Beyond Structured Settlements

S2P2J Release 63

The United States structured settlement market has been in existence for approximately 40 years and continues to expand its scope, complexity and importance within the context of personal injury settlement planning. When structured settlements were first introduced in the United States in the late 1970s, they were viewed primarily as a defense claim management concept which was binary in nature. A settlement was either “cash” or “structure”. A “failed” structured settlement was a “cash out”. Defense brokers sold a single product – a structured settlement annuity which could be, and almost always was, combined with up front cash. Rarely, however, from a defense perspective, was a structured settlement annuity integrated with other financial products or government benefits. In fact, a fundamental public policy justification for structured settlements claimed that “structured settlements enable injury victims to live free of reliance on government assistance.”
As the U.S. structured settlement market evolved, however, a shift in control has occurred as plaintiffs and their attorneys now retain their own structured settlement advisors. From the plaintiff perspective, a structured settlement annuity looks less like an all or nothing settlement proposition and more like a strategic product that can be combined with other financial products, government benefits and trusts into comprehensive settlement plans. National associations of plaintiff structured settlement brokers (SSP), special needs attorneys (SN Alliance and ASNP), and other professionals, as well as traditional structured settlement participants (NSSTA) increasingly recognize a much larger and more complex market (personal injury settlement planning) within which structured settlement annuities represent a core strategic product.
Since it was first published in 1986, "Structured Settlements and Periodic Payment Judgments" (S2P2J), has provided structured settlement stakeholders and settlement planning professionals with an authoritative reference guide, consisting of 16 chapters with extensive footnotes and Appendix documents, to help them understand issues and fashion settlements and judgments utilizing periodic payments. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

Co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert, S2P2J now features an online version as well as the traditional hardcopy. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes. In addition to contributing authors recognized below, the book authors acknowledge and thank the NSSTA and SSP Legal Committees for sharing case and industry updates.

Publisher Law Journal Press anticipates a March 2018 distribution date for hardcopy supplements for S2P2J Release 63 with online S2P2J subscribers receiving their update simultaneously with no additional subscription charge. Competent professionals confronted by structured settlement issues should have access to an up-to-date copy (or the online version) of this indispensable source book.

Release 63 Highlights - Release 63 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• Historical Analysis - To help structured settlement stakeholders analyze the comprehensive changes impacting their industry, Release 63 adds three new subsections to Chapter 1 expanding its historical analysis of the U.S. structured settlement market including: "Historical Trends and Transitions"; "Legislative History"; and "Significant Historical Developments."
• ABLE Accounts - The "Achieving a Better Life Experience Act of 2014" (ABLE Act) created an important new option (ABLE accounts) for qualifying individuals (disabled prior to age 26) to save and accumulate money while preserving eligibility to receive means-tested government benefits. In the personal-injury context, ABLE accounts cannot be funded directly with a structured settlement, but can be funded indirectly using a special needs trust. Contributing author David Lillesand, a nationally recognized special needs legal expert, highlights Release 63 with a comprehensive introduction to ABLE accounts for structured settlement and settlement planning professionals. Among the topics attorney Lillesand addresses: 1) Federal laws and regulations - including Congressional improvements in 2017; 2) State ABLE programs; 3) ABLE accounts in practice; and 4) a comparison of special needs trusts and ABLE accounts.
• Market-based Programs - One result of settlement planning has been the development of an increasing number of products and financial vehicles directly and indirectly related to structured settlements. Contributing author Serena Fitchard introduces and explains "market-based programs" which provide periodic payments linked to the performance of an underlying investment portfolio. At one time, most industry participants assumed market-based programs did not meet IRC 130's "fixed and determinable" test. In multiple PLRs, however, the IRS has concluded that the variable nature of a payment does not preclude it from being fixed and determinable if the payment obligation is fixed at the time of settlement and the amount can be calculated pursuant to an objective formula.
• Rating Agencies - Contributing author Michael Cohen, former head of A.M. Best's U.S. Life Insurance Industry rating division, provides an extensive update in Release 63 to S2P2J's summary and analysis of financial rating agencies relevant to structured settlements. Mr. Cohen's commentary: 1) introduces new companies that provide ratings for insurers; 2) discusses the quantitative and qualitative factors rating agencies utilize when they apply their rating methodologies; and 3) emphasizes the importance of risk based capital in life insurer evaluations. He further explains why A.M. Best has two rating scales (Financial Strength Rating and Issuer Strength Rating) and how those rating scales interact.
• Non-Qualified Assignments - Release 63 continues to track developments in the non-qualified structured settlement market which features an increasing number of non-traditional product providers as well as funding options where non-U.S. companies serve as obligors. S2P2J's analysis highlights many of tax and non-tax issues that these "off-shore" products raise which structured settlement professionals should evaluate and be able to explain to clients.
• Guaranty Association Model Act - As one result of the ELNY liquidation, the NAIC updated its "Model Life and Health Insurance Association Model Act" in 2017. Release 63 addresses the sections specifically impacting structured settlements including a clarification that Guaranty Association coverage under this newest version of the Model Act does not extend to "persons" who acquire rights to receive structured settlement annuity benefits via factoring transactions or to the "rights" so acquired. Louisiana became the first state to enact the new Model Act provision specifically excluding factored benefits.
• Lanclos v. United States - To its extensive coverage of the ELNY insolvency and liquidation, Release 63 provides a summary of Lanclos v. United States, a case decided by the U.S. Court of Federal Claims in 2017, in which an ELNY shortfall victim successfully argued that the U.S. government should be held liable for the shortfall because it "guaranteed" the structured settlement payments. To support her position, the plaintiff relied on Massie v. United States, where a Federal Circuit Court relied on a plain reading of the contract terms which stated the payments were “guaranteed” and “shall be paid.” Because of this language, the Court in Massie rejected the government’s argument that it had discharged its duty under the settlement agreement by “purchasing an annuity.”
• Privacy Issues - Professional structured structured practitioners must be aware of various federal and state privacy laws that may impact the gathering and/or sharing of medical or other personal information belonging to a claimant during the course of a personal injury settlement negotiation. Release 63 continues S2P2J's coverage of these privacy laws which can include not only HIPAA and the Gramm-Leach-Bliley Act but also state legislation similar to the NAIC's Model Act entitled "Privacy of Consumer Protection and Health Information Regulation" which may apply to all entities licensed by the State Department of Insurance.
• Deferred Attorney Fees - Plaintiff attorneys who wish to defer part or all of their fees in a contingent fee case have multiple product options depending upon whether the underlying case involves non-taxable personal physical injuries. For non-taxable injury cases, most structured settlement annuity providers allow attorney fees to be structured using an IRC 130 qualified assignment even on a "stand alone" basis. Release 63 updates S2P2J's analysis of qualified assignment applications to deferred attorney fees and questions whether the Childs case on its own represents appropriate tax authority.
• Settlement Planning Practice Standards - More recent S2P2J updates have recognized the evolution of personal injury settlement planning and its strategic relationship with structured settlements. Originally composed primarily of plaintiff structured settlement brokers, the Society of Settlement Planners (SSP) has played a leading role in defining this new profession. Release 63 highlights SSP's most recent contribution, their "Settlement Planning Practice Standards," and also includes a copy of these Standards in S2P2J's Appendix.
• CMS WCMSA Reference Guide - Medicare Set-Asides (MSAs) have become an important sub-market for structured settlements. Release 63 summarizes sections applicable to structured settlements within the most recent (2017) update of the CMS Workers Compensation (WC) MSA Reference Guide. Significantly, this newest version of the Reference Guide continues to incorporate the October 15, 2004 CMS Memo that provides structured settlement annuities with an inherent cost advantage compared with lump sums for funding most WCMSAs. Every structured settlement professional should be aware of this cost advantage and be able to explain it to their clients.
• Secondary Market Business Practices - Successful cooperation between NSSTA and the National Association of Settlement Purchasers (NASP) has resulted in greater consumer protections within the Model Act and multiple state structured settlement protection statutes. Unfortunately, the conduct of some secondary market participants continues to result not only in negative national publicity but also government actions against certain factoring companies alleging fraud and other deceptive business practices. Among other additions, Release 63 summarizes two recent criminal cases involving forgeries of protection act transfer orders to S2P2J's already extensive chapter addressing "Transfers of Structured Settlement Payment Rights."

For additional coverage of historical structured settlement issues and developments, see the structured settlement wiki.

Life Insurer Liquidation Process

What happens if and when a multistate life insurance company like Executive Life Insurance Company of New York (ELNY) is liquidated?

The answer: no one knows for certain. This uncertainty, specifically for ELNY, results from many factors:

• No significant multistate life insurers have failed since 1994.
• Many state life insurance guaranty association laws have been amended since 1994.
• Different state life insurance guaranty laws provide significantly different coverage applications, caps and requirements.
• ELNY's current negative surplus is historically large compared with previously liquidated life insurers.
• The vast majority of ELNY's remaining liabilities consist of structured settlement obligations.
• A 2007 "Agreement in Principle" to address ELNY's problems has never materialized.
• In a 2007 Business Insurance article, Mark Peters, then head of the New York Liquidation Bureau (NYLB) stated that this proposed bail-out plan “would be cheaper for the insurers and avoids the ‘chaos’ that would come with a liquidation.” (emphasis added)
• As ELNY's Rehabilitator, the New York Insurance Superintendent has repeatedly extended the original July 1, 2011 state court imposed deadline for filing a plan of liquidation, most recently to September 1, 2011.
• According to some critics, including New York attorney Peter Bickford, the problems with the insurer liquidation process in New York are systemic and lack transparency and accountability.
• New York has two state life and health insurance guaranty funds with different coverage dates, caps and requirements.
• The 2010 Dodd Frank law created a Federal Insurance Office (FIO) which could eventually supervise some life insurer insolvencies.

How U.S. life insurer liquidations are supposed to work

The United States federal bankruptcy law expressly excludes insurance companies from the definition of "debtor". As a result, when a life insurance company fails, it does not enter bankruptcy. Instead, the insurance commissioner (or superintendent) of the state that granted the life insurer's charter (domiciliary state) places the company in receivership - a status which can include conservatorship, rehabilitation and/or liquidation depending upon the severity of the insurer's problems. Liquidation is the most serious form of receivership.

All forms of life insurer receivership are conducted pursuant to the domiciliary state's insurance receivership statute under the supervision of a state court. Thirty-two states have adopted some version of the Insurers Rehabilitation and Liquidation Model Act which the National Association of Insurance Commissioners (NAIC) adopted in 1978. This Model Act helps to achieve uniformity and encourages reciprocity among the states.

ELNY was placed into rehabilitation on April 23, 1991 by the New York Superintendent of Insurance, a status it retains to the present day under the supervision of the NYLB. Prior to 1991, ELNY sold an estimated 8,000 structured settlement annuities which, according to ELNY's most recent financial statements (December 31, 2010) continue to represent "the vast majority of the value of ELNY's remaining contract liabilities." To date, all related ELNY structured settlement payments have been paid in full. However, the most recent ELNY financial statements show assets of $905,945,200 compared with liabilities of $2,474,317,342 resulting in a negative surplus of $1,568,372,142.

If and when the insurance commissioner (or superintendent) determines that a life insurer should be placed in liquidation, the commissioner petitions a state court for an Order of Liquidation. On December 17, 2010, a New York State Supreme Court Judge ordered the Superintendent of the New York State Insurance Department to present the Court with a proposed Order and Plan of Liquidation for ELNY on or before July 1, 2011 - a date which has now been pushed back twice most recently to September 1, 2011.

In most states, following an order of liquidation, the court appoints the commissioner/superintendent as liquidator and grants the liquidator title to all of the life insurer's assets and, subject to court approval, control of the life insurer's operations with the objective of winding up the life insurer's business. In New York, the NYLB, acting as agent for the Superintendent of Insurance, generally serves as liquidator in life insurance insolvency proceedings.

The liquidator is responsible for "marshalling" the insurer's assets, evaluating the claims of policyholders and creditors, and distributing assets to approved claimants according to statutorily prescribed priorities. Alternatively, as was the case with Executive Life Insurance Company of California (ELIC), a liquidation plan may provide for the transfer of some or all of the failed insurers assets and/or liabilities to a new and/or healthy insurer. The objective, with either alternative is to protect policyholders and consumers against three risks:

• Delays in claim payments;
• Uncertainties about payment amounts; and
• Replacement costs for defaulted policies.

An Order of Liquidation also generally triggers involvement by one or more state life and health insurance Guaranty Associations. These state Guaranty Associations are specially chartered, not-for-profit legal entities created pursuant to state guaranty association legislation. All fifty states, plus Puerto Rico and the District of Columbia, have enacted some version of the NAIC's Life and Health Insurance Guaranty Association Model Act which was first promulgated in 1971. Important differences, however, exist among these various state statutes including coverage caps and whether the Guaranty Associations protect annuity policyholders or payees.

All state life and health guaranty associations are also members of the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), a not-for-profit organization founded in 1983. The core mission of NOLHGA and its member Guaranty Associations, according to NOLGA President Peter Gallanis, is "to ensure that consumers receive at least a statutorily prescribed base level of financial protection when a life or health insurance company fails. That protection may be achieved either by transferring to a healthy insurer the failed company's business that is in force at the time of the company's failure or by supporting the 'runoff' of that in-force business."

A 2009 NOLHGA document assessing ELNY and titled "Information and Guidance on Estimating Potential Guaranty Association Assessments Relating to Executive Life Insurance Company of New York ('ELNY')" includes the following paragraph:

"No guaranty association has yet to enter into a legally binding commitment to participate in any plan or contribute any level of funding. As a result, at this time, we cannot confirm which particular state guaranty associations will participate in any plan. It is estimated, however, that if a plan similar to the one that is being considered is adopted, the majority of the guaranty associations’ costs (e.g., 66-75%), will likely be borne by New York's guaranty associations. Currently, it is estimated that 20-30 guaranty associations may eventually participate in a final plan once it is completed. In most states, assessments by guaranty associations relating to annuities are primarily associated with the allocated annuity account. New York has two separate guaranty associations: the assessment base for its “new” guaranty association is primarily associated with its life insurance, annuity and funding agreement account; while the assessment base for its “old” guaranty association is based upon admitted assets."

The 2009 NOLHGA document also includes a section titled "Guidance on Estimating a Company’s Potential Guaranty Association Assessment".

For S2KM's complete reporting and analysis of ELNY, including an Executive Life timeline, see the structured settlement wiki.

SSP and NSSTA 2011 Annual Meetings - 7

Fulfilling the promise to pay future periodic payments has been the primary mission, and a cornerstone for success, of the United States structured settlement industry for more than 30 years.

With the exception of Executive Life Insurance Company of California, which collapsed in 1991 and resulted in some individuals receiving somewhat less than 100% of their payments, all structured settlement recipients, or the factoring companies and/or investors who purchased their payment rights, have to this date received their promised future periodic payments in full.

What happens if and when a structured settlement annuity provider is financially unable to meet its periodic payment obligations?

In the United States, the regulation of insurance and insurer insolvency is governed by state law. Insurance companies are expressly excluded as debtors under the Federal Bankruptcy Code. For structured settlements, however, the Federal Bankruptcy Code could apply if a non-insurance qualified assignee entered bankruptcy.

Most state insurance laws provide for the Commissioner of Insurance of the state where an insurance company is domiciled to:

• Determine that an insurer should be placed in liquidation.
• Petition a state court to enter an order of liquidation.
• Serve as receiver or liquidator when an insurer is placed in liquidation.
• The liquidator's role is to wind up the insurer's business under court supervision.
• In New York, the New York Liquidation Bureau (NYLB) manages insurance company liquidations as well as conservatorships and rehabilitations.

Since 1971, when the National Association of Insurance Commissioners first promulgated the Life and Health Insurance Guaranty Association Model Act (Model Act), state life and health guaranty associations have provided a safety net to protect consumers from some of the risks resulting from the insolvency of a life or health insurance company.

Every state, plus the District of Columbia and Puerto Rico, currently has a life and health guaranty association. All of these guaranty associations are members of the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA).

NOLHGA was founded in 1983 and operates as a not-for-profit corporation. The primary mission of NOLGA and its members, who are separate from but work closely with state insurance regulators, is to ensure that consumers receive (at a minimum) a level of financial protection as prescribed by state statute when a life or health insurance company fails.

Perhaps anticipating the possible insolvency of Executive Life Insurance Company of New York (ELNY), the National Structured Settlement Trade Association (NSSTA) provided a timely and valuable educational discussion about state life and health guaranty associations featuring Thomas Ronce and Craig Ulman during its 2011 Annual Meeting.

In his NSSTA presentation, Ronce explained how the state life and health guaranty structure differs from FDIC protection because of the non-uniform state-based provisions, lack of pre-funding, and the nature of the guaranty itself. Ronce reviewed the history of the guaranty associations and also discussed:

• Guaranty association coverage issues.
• Powers and duties of guaranty associations.
• How assessments are calculated.
• Collections and tax offsets.
• NOLHGA's role generally and in multi-state insolvencies.
• NOLHGA's Insolvency Task Forces.

Ulman focused his discussion of guaranty association coverage on "Issues, Pitfalls and Developments Affecting Structured Settlements". Among the issues:

• Guaranty association coverage limits - with more than half the states providing $250,000 or less.
• Owner-based coverage vs. payee based coverage - with most states providing the later.
• The NAIC Model Act subrogation provisions (enacted in 27 states) which specifically address and impact structured settlements.

As potential pitfalls for structured settlements, Ulman highlighted general and state-specific coverage exclusions as well as timing issues which could determine whether and when a state guaranty statute applies to a structured settlement recipient.

As significant, related developments, Ulman identified several enacted or proposed amendments to state guaranty statutes:

• Replacing owner-based coverage with payee-based coverage.
• Increasing coverage limits from $100,000 to $250,000.
• Adopting subrogation provisions based on § 8.K.(3) of the NAIC Model Act.
• Relaxing or eliminating the prohibition on advertising the availability of Guaranty Association coverage.
• Reducing or eliminating state tax offsets for Guaranty Association assessments.

For additional information about structured settlement annuity company insolvencies and state insurance guaranty associations, see sections 3.05 and 5.04 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For S2KM's complete reporting about the SSP and NSSTA 2011 Annual Meetings, see the structured settlement wiki.