling more bad jokes. Although he cannot cook, Glenn generally returns home in time to prepare a sandwich for lunch. 

During the afternoon, Glenn watches TV or reads his emails. Then he rides his bike back to the plaza for dinner at one of several restaurants. The staff of these restaurants have known Glenn for 20 years. When Glenn orders his dinners "chop chop", they help cut up his meals because he is unable to do so himself. Like other brain injured individuals, Glenn's life requires and benefits from similar daily and weekly routines. This includes Glenn's nighttime routine when, due to back pain, he always sleeps on his left side on the right side of his bed.

The ELNY Liquidation

Glenn's ability to sustain his life in "Glenn's World" depends upon his monthly ELNY annuity payments. His financial needs are extraordinary and his limitations profound. Glenn is completely reliant and dependent on others to do what he cannot do for himself. Besides his ELNY annuity payments, the only income Glenn receives is a monthly Social Security Disability payment in the amount of $720.

Glenn is presently being treated by a psychologist for the emotional stress and anxiety created by the ELNY liquidation. He suffers from depression and has difficulty sleeping at night. Glenn does not understand why the State of New York or other insurance companies did not bail out ELNY or why ELNY shortfall payees with catastrophic injuries will be forced to exist on budgets that do not meet their needs. Although Glenn would like to be part of an ELNY support group with other shortfall payees, Judge Galasso has ruled that Glenn and other shortfall payees cannot have access to each others names and contact information.

Some proponents claim that structured settlements are "the ultimate safeguards to guarantee the long term financial health of people harmed in accidents". For Glenn Arensdorf and similarly situated ELNY shortfall payees, however, the structured settlement system has failed them. To protect their rights, they have been forced to challenge the legality and unfairness of Judge Galasso's liquidation order and restructuring agreement against long odds and powerful opponents.

Additional Information

For profiles of five additional ELNY structured settlement shortfall payees, see "The Complete ELNY Saga - 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", the lead article in a comprehensive ELNY analysis published in 2012 by LifeHealthPro.

For S2KM's complete reporting about the ELNY liquidation, including related litigation and an Executive Life timeline, see the structured settlement wiki.

Structured Settlement Sales Decline in 2012

Sales of structured settlement annuities totaled $4,819,124,617 during 2012 (down from $4,974,710,838 in 2011) as reported today by Melissa Evola in her quarterly summary of United States structured settlement annuity provider premium.

The 2012 U.S. structured settlement annual premium total represents the lowest amount since 1999 based upon historic reporting in "Structured Settlement and Periodic Payment Judgments" (S2P2J) and more recent reports by Evola. According to these same sources:

• Annual structured settlement annuity premium reached an historic high in 2008 ($6,226,578,725) after consistently averaging close to $6 billion annually from 2001-2007.
• Total historic structured settlement premium written from 1975 through 2012 approximates $134 billion. Note: for historic annual totals, see the structured settlement wiki.

Evola's report documents substantial increases and decreases of annual premium among the 12 annuity providers who participated in the U.S. structured settlement market during 2012 compared with 2011.

The following annuity provider list summarizes 2012 data from Evola's most recent report and indicates approximate market percentages (in parentheses), annual premium and the premium increase (+) or decrease (-) from 2011.

• Pacific Life (17%)
  • Premium:  $837,053,958
  • + $266,494,958
• Berkshire Hathway (17%)
  • Premium:  $824,962,720
  • + $708,504,475
• MetLife (14%)
  • Premium:  $664,000,000
  • - $433,000,000
• Prudential Life (13%)
  • Premium:  $635,400,000
  • - $386,900,000
• Amgen/AI Life (11%)
  • Premium:  $526,088,761
  • - $18,613,212
• Liberty Life (9%)
  • Premium:  $410,854,349
  • + $51,007,955
• New York Life (7%)
  • Premium:  $322,734,527
  • - $49,650,217
• John Hancock Life (6%)
  • Premium:  $304,328,594
  • - $140,061,704
• Allstate Life (3%)
  • Premium:  $140,406,198
  • - $159,295,775
• Symetra Life (2%)
  • Premium:  $79,677,226
  • - $31,088,922
• Mutual of Omaha (1%)
  • Premium:  $57,593,264
  • + $33,284,297
• Hartford Life (0.3%)
  • Premium:  $16,025,020
  • + $3,317,579

Additional noteworthy statistics from Evola's report: while total structured settlement cases written during 2012 declined to 25,038 (from 28,811 in 2011), the average 2012 premium per case increased to $192,472 (compared with $172,667 in 2011).

Interest Rate Impact

Many U.S. structured settlement industry participants attribute declining sales to low interest rates including future forecasts by the Federal Reserve. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981. Here are several historic average annual rates for 30 year Treasury securities (source: U.S. Department of the Treasury):

• 2013 (as of 2/15/13) - 3.18%
• 2012 - 2.93%
• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

ELNY Contempt Order Appealed

Three Executive Life of New York (ELNY) structured settlement shortfall payees (objector respondents) and their legal counsel have filed a Notice of Appeal dated February 14, 2013 challenging "each and every part" of a Contempt Order issued January 25, 2013 by New York Supreme Court Judge John Galasso "on questions of both fact and law".

Judge Galasso's Contempt Order:

• Responded to a federal class action lawsuit filed November 8, 2012 by the three ELNY structured settlement shortfall payees, as plaintiffs, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, in his non-regulatory capacity as ELNY's Receiver, including predecessor ELNY Receivers (Superintendent), Metropolitan Life Insurance Company and Credit Suisse Group, AG, as defendants.
• Determined the federal class action lawsuit violated three ELNY injunctions: injunctions contained in the ELNY Rehabilitation Order (1991) and the ELNY Rehabilitation Plan Approval (1992) as well as an injunction in Judge Galasso's April 16, 2012 ELNY Liquidation Order which states: "All persons are enjoined and restrained from commencing or further prosecuting any actions at law or other proceedings against ELNY or its assets, the Receiver or the New York Liquidation Bureau, or their present or former employees, attorneys, or agents, with respect to this proceeding or the discharge of their duties under Insurance Law Article 74."
• Imposed a fine, payable by the ELNY shortfall payees’ legal counsel to the Superintendent for costs, disbursements and reasonable attorney’s fees the Superintendent had incurred defending the federal class action and for pursuing the contempt application plus potential additional legal expenses assuming the Superintendent achieved a favorable result in the concurrent appeal of the ELNY Liquidation Order which was denied February 6, 2013 by the Appellate Division of the Supreme Court of the State of New York, Second Department.
• Acknowledged: "This Court is not empowered to dismiss the federal complaint outright."

Following Judge Galasso's Contempt Order and the denial of their Liquidation Order appeal, attorneys representing the structured settlement shortfall payees voluntarily dismissed their ELNY class action lawsuit without prejudice preserving their right to refile claims and tolling the statute of limitations.

Attorney Edward Stone characterized the voluntary dismissal as a "strategic decision" attributable to the Contempt Order which left open the possibility of additional fines for continued legal efforts to protect ELNY shortfall payees.  

The objector respondents and their legal counsel, attorneys Stone, Roger Christensen and Karra Porter, have six months to perfect their appeal of Judge Galasso's Contempt Order with the same appellate court that denied their earlier appeal of the ELNY Liquidation Order. Based upon previous court filings and out-of-court statements, they are expected to argue, in part, that Judge Galasso's Contempt Order violates the United States Constitution.

In a letter written to United States District Judge Jesse M. Furman prior to the voluntary dismissal of the ELNY class action lawsuit, attorney Christensen quoted from the 1964 decision of the United States Supreme Court in Donovan v. City of Dallas: "Early in the history of our country, a general rule was established that state and federal courts would not interfere with or try to restrain each others proceedings. That rule has continued substantially unchanged to this time."

Christensen's letter continued: "It could not be more clear that a state court cannot enjoin a federal action or use contempt proceedings to preclude citizens' attempts to have their claims heard in federal court." 

For S2KM's complete reporting about the ELNY liquidation, including related litigation and an Executive Life timeline, see the structured settlement wiki.

Moody's Downgrades JG Wentworth

Moody's Investors Service has announced a downgrade of its Corporate Family Rating (CFR) for JG Wentworth (JGW) from B3 to Caa1 and has issued the same downgrade for JGW's new $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW. Moody's outlook for both the CFR and the debt ratings is "stable".

Under Moody's credit rating scale, "B3" signifies a long-term rating "judged as being speculative and a high credit risk" and "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk."

Moody's CFR and debt ratings for JGW are separate and distinct from financial agency ratings applicable to JGW securitizations of structured settlement payment rights which historically have been rated as high quality and low risk investments.

Bloomberg News reported in early January 2013 that JLL Partners, owners of JGW, had abandoned plans to sell the company after bids failed to meet expectations and might consider a dividend recapitalization or an initial public offering instead.

Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan." 

Moody's identified multiple reasons for its downgrade of JGW:

• JGW's leveraged recapitalization will result in a "meaningful increase in leverage and decrease in debt service coverage."
• It also "indicates a more aggressive financial policy than was anticipated in the previous B3 rating, given the large size of the capital distribution, the notable increase in debt service requirements and accompanying high corporate leverage."
• Based upon significant capital distributions JGW's financial owners have previously taken, Moody's believes the risk of future aggressive financial policies continues despite JGW low structured settlement portfolio risk and historically strong cash flow.
• JGW's "cash flows are already highly leveraged, with the vast majority of cash flows utilized to support securitization structures' debt servicing requirements."
• "Increased interest coverage requirements will also divert resources that could otherwise be utilized to build the [JGW] franchise or support growth-related infrastructure."
• In addition to its complex organizational structure, JGW lacks clearly defined financial policies and has experienced Chief Financial Officer turnover.
• JGW is significantly dependent on the confidence-sensitive securitization market and its structured settlement payment rights are illiquid.

Moody's also identified factors whereby JGW's rating could be upgraded or downgraded:

• Upgraded - If JGW "meaningfully decreases its leverage, improves interest coverage levels and adopts a more conservative financial policy."
• Downgraded - If JGW's "liquidity risk increases, such as through a failure to renew major warehouse lines or securitize receivables, or due to reduced cash flows, such as through a decrease in net yield, loss of market share or a material adverse legal or regulatory ruling."

As S2KM reported in this prior blog post, JGW, which was founded in 1995, has experienced a tumultuous recent history:

• On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
• Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
• During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
• According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
• Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
• By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
• A June 2011 DBRS report, published prior to JGW's 23rd asset-backed structured settlement securitization, stated that JGW had previously consummated 59.000 structured settlement factoring transactions with aggregate payment streams of $4.5 billion and 0.11% of losses.
• Also in 2011, JGW merged with Peachtree Settlement Funding (Peachtree) in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
• Industry estimates obtained by S2KM of the post-merger 2012 market share (revenue and sales) of the now-combined JGW/Peachtree vary from a low of 50% to a high of 75%.
• Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.

Despite JGW's downgrade by Moody's and its tumultuous recent history, industry experts, including some rating agencies, maintain a positive outlook for the 2013 structured settlement secondary market.

For example, in a recent "Secondary Market Update", S2KM reported the following 2013 structured settlement secondary market projections by DBRS, a rating agency that covers various structured finance product groups: "Based on the estimated 15% increase in issuance in 2012 to $630 million, DBRS expects further 10%+ increase in issuance in 2013 amid the continuing popularity of the [structured settlement] asset class among certain investors."

Additional Resources

• For additional S2KM reporting and commentary about the structured settlement secondary market, see the structured settlement wiki.

• For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

ELNY Class Action Dismissed

Attorneys representing Executive Life of New York (ELNY) shortfall victims have voluntarily dismissed an ELNY class action lawsuit without prejudice preserving their right to refile claims and tolling the statute of limitations.

The dismissal of the ELNY class action lawsuit follows:

• Contempt Order Issued - Judge M. Galasso sanctioned attorney Edward Stone and representatives of the Christensen & Jensen law firm for civil contempt February 25, 2013 for filing the ELNY class action lawsuit in the United States District Court Southern District of New York in violation of existing ELNY anti-lawsuit injunction orders.
• Anticipated Appeal of Contempt Order - Stone and Christensen & Jensen responded January 28, 2013 with a press release announcing their plan to pursue an appeal of the contempt order with the Appellate Division of the Supreme Court of the State of New York.
• Appeal of Liquidation Order Denied - The Appellate Division of the Supreme Court of the State of New York, Second Department denied an appeal February 6, 2013 challenging the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by Judge Galasso on April 16, 2012.

Attorney Stone has informed S2KM Limited the voluntary dismissal of the ELNY class action was a "strategic decision" attributable to Judge Galasso's contempt order which left open the possibility of additional fines for continued legal efforts to protect ELNY shortfall payees. Judge Galasso's contempt order provides in relevant part:

"Should [Superintendent Benjamin M Lawsky] accrue additional legal expenses, such as in filing a motion to dismiss the federal complaint upon a successful appellate result, [Stone and Christensen & Jensen] may be subject to an additional fine."

Judge Galasso acknowledged in the contempt order: "This Court is not empowered to dismiss the federal complaint outright."

Stone and the Christensen law firm maintain that the blanket immunity and permanent injunction granted by Judge Galasso in the ELNY liquidation order go beyond what Article 74 of the New York Insurance Law allows and that Judge Galasso's contempt order violates the United States Constitution.

In a letter written to United States District Judge Jesse M. Furman prior to the voluntary dismissal of the ELNY class action lawsuit, attorney Roger Christensen quoted from the 1964 decision of the United States Supreme Court in Donovan v. City of Dallas: "Early in the history of our country, a general rule was established that state and federal courts would not interfere with or try to restrain each others proceedings. That rule has continued substantially unchanged to this time."

Christensen's letter continued: "It could not be more clear that a state court cannot enjoin a federal action or use contempt proceedings to preclude citizens' attempts to have their claims heard in federal court."

For S2KM's complete reporting about the ELNY liquidation, including related litigation and an Executive Life timeline, see the structured settlement wiki.

ELNY Appeal Denied

The Appellate Division of the Supreme Court of the State of New York, Second Department, has denied an appeal challenging the Executive Life of New York (ELNY) Order of Liquidation and Approval of the ELNY Restructuring Agreement signed by New York State Supreme Court Judge John M. Galasso on April 16, 2012.

The unanimous February 6, 2013 appellate decision:

• Dismissed the appeal;
• Affirmed Judge Galasso's order; and
• Awarded costs to Benjamin M. Lawsky, Superintendent of New York's Department of Financial Services (petitioner-respondent) and NOLHGA (nonparty-respondent).

The appeal, filed May 30, 2012 on behalf of 18 ELNY structured settlement shortfall victims as objectors:

• Alleged Judge Galasso "erroneously denied objectors' request to reject the proposed agreement of restructuring in connection with the [ELNY] liquidation";
• Further alleged Judge Galasso's order:
  • "[I]mproperly grants and/or continues certain injunctions and immunities and discriminates against the objectors";
  • "[C]reates impermissible sub-classes of claimants"; and
  • "[R]eflects the courts erroneous denial of objectors' requests to adjourn the hearing ... due to a lack of proper notice of such hearing."
• Sought to compel:
  • The Superintendent, as ELNY's Rehabilitator, "to provide certain discovery necessary to, among other things, allow objectors to demonstrate why the plan should not be approved and submit a viable competing restructuring plan";
  • Judge Galasso "to unseal certain documents submitted to the court by the rehabilitator"; and
• Further sought to allow the objectors "to present evidence (in the form of live testimony by certain witnesses) rebutting the receiver's experts and otherwise showing that the proposed-liquidation plan should not have been approved."

The Appellate Court rejected all of these allegations and denied further relief.

The brief appellate opinion focused primary on due process issue. The Appellate Court stated: "[t]he fundamental requisite of due process of law is the opportunity to be heard" and concluded the ELNY shortfall payees had not been denied due process "either in the manner in which the notice was provided to them or in the conduct of the hearing."

Concerning due process, the Appellate Court reasoned: "The notice mailed to the last known addresses of the ELNY annuity payees was reasonably calculated to apprise them of the pendency of the liquidation proceeding and the execution of the proposed agreement, and to afford them an opportunity to be heard, and, thus, satisfied due process.... Moreover, the record does not support the contention that the hearing was "an unfair proceeding."

The appellate opinion summarily dismissed the immunity and injunction issues. "There is no merit to the contention that the Supreme Court lacked subject matter jurisdiction to include, in the order approving the agreement, provisions which granted the receiver for ELNY judicial immunity and preliminary injunctive relief," the Appellate Court stated. "Furthermore, such relief was appropriately granted in the order."

Additional ELNY Developments

The ELNY appellate court decision follows a civil contempt order issued by Judge Galasso January 25, 2013 in which he sanctioned legal counsel for three ELNY structured settlement shortfall payees for filing an ELNY class action lawsuit in the United States District Court Southern District of New York. The attorneys issued a press release January 28, 2013 announcing their plan to appeal the contempt order. The ELNY class action lawsuit is still pending despite arguments on behalf of Superintendent Lawsky seeking dismissal.

Addendum: subsequent to publishing this blog post, S2KM learned the ELNY class action lawsuit has been voluntarily dismissed without prejudice. Please see this S2KM blog post for details.

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

Structured Settlements in Australia - 1

Several countries, in addition to the United States, have experimented with structured settlements and/or periodic payment judgments as lump sum alternatives for resolving various types of personal injury claims.

Canada, the United Kingdom and Continental Europe

Canada, where annuity-funded periodic payments were utilized by Richardson Merrill and other drug companies to settle Thalidomide cases during the 1960s, is generally credited as the birthplace of structured settlements. In 1973, the Canadian Parliament enacted legislation to exempt the investment income of minors resulting from a personal injury action. A 1979 Canadian revenue ruling extended the tax-exempt status to structured settlement recipients generally.

In the United Kingdom, the English Parliament changed the centuries-old, common law "single recovery rule" in 2003 to permit courts in England, Wales and Northern Ireland to order periodical payment damages "for future pecuniary loss" in personal injury cases. In 2005, the English Parliament extended this discretionary authority to any personal injury case involving future loss and such an order can now be imposed by a court on the parties to a lawsuit against their wishes.

In Continental Europe, where legal systems are based on civil law rather than common law, statutes control how personal injury damages are paid and whether they are taxable. Both France and Germany, for example, permit periodic payments for certain types of injuries.

Australia - Lobbying and Legislation

With leadership from the New South Wales Motor Accident Authority (NSWMAA), various interest groups in Australia began investigating the advantages and feasibility of structured settlements in the early 1990s. One milestone was a 1994 National Structured Settlement Conference in Sydney where Patrick Hindert, S2KM's author, presented the keynote address titled: "Structured Settlements - the United States Experience".

Subsequent lobbying efforts in Australia included a report released by the NSWMAA in 1998 ("Structured Settlements - Choice and Certainty") and the formation of "The Structured Settlement Group" in 1999 - both proposing amendments to Australia's tax laws to encourage the use of structured settlements.

In 2002, a Structured Settlement Bill was introduced into Australia's Parliament containing proposed amendments to provide an income tax exemption for annuities and certain deferred lump sums paid under structured settlements. The bill was enacted into law later that same year and remains in effect today. Among its provisions and restrictions:

• The annuity must be purchased by a defendant or the defendant's insurer.
• The exemption does not apply to workers compensation cases.
• The annuity is exempt only if the applicable damages would have been tax-exempt if paid as a lump sum.
• The annuity must provide a minimum level of support equal to the standard age pension with subsequent annual increases determined by a consumer price index.
• To protect the security of a recipient’s tax free income stream, neither assignments nor commutations are permitted.
• The tax exemption applies to periodic payment judgments ("structured orders") as well as structured settlements.

Australia - Legislative Review

In 2007, Australia's Minister for Revenue and Assistant Treasurer published a "Review of the operation of the income tax exemption for structured settlements" (review) authored by Alan Cameron. The purpose of the review was "to assess the effectiveness of the tax exemption and to identify any changes that need to be made to improve its effectiveness." Among the review's findings and conclusions:

• "Structured settlements have not been taken up in Australia ..." In fact, the 2007 review reports "only one structured settlement made since the [2002] tax exemption .... came into effect. This structured settlement was made between South Australia’s Motor Accident Commission and one of its claimants."
• The failure of structured settlements in Australia cannot be attributed to a lack of appropriate cases. The review cites these statistics:
  • During 2005 and 2006, a total of 190 claims greater than $500,000, related to medical malpractice, public liability, mixed public/product liability and product liability, were settled or reached verdict in Australia.
  • From 2003 to 2006, in New South Wales and Queensland, an average of 89 settlements of compulsory third party claims exceeding $1 million were made each year, the average lump sum exceeding $2 million. An average of 236 settlements between $500,000 and $1 million were made each year during the same period.
• Nor, according to the review, has the failure of structured settlements in Australia resulted from the tax exemption itself. The review concludes: "there are no changes that can be made to [the tax legislation] that would be likely to increase the use of structured settlements in Australia."
• Instead, the 2007 review attributes the failure of structured settlements in Australia to its life insurance companies "who have been unable to offer CPI-indexed lifetime annuities that are attractive to claimants."
• The review further states: "it seems annuities are not popular products for a number of reasons, including their lack of flexibility and the inability to leave any residual capital as an inheritance for dependents."
• By comparison, the review observes, "the investment strategy of placing compensation payments into a superannuation fund and drawing an allocated pension is attractive to many accident victims because it gives them more flexibility than a lifetime annuity regarding payment options, investment choice and access to capital."
• Nevertheless, the review recommends retaining the existing structured settlement tax law "as it has potential application, including in relation to cases where life expectancy is normal or close to normal."

From a United States structured settlement perspective, CPI-indexed annuities are generally untested and create an expensive pricing nightmare for life companies. Dallas Booth, Chief Executive Officer of the National Insurance Brokers Association of Australia (NIBA) and a long-time supporter of structured settlements, agrees based upon Australia's experience. "The annuity products needed to match the requirements of Australia's structured settlement legislation have been financially unattractive to all concerned", Booth noted in a recent email. 

Australia - New Developments

Booth also highlighted newer developments which may prevent an annuity-funded structured settlement market from emerging in Australia anytime soon. "New South Wales (NSW) has implemented a scheme ("Lifetime Care and Support Authority") that precludes the need for structured settlements," Booth stated. "It was created to provide care and support for people who sustain severe impairments and disability arising out of motor and workplace trauma."

"Under this model", Booth continued, "benefits are provided as and when needed. You receive services and support, not money or compensatory damages. Essentially monetary damages for future care and support are abolished. Lifetime Care and Support is funded the same way as insurance. Each year, funds are collected to cover the cost of major trauma likely to be incurred during that year. These funds are invested until needed to meet care and support needs. The Lifetime Care and Support Authority is building a major pool of funds for this purpose."

"This NSW lifetime care model has been proposed as a model called the National Injury Insurance Scheme (NIIS) for all insurable trauma across Australia," Booth added. "The model creates a constitutional challenge in Australia because the states are responsible for tort laws and NIIS is being proposed as a federal model. It can only be implemented on a cooperative basis between the federal and state governments."

Implementation would be relatively easy for NSW, Tasmania and Victoria, according to Booth, because these states already have no-fault care and support models for motor vehicle and workplace injury. Queensland, South Australia and Western Australia, however, still have common law lump sum compensation for motor vehicle trauma, without no-fault benefits. "It will be a major change for those States to move from common law damages to a NIIS model," Booth concluded.

For an earlier S2KM interview with Dallas Booth, see "Tort Reform in Australia". Booth will be a featured speaker at the first Asia Insurance Brokers' Summit in Singapore later this month.

For more detailed information about structured settlements in countries outside the United States, see Section 1.05 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).