Beyond Structured Settlements

Structured Settlements in 2007

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

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

Industry Growth and Development

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

Legislation and Regulations    

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

Case Law - some of the significant 2007 cases:    

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

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

Educational Programs and Resources

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

Business Standards and Practices

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

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

S2KM Mid-2007 Structured Settlement Report

As Fourth of July 2007 quickly approaches, structured settlement stakeholder associations are re-organizing under their 2007 leadership.  These stakeholder associations include:

• National Structured Settlement Trade Association (NSSTA).
• Society of Settlement Planners (SSP)
• American Association for Justice (AAJ)
• National Association of Trial Lawyer Executives (NATLE)
• National Academy of Elder Law Attorneys (NAELA)
• Academy of Special Needs Planners (ASNP)
• Special Needs Alliance (SNA)
• National Alliance of Medicare Set-aside Professionals (NAMSAP)
• National Association of Settlement Purchasers (NASP)

As  unsollicited input to these associations, S2KM offers this mid-year 2007 summary of important structured settlement legal developments. 

S2KM's Podcast 3 (accessible from S2KM's blog courtesy of Truffle Media Networks) provides a related audio summary.

Mid-2007 Structured Settlement Legal Developments

• Potential $600 Million Shortfall at Executive Life of New York - "Drinker Biddle's Structured Settlement Update" provided an early Internet analysis of this story.  NSSTA has reacted swiftly by announcing an "ELNY Task Force".  In a June 29, 2007 written message to NSSTA members, President Henry Strong also announced:
  • Two-time NSSTA President Len Blonder will Chair NSSTA's ELNY Task Force;   
    
  • NSSTA has already met directly with the New York Liquidation Bureau; and   
    
  • NSSTA has initiated "productive discussions" with the American Counsel of Life Insurers (ACLI).
• Social Security POMS to Address Structured Settlements - S2KM first reported this announcement by the SSA's Ken Brown in an April 9, 2007 blog post titled: "Academy of Special Needs Planners".  See these S2KM blog posts for additional background and analysis:
  • Structured Settlements and Government Benefits
  • Deficit Reduction Act of 2005 (DRA) - S2KM's 3-part blog series titled "Inconvenient Questions" reviews Sylvius von Saucken's 2007 article about the DRA and structured settlements.
  • Release 41 of "Structured Settlements and Periodic Payment Judgments" includes a new Chapter 15 titled "Government Benefits and Structured Settlements".
• First Primary Market Disclosure Case - "Pullman & Comley's Structured Settlement Insights" provided the first Internet analysis of Joseph v. The City of New York which Pullman & Comley characterizes as ""the first court opinion to analyze the requirements in structured settlement protection acts that disclosures be made when negotiating a structured settlement."  
• DOJ Sovereign Immunity Defense Voids Transfers - see "Drinker Biddle's Structured Settlement Update" for analysis of two DOJ sovereign immunity cases: Transamerica v. Settlement Capital and Continental Casualty v. United States.
  
• New Pennsylvania Rule 229.2 - S2KM reported and analyzed this change to the Pennsylvania Structured Settlement Protection Act in a June 27, 2007 blog post.
• Rapid v. Symetra - S2KM reported this case in a June 19, 2007 blog post.  The case confirms the general rule that, even following the enactment of IRC Section 5891, courts will enforce a clear and explicit anti-assignment provision in structured settlement agreements provided the interested parties timely object after having been given notice and an opportunity to be heard. For additional S2KM reporting about Rapid, see: CNA v. Rapid Settlements.

Check back for continuing S2KM blog and podcast reports and commentary covering important structured settlement issues and events - including exclusive S2KM reports from the 2007 AAJ Annual Convention July 13-18, 2007 in Chicago. 

For previous S2KM analysis of the structured settlement industry, see:

• Structured Settlement History
• Structured Settlements in 2006
• Structured Settlement Transaction Diagram
• Overview of the Structured Settlement Market
• Structured Settlement Transfers: Good or Bad?
• How the Primary Market Views Factoring
• The Future of Structured Settlements

Drinker Biddle's Structured Settlement Update

Drinker Biddle's June 2007 Structured Settlement Update (posted on their website) provides concise legal summaries for two current industry developments:

• Executive Life of New York

• Transamerica v. Settlement Capital

Executive Life of New York (ELNY)

Drinker Biddle's update contains this bombshell about ELNY: "Over the past several weeks, the New York State Insurance Department has notified certain property and casualty insurance companies that own structured settlement annuities issued by ELNY and certain guarantee associations that there will be a shortfall in ongoing payments from annuities issued by ELNY. Although it is unclear how many annuities remain in force, we understand that the total shortfall may amount to as much as $600 million."

Structured settlement industry insiders, who requested anonymity, are divided in their reaction to this news. Some were shocked. One industry leader stated: " We all thought ELNY had a strong financial position." Other industry leaders downplayed the importance of the announcement. From a claimant perspective, they emphasized the strength of the state guarantee funds and the fact that the notice is precautionary. According to one source, no immediate emergency exists.  NSSTA, a structured settlement trade association, monitors Executive Life and continues to report on Executive Life to its members (including this blog author).  NSSTA's most recent Executive Life update (January 8, 2007), however, makes no mention of any ELNY shortfall.

The Drinker Biddle update estimates that, at the time of its rehabilitation in 1992, ELNY had issued as many as 8,500 structured settlement annuities.

Although all 50 states now have insurance guarantee funds, the Drinker Biddle update identifies two significant issues potentially applicable to ELNY:

• Whether the guarantee association of the state of domicile of a payee, or the state of domicile of a contract owner will be called upon to pay benefits to a claimant?

• Whether the claimant entitled to obtain relief is the contract owner or the payee?

Hopefully, NSSTA and its legal committee will address these ELNY developments and provide additional details about ELNY's status.

For additional historical analysis about Executive Life, see "Structured Settlements and Periodic Payment Judgments":

• Section 3.05.10 - "Insolvency of Annuity Issuers"

• Section 3.05.9 - "Life Insurance Guarantee Associations"

Transamerica v. Settlement Capital

Drinker Biddle's June 2007 Structured Settlement Update also features a legal summary of Transamerica v. Settlement Capital, a recent decision from the U.S. Court of Appeals for the Sixth Circuit that reconfirms sovereign immunity as a permissible defense for the United States government in objecting to proposed structured settlement transfers. This case is one of a series of cases where the United States Department of Justice Civil Division Tort Branch (DOJ) has asserted sovereign immunity (after the transfer has been approved by a state court, without making an appearance and despite timely notice) to void a transfer of  payment rights approved by a state court pursuant to the state's structured settlement protection statute - in this case Florida.

Other recent cases supporting sovereign immunity to void state court ordered transfers of structured settlement payment rights include:

• Symetra v. Fentress (2006), a U.S. District Court case in Virginia.

• Settlement Funding v. Garcia (2006), a U.S. District Court case in Texas.

Although not referenced in the Drinker Biddle Structured Settlement Update, a recent, related sovereign immunity case, Continental Casualty v. United States, is significantly more important strategically for structured settlements than Transamerica v. Settlement Capital. In Continental Casualty, decided by U.S. District Court in Northern California in 2006, the plaintiff challenged the DOJ's structured settlement policy. The plaintiff sought an order:

• Imposing restrictions on the DOJ's terms of settlement;

• Imposing the same restrictions on all settlements by the DOJ Torts Branch Civil Division;

• Establishing a 468B settlement trust.

Although the terms of a settlement had been memorialized in Continental Casualty in a letter from the DOJ to the plaintiffs' counsel, the letter did not address a structured settlement. Plaintiffs alleged that the DOJ understood that the agreement was conditioned upon a structured settlement to be approved by CMS. The DOJ argued it never agreed to a structured settlement.

In addition to seeking a court order for a qualified settlement trust (which the court refused to create), the plaintiffs challenged the following DOJ structured settlement requirements:

• DOJ selects the annuity broker;
• Plaintiffs are offered less for a structured settlement than a cash settlement;
• Annuities provide reversionary interests to the United States;
• Limit on available financing options;
• Prohibit assignments of payment rights

In denying the plaintiff's joint petitions, the District Court stated: "The court is not in a position to make policy decisions regarding DOJ settlement practices and finds no illegality in any of the requirements. To the extent these practices are contrary to sound or appropriate public policy, it rests with the executive or legislative branch to regulate."

Does the DOJ's existing structured settlement program support or violate public policy?  This question represents a fundemental political and business issue for all structured settlement stakeholders.  Congress is currently investigating the DOJ and should include this issue within the scope of its ongoing investigation.  All structured settlement stakeholders should separately address and highlight this issue as part of a broader industry discussion of business standards and practices.