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).