Beyond Structured Settlements

Business Standards and Practices - 2

A prior S2KM blog post (Business Standards and Practices-1) asserted that structured settlement business standards and practices must improve before the industry can achieve its public policy and revenue potential. The prior post also highlighted historical events that help explain the development of traditional structured settlement business and professional models. This post continues S2KM analysis of traditional and transitioning structured settlement business and professional models and their related business standards and practices.

Before the structured settlement industry can improve and grow, the primary market must address these strategic issues:

• What are the traditional structured settlement business and professional models?
• What problems have traditional structured settlement models created that have restricted industry growth?
• What new business and professional models are competing with traditional structured settlement models?
• How will the business standards and practices of these new models differ from traditional structured settlement models?

The traditional primary market structured settlement business model is a "claim management model" including some or all of the following characteristics:

• IRC section 130 Qualified Assignments as the standard funding model;
• Single product (annuity) predominates;
• No requirement to define injury victim (customer) "best interests" or structured settlement product "suitability";
• Defendant "approved" structured settlement agents;
• Defendant "approved" structured settlement annuity providers;
• Defendant "right of last refusal" to match funding alternatives with affiliated annuity provider quotes;
• Defendant "right" to deny structured settlements to injury victims;
• Defendant strategies to appropriate the structured settlement tax benefit to save costs and/or generate profits;
• Opposition to single claimant 468B Qualified Settlement Funds;
• Failure to fully inform injury victims about IRC section 5891, settlement transfers or case-specific structured settlement protection statutes;
• Failure to promote "full disclosure" and "informed consent" of structured settlement compensation and/or conflicts of interest;
• Misrepresentations including (but not limited to) the "cost" and/or "value" of structured settlements.

The traditional structured settlement "professional" typically refers to himself (or herself) as a "structured settlement broker" or "structured settlement consultant". By background, he or she generally is a life insurance agent or insurance claims representative licensed to sell life insurance and typically sells one product: a single premium fixed payment life insurance annuity.

"Advanced training" for those structured settlement broker/consultant/agents who are members of NSSTA ("America's largest association of structured settlement professionals") may include a one-time one weekend "certification" program (CSSC) at the University of Notre Dame plus continuing education credits at NSSTA-sponsored education conferences. NSSTA's Code of Ethics (a Statement of Ethics and Professional Responsibility) was approved by NSSTA in 1997 "to provide guiding principles to its members and member organizations".

For many structured settlement stakeholders, including some NSSTA members and many structured settlement recipients, the problems with the traditional structured settlement business and professional models are apparent if not obvious:

• For example, NSSTA sponsored a Broker Relations Initiative beginning in 2006 to improve the reputation and public image of structured settlements by establishing more effective broker to broker communication and understanding. Despite many featured presentations and progress reports, however, the Broker Relations Initiative has not yet produced any final report or noticeable industry changes.
• During NSSTA's 2009 Winter Meeting, NSSTA member and speaker Joseph DiGangi addressed problems resulting from the structured settlement industry's traditional "annuity broker" business model. These problems, according to DiGangi, include a stagnant market, negative perceptions of structured settlement participant roles and value, a limited knowledge base and knowledge resources as well as a single product offering. DiGangi proposed an alternative "consultant" business model, which he termed "settlement consulting", with multiple products and services providing added value.
• During NSSTA's 2010 Annual Meeting, featured speaker Dan Clark highlighted NSSTA's stagnating revenue growth. As a remedy for structured settlement industry problems, Clark challenged NSSTA to change from within. According to Clark, "to improve industry performance, NSSTA must discuss both sides of every issue and do what is right."
• DiGangi's proposal and Clark's admonition create challenges that NSSTA historically has been unwilling to acknowledge or address. For example, during NSSTA's 2009 Winter Meeting, featured speaker Rev. Oliver Williams challenged the NSSTA audience to identify structured settlement business conduct that caused "shocked disbelief" among NSSTA members. Noone mentioned Macomber v. Travelers or Spencer v. Hartford or allegations by structured settlement recipients of fraud, Rico violations, misrepresentations, and rebating by primary market participants. Instead, the NSSTA members identified "structured settlement factoring" and how factoring companies have "stolen" the structured settlement brand.
• Staying focused on NSSTA, "shocked disbelief" and "structured settlement factoring", what should be surprising is how NSSTA has attempted to ignore (from their business practice and responsibility perspective) and simultaneously demonize the secondary structured settlement market. Consider, for example, the NSSTA website. If you want to "Learn More" about structured settlements:
  • NSSTA encourages you "to contact a structured settlement broker or life insurance company in your area".
  • However, if someone has offered to purchase your structured settlement payments, NSSTA advises you to contact someone else - "a trusted attorney" or "the office of your state's attorney general" - adding that "advocates for consumers and the disabled have publicly called attention to the practices of firms engaged in the purchase of structured settlement payments".
  • NSSTA's identification of structured settlement tax rules highlights IRC 104(a)(2) and 130 while omitting IRC 5891 - which includes the only Federal tax definition for a structured settlement.
• Consider also NSSTA's Code of Ethics and Professional Responsibility, which provides the following guiding principles for NSSTA member companies, their employees and individual members: integrity, fidelity, honesty, candor, competence, faithfulness, fairness, disclosure, due diligence, knowledge, skills, honesty, dignity, courtesy, professionalism and compliance with applicable federal and state laws.
• How do NSSTA's "guiding principles" square with:
  • Allegations of primary market illegal activities by structured settlement recipients in the Macomber v. Travelers and Spencer v. Hartford class action lawsuits;
  • A stagnant primary structured settlement market with negative stakeholder perceptions of participants' roles and value, a limited knowledge base and resources plus a single product offering; and/or
  • Peripheral markets such as special needs attorneys, life care planners, Medicare set-aside professionals and the structured settlement secondary market that are growing?
• The answer is they don't square. A fundamental mismatch exists between NSSTA's Code of Ethics and Professional Responsibility and traditional structured settlement business practices and standards. The reasons include:
  • NSSTA's Code of Ethics and Professional Responsibility does not contain any enforcement procedures and NSSTA has made no attempt to enforce its Code of Ethics and Professional Responsibility.
  • NSSTA adopted its Code of Ethics and Professional Responsibility in 1997. More recent structured settlement laws and related market developments have substantially changed the structured settlement market. NSSTA's Code is outdated and largely irrelevant for the transitioning structured settlement market.
  • The traditional structured settlement "claim management" business model and "annuity broker" professional model include flaws and conflicts as outlined above. Those flaws and conflicts are being exposed and punished in class action lawsuits.

For S2KM's continuing analysis of structured settlement business standards and practices, see S2KM's structured settlement wiki.

Business Standards and Practices - 1

For the structured settlement industry to achieve its public policy and revenue potential, business standards and practices must improve. This blog post, which begins a new S2KM series, highlights historical developments which help define the business standards and practices of the current structured settlement industry.

Periodic Payment Settlement Act of 1982 - This Federal legislation amended IRC section 104(a)(2) (clarifying an exclusion for "periodic payments") and added IRC section 130 (introducing and defining "qualified assignments" and "qualified funding assets").

NSSTA (1985) - A pioneering group of structured settlement agents and life companies formed the National Structured Settlement Trade Association (NSSTA) which became the first, and remains the largest, structured settlement professional association.

First Settlement Transfer (1986) - James Lokey completed the first transfer of structured settlement payment rights thereby launching the structured settlement secondary market. A number of companies subsequently responded to this market development to create a "gray market" allowing and encouraging structured settlement recipients to liquidate part or all of their future payment rights.

Revenue Procedure 93-34 (1993) - Regulations issued by the U.S. Treasury became effective defining a new type of IRC 468B fund ("Qualified Settlement Fund") providing an efficient dispute resolution technique for defendants and a safe harbor for plaintiffs who need time to resolve their own settlement planning issues prior to deciding upon any specific form of distribution including structured settlements.

NSSTA CSSC Program (1994) - NSSTA originated a training and certification program at the University of Notre Dame leading to a designation for qualifying persons as Certified Structured Settlement Consultants (CSSC).

Weil Settlement (1996) - The plaintiff in this lawsuit argued that, as a result of an anti-competitive conspiracy among certain structured settlement agents, annuity providers and NSSTA, structured settlement annuity providers marketed exclusively through agents who represented defendants and refused to appoint agents who represented plaintiffs or their attorneys. The confidential settlement of the Weil lawsuit coincided with a change in industry business practices whereby structured settlement annuity providers began to appoint agents representing plaintiffs and allowing agents representing defendants and plaintiffs to share commissions.

NASP (1996) - A group of companies specializing in structured settlement transfers created the National Association of Settlement Purchasers (NASP) which became the first and only trade association specializing in the structured settlement secondary market.

Structured Settlement Protection Statutes (1997-present) - Beginning with Illinois in 1997, nearly all states have enacted some form of structured settlement protection statute with many such statutes, since 2000, based upon the Model State Structured Settlement Protection Act which was also adopted by the National Conference of Insurance Legislators in 2004. These state laws require structured settlement transfers to receive advanced state court approval.

NSSTA Code of Ethics (1997) - NSSTA adopted and published its Statement of Ethics and Professional Responsibility "to provide guiding principles to its members and member organizations". Implicit in the acceptance of this Statement, according to NSSTA, "is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services".

NY Attorney General Investigation (1999) - The New York Attorney General launched an investigation of J.G. Wentworth, a leading structured settlement transfer company, and entered into a settlement in 1999 limiting discounts on J.G. Wentworth's New York transactions to no more than 25%.

Victims of Terrorism Tax Relief Act of 2001 - Among other provisions, this legislation added IRC section 5891 ("Structured Settlement Factoring Transactions") to Subtitle E of the Internal Revenue Code and resulted from a political compromise between NSSTA and NASP.

SSP (2001) - Dissatisfied with what they considered NSSTA's continuing defense bias, a group of structured settlement agents formed the Society of Settlement Planners (SSP), a national non-profit education and public policy association for structured settlement professionals who advocate "the injury victim's right to choose settlement planning advisers and financial and guarantee providers".

Grillo case (2001) - A Texas district court entered a $1,600,000 judgment against plaintiff attorneys based upon allegations by their prior clients that a medical malpractice case settlement "contained no language which required at least one defendant or its liability insurer to promise a fixed and determinable periodic payment which would be tax free to the claimant".

California Attorney General's Study (2004) - Prepared for the California legislature, this study surveyed hundreds of California transfers between 2000 and 2003. For a summary of the results, see "Transfers of Structured Settlement Payment Rights - What Judges Should Know about Structured Settlement Protection Acts", by Daniel Hindert and Craig Ulman.

NAIC Compensation Disclosure (2004) - The National Association of Insurance Commissioners (NAIC) adopted a Compensation Disclosure Amendment to its Producer Licensing Model Act. The Disclosure Amendment neither mentions nor excludes structured settlements.

Saltzburg and Chemerinsky Opinion Letters (2006) - First presented at the ATLA 2006 Winter Meeting, two legal opinion letters written by law professors Stephen Saltzburg and Erwin Chemerinsky reach similar conclusions:

• Experts, including structured settlement experts, have a fiduciary duty to their clients.
• Plaintiff experts have a conflict of interest if they are paid by someone other than the plaintiff without disclosure to and consent by the plaintiff.
• Plaintiff attorneys have a duty to disclose this conflict of interest by structured settlement experts to their clients.

Macomber v. Travelers (2007) - Settled on undisclosed terms, this class action lawsuit alleged that Travelers lowered the cost of structured settlements by 2% without informing plaintiffs (shortchanging) by paying its approved structured settlement agents a 2% commission and retaining a 2% commission for itself (rebating). Coincidental with this settlement, Travelers changed its structured settlement business practices and its affiliated life company stopped selling structured settlement annuities.

SSP RSP program (2007) - SSP launched a Registered Settlement Planner (RSP) professional certification program in affiliation with Texas Tech University including an educational component; submission and review of a comprehensive personal injury settlement plan; experience requirements; continuing education; and a code of ethics.

NSSTA Broker Relations Initiative (2007) - Consultant Lynn Courier introduced the first draft of a proposed "Standards of Professional Conduct" for structured settlement consultants developed by the NSSTA-sponsored Broker Relations Initiative (BRI) during the NSSTA 2007 Fall Meeting. To date, NSSTA has not adopted any additional standards of professional conduct beyond its 1997 Code of Ethics.

Rapid Settlements (2007) - Rapid Settlements, a Texas factoring company, failed in a series of transfer cases to successfully utilize arbitration clauses in its attempt to bypass state structured settlement protection statutes.

Fresno County Factoring Cases (2009) - In Henderson v. Scioteco, a California appellate court ruled favorably for 321 Henderson Receivables, a J.G. Wentworth affiliate, reversing earlier opinions of a California superior court in 11 factoring cases consolidated for appeal. The appellate court ruling allowed Henderson to amend the transfer petitions at issue to correct any errors prior to any new hearing on the petitions and additionally held that public policy supports state court approved structured factoring transactions.

Suitability in Annuity Transactions Model Regulation (2010) - The NAIC adopted this Model Regulation "to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transaction involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed." Significantly for structured settlements, exemptions from the Model Regulation include: "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process."

Spencer v. Hartford (2010) - A U.S. district judge in Connecticut approved a $72.5 million class action settlement resulting from plaintiff allegations (denied by Hartford) that Hartford and its attorneys, brokers and agents violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed common law fraud in structuring its settlements. Hartford's affiliated life company stopped selling structured settlement annuities in 2009.

For more detailed information about these structured settlement business standards and practices developments, see "Structured Settlements and Periodic Payment Judgments" co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert.

S2P2J Release 48

Publisher Incisive Media has announced October 21, 2010 as the distribution date for Release 48 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). 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.

S2P2J Release 48 Highlights

• How the Spencer v. Hartford and the Macomber v. Travelers class action lawsuit settlements impact structured settlements; and
• More specifically, how these two class action settlements impact structured settlement risk analysis, business strategy, business models, business practices and business standards for various stakeholders and participants:
  • Chapter 4 - Defendants and their attorneys:
    • Whether, when and how to structure
    • Risk and cost analysis
    • Related party transactions
    • Insurance policy issues
    • Financial impact
    • Releases and assignments
    • Multiple defendant cases
  • Chapter 5 - Plaintiffs and their attorneys
    • Settlement planning options and responsibilities
    • Comparing lump sums and periodic payments
    • Investment standards
    • Addressing the risk of non-payment
    • How to control decision making
    • Integrating government benefits
    • Informed consent
  • Chapter 6 - Structured settlement consultants
    • Available resources
    • Products and services
    • Business standards and practices
    • Licensing and certification
    • Agent vs. broker
    • Conflicts of interest
    • Representations and misrepresentations
    • Obligations and potential liabilities
  • Chapter 7 - Structured settlement negotiation strategy
    • Public policy
    • Legal mandates
    • Negotiation guidelines
    • Safe harbors
    • Defense and plaintiff strategies
    • Disclosure and privacy
    • Discovery issues
    • Compensation issues
    • Secondary market issues
    • Minors and incompetents
    • Utilizing 468B funds
    • Drafting settlement documents
    • Court approval
• Release 48 also updates recent developments for:
  • Structured settlement public policy (Chapter 1),
  • 468B settlement funds (Chapter 3) and
  • The secondary market (Chapter 16).

Spencer v. Hartford - 3

Spencer v. Hartford is a class action civil lawsuit potentially involving more than 9000 plaintiffs who received structured settlement annuities from Hartford insurance subsidiaries. The plaintiffs allege:

• Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program. 

The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .

Prior S2KM blog posts:

• Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
  
• Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.

This S2KM blog identifies and recommends:

• Questions;
• Lessons;
• A proposed solution.

Questions:

• Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
• How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
• Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
• Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
• Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
• Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
• Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
• How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
• Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
• Regardless of case outcome:
  • What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
  • What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
  • Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?

Lessons

• Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
• If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
• The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
• Structured settlement compensation arrangements and relationships generally are not disclosed.
• Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
• Structured settlement stakeholders are not capable of self-regulation.
• The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.

Proposed Solution

• Controlling criteria:
  • Judicial approval of structured settlements;
  • Standards and requirements:
    • Best interest test;
    • Due diligence;
    • Disclosure - compensation and conflicts of interest;
    • Informed consent;
    • Licensing;
    • Certification.
• Laws and regulations
  • Identify, preserve and promote existing structured settlement laws;
  • Improve state structured settlement protection statutes;
  • Apply the state protection statutes to the primary market;
  • Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
• New business models
  • Re-define the "claim management" structured settlement business model:
    • Defendants' first priority in structured settlement cases should be to obtain a full legal release.
    • If defendants want to participate in settlement planning, they should:
      • Study settlement planning;
      • Understand the laws, products, documentation and participants;
      • Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
  • Grow the "settlement planning" business model featuring:
    • Qualified settlement funds (QSFs);
    • Structured settlement annuities - qualified and non-qualified under IRC 130;
    • Settlement trusts;
    • MSAs;
    • SNTs;
    • New products such as tax-free disability funds;
    • Secondary life and annuity markets.
• Re-learn and re-market structured settlements
  • Re-study structured settlements from a settlement planning perspective;
  • Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
  • Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
  • Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
  • Schedule and require ethics classes focused on structured settlement and settlement planning business conduct;
  • Organize, promote and participate in community service activities with and for disability associations.

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.

SSP 2007 Fall Meeting

The Society of Settlement Planners (SSP), hosted its 2007 Fall Meeting September 8 at the Camelback Inn in Scottsdale AZ. SSP is a national nonprofit educational and public policy association of professional structured settlement producers and other professionals who assist injured claimants in the settlement process.

During the past three years, SSP has offered outstanding structured settlement and settlement planning educational programs. Earlier this year, SSP announced the creation of a new Registered Settlement Planner (RSP) professional designation. The first RSP program is scheduled to begin today in affiliation with Texas Tech University.

For summaries of prior SSP educational programs, see these earlier S2KM blog posts:

• SSP 2007 Annual Meeting
• SSP's 2007 Educational Seminar
• SSP to Create Professional Designation
• SSP 2006 Annual Meeting
• SSP's 2005 Annual Meeting

Highlights of SSP's 2007 Fall meeting included educational presentations by SSP members for the following topics:

• Medicaid Liens - At SSP's 2007 Annual Meeting, Matt Garretson summarized his paper titled "What does the Ahlborn Case Really Mean?" In Ahlborn, the U.S. Supreme Court unanimously affirmed the Eighth Circuit's decision limiting a state Medicaid agency to reimbursement from only that portion of a judgment or settlement that represents payment for medical expenses. At SSP's Fall 2007 Meeting, attorney Greg Maxwell continued SSP's analysis of Medicaid liens. Maxwell discussed preliminary responses by state Medicaid agencies to Ahlborn and identified lien resolution services as an increasingly important settlement planning service and skill set. For additional information about Medicaid lien resolution, see section 15.04[4] of "Structured Settlements and Periodic Payment Judgments" as well as Matt Garretson's new book "Negotiating and Settling Tort Cases".
• Personal Injury Tax Planning - Jesus Longoria, a Texas-based financial planner, discussed several settlement planning tax issues including punitive damages; confidentiality agreements; alternative minimum tax; and commutation riders. Longoria's presentation also featured a product developed by Amicus Financial Advisors that calculates projected taxes on various settlement options. Longoria's presentation did not detail two important settlement planning tax issues addressed by attorney Robert W. Wood in recent S2KM blog posts and podcasts - IRC section 468B funds and structured attorney fees. Wood also authors "Taxation of Damage Awards and Settlement Payments", a definitive hardcopy textbook that encompasses personal injury tax planning.
• Dissipation Risk - Professor Joe Tombs of Texas Tech University delivered an entertaining presentation about dissipation risk titled "The Elephant in the Room". Tombs' conclusions: 1) Financial planners generally ignore dissipation risk; 2) Dissipation risk defines settlement planning; and 3) Settlement planners must teach personal injury claimants how to manage their impulses. Tombs also introduced a new Amicus product that he has titled the "Tombs' Dissipation Index" (TDI). According to Professor Tombs', the TDI measures (on a scale of 1 to 100) the relative propensity of individual settlement recipients for dissipation risk. The most important indicators: education and physical fitness. Had time permitted, it would have been interesting to hear Professor Tombs address these additional dissipation-related topics:
  • How inadequate settlement amounts (compared with projected injury-related expenses) and unexpected (and unplanned for) future events impact settlement planning and dissipation analysis?
  • What impact, if any, pre-litigation funding and post-settlement funding (factoring) have on settlement planning and dissipation analysis?
  • How factoring, from a dissipation perspective, impacts a settlement planner's financial and insurance product recommendations?
• Annuities and Managed Money - Paul Lesti, author of a structured settlement treatise, repeated a presentation he originally delivered at the AAJ 2006 Winter Meeting as part of a debate with Rich Halpern. One of the results of Lesti's debate with Halpern was the distribution by Halpern of widely-discussed (within the structured settlement industry) opinion letters by two law professors, Stephen Saltzburg and Edwin Chemerinsky. These opinion letters highlight the obligations of plaintiff attorneys, under the ABA's Model Rules for Professional Conduct, to understand and inform their clients about proposed structured settlement compensation arrangements and to secure their client's "informed consent" for any such compensation arrangement. Although Lesti's presentation provided a persuasive summary of the advantages of structured settlement annuities, Lesti did not:
  • Address the settlement planning issues raised by Professors Saltzburg and Chemerinsky;
  • Define "managed money" for purposes of settlement planning;
  • Discuss the role and interaction of settlement trusts (managed money) and annuities in preserving government benefits.
• Settlement Planning - Jack Meligan summarized examples of Settlement Professional Inc's (SPI) settlement plans and settlement planning strategies. SPI's settlement planning approach focuses on empowering personal injury victims to control and direct their own settlement planning. For future SSP educational programs, Meligan should be encouraged to expand his excellent presentation to address the following issues:
  • What is settlement planning and how does it differ, from a product and knowledge perspective, from:
    • Structured settlements?
    • Special needs planning?
  • How do settlement planners identify and collaborate with settlement trust providers?
  • How does factoring (and the secondary insurance markets generally) impact settlement planning?
• Annuity Testimony - Jack Meligan and Paul Lesti teamed up to provide a valuable and enlightened analysis of annuity testimony. When offered as proof of present value in personal injury litigation, annuity testimony generally is provided by defendants as a trial strategy for limiting economic damages. Chapter 12 of "Structured Settlements and Periodic Payment Judgments" provides a traditional, defense-oriented analysis of annuity testimony. In their presentation, Meligan and Lesti looked at annuity testimony from the perspective of settlement planners working with  plaintiff attorneys to challenge and defeat annuity testimony by defendants. Their analysis included trial tactics as well as how to use annuity testimony expertise as a marketing advantage.
• Medical Imagery - What does medical imagery have to do with settlement planning? Quite a bit - if you listen to the representatives of Bio-Sim Corporation, who made a brief presentation at the SSP meeting. Bio-Sim, whose work is featured on the television show, Grey's Anatomy, believes their work product can substantially reduce settlement time - and improve settlement results for plaintiffs. Bio-Sim also offers referral fees to settlement planners. Which raises this question: if you are a settlement planner focused on marketing to plaintiff attorneys, what products and services should you be offering?

For an association that purports to be a protector of claimants rights, it was surprising SSP did not address the following important settlement planning issues as part of its Fall 2007 Meeting:

• Executive Life of New York - NSSTA has created a Task Force. SSP should at least provide its members with a status report.
• 2007 POMS - how are SSP and NSSTA tracking this issue? - specifically what new POMS sections are being proposed for annuities, structured settlements, assignment rights and special needs trusts?
• State Medicaid responses (and related judicial responses) to the Deficit Reduction Act of 2005 - Sylvius von Saucken introduced this issue to SSP members at SSP's 2007 Annual Meeting and to NSSTA members at the NSSTA 2007 Annual Meeting.
• Transparency and informed consent for all settlement planning compensation. SSP should continue its leadership with these issues.
• Single Claimant 468B Funds - What is the strategy to secure clarification by the U.S. Treasury confirming single claimant 468B funds? 
• Rebating
  • Which statutes define rebating?
  • Which rebating practices (plaintiff and defendant), are:
    • Legal vs. illegal; and
    • Represent good vs. unacceptable business practices?
• Macomber case - Having featured this case at its 2006 Annual Meeting, SSP should provide an update for its members about the Macomber settlement.
• State structured settlement protection statutes - NSSTA provides educational presentations about these statutes for its members.  Why not SSP?

In addition to SSP's educational presentations in Scottsdale, SSP's President Anthony Alfieri chaired a discussion about SSP's organizational and promotional issues. Here are some related and unsollicited S2KM recommendations for SSP:

• Continue to identify and recruit structured settlement and settlement planning industry leaders who share SSP's values and priorities - even if they compete with you and challenge your viewpoints on important issues.
• Establish communication with other settlement planning associations - including NSSTA; NAELA; NAMSAP; NASP; ASNP; and SNA. Focus on shared issues and collaboration opportunities. Attend the Stetson Law School SNT seminar.
• Use a wiki to publish online (publicly or privately) the current draft of SSP's Code of Ethics. Sollicit and review comments and improvements.
• Learn web 2.0 (aka social network) technologies to improve SSP's online identity as well as SSP's  communication, learning and operating efficiencies.

NSSTA 2007 Winter Regional Meeting-3

S2KM's coverage of the National Structured Settlement Trade Association (NSSTA) 2007 Winter Regional Meeting includes two prior blog posts:

NSSTA-1 summarizes progress reports from two NSSTA-sponsored initiatives and highlights NSSTA's new strategic priority to recapture the structured settlement brand.

NSSTA-2 summarizes five experts who spoke about factoring at the NSSTA 2007 Winter Regional Meeting.

This S2KM blog post addresses the remaining presentations from NSSTA's educational programs:

All Things Considered (ATC) - Formerly known as "The Tax Posse", this presentation features topics and presenters selected by NSSTA's Legal Committee. In addition to two factoring presentations (see NSSTA-2), the ATC panel addressed three issues in Santa Fe:

• NSSTA Lobbying
  
  • NSSTA lobbyist Eric Vaughn summarized the challenges NSSTA faces with the new Congress including change of control and new membership for both the House Ways and Means Committee and the Senate Finance Committee. 
  • Vaughn did not discuss two lobbying issues which have become increasingly important for NSSTA - government benefits (Medicaid and Medicare) and state laws including: settlement transfer protection acts, state periodic payment of judgment statutes and state Medicaid rules. 
  • One member of NSSTA's government affairs committee stated privately that for the first time in NSSTA history, NSSTA representatives, including Vaughn, recently met with CMS.
  • Two other speakers (Craig Ulman and Peter Vodola) referenced proposed judicial rules which could impact the Pennsylvania structured settlement protection act.

• Tax Issues - Tax specialist Tom Ronce addressed three topics. Ronce warned against potential offsets in current bills in Congress which could impact structured settlements. Ronce provided an update of Murphy v. IRS in which the D.C. Circuit Court of Appeals has agreed to revoke its controversial 2006 decision and to rehear the case in 2007.  Ronce summarized proposed federal tax regulations, including private annuity regulations, which could potentially prevent the structuring of attorney fees.  For additional information about the attorney fee issue, read this prior S2KM blog post.

• Agent Responsibilities and Exposures - Attorney Mike Miller summarized the Law of Agency as it relates to structured settlement consultants. Miller's comments also included a review of the 2006 Saltzburg and Chemerinsky memorandums plus an update on two class actions lawsuits, Macomber v. Travelers and Spencer v. Hartford.  For additional information about the Saltzburg and Chemerinsky memos, read and listen to this "Jack Meligan Interview". For additional information about Macomber v. Travelers, read this prior S2KM blog post.

Supporting Casualty Claims - Ismael Acevedo, Vice President of AIG's Structured Settlement Division delivered an educational primer for structured settlement consultants who represent (or want to represent) casualty claim departments. Acevedo's presentation summarized the results of an AIG survey of 1000 claims adjustors.  In addition, Acevedo announced a new AIG initiative to make its structured settlement program "more transparent". Acevedo did not specify whether or how this new AIG initiative will apply to such issues as factoring and/or to informed consent by injured claimants for structured settlement compensation arrangements.

The Non-Qualified Market - Speaker Dennis Drexler recommended that structured settlement consultants should consider the market for non-qualified annuities used to fund installment sales of businesses, professional practices or real or personal property. The benefits for a purchaser, according to Drexler, can include: deferred payment of capital gains, the ability to customize a payment stream, and the improved credit worthiness of the obligor.

Settlement Trust Workshop - For the second consecutive conference, NSSTA devoted half-a-day of its educational program to settlement trusts. Three trust experts, David Cover, Brad Cantwell and Jay Sangerman analyzed the relationship of annuities and trusts in the context of three case studies.

• Cover, a trust officer, pointed out the lack of knowledge most trust officers have about structured settlements as well as the important role of special needs attorneys when government benefits are an issue.
• Cantwell, a structured settlement consultant and Chairperson of NSSTA's Educational Committee, described how blended products (trusts and annuities) improve settlement planning.
• Sangerman, a special needs attorney, discussed the use of annuities to fund special needs trusts. Responding to this author's question, Sangerman insisted the Deficit Reduction Act of 2005 (DRA) does not apply to structured settlement annuities.
• Read these prior S2KM blog posts for additional information about:
  • Settlement trusts;
  • The DRA and structured settlements.

Macomber v. Travelers - Update 2

The recent decision by the Connecticut Supreme Court in Macomber v. Travelers did not represent a victory for either the defendants or the plaintiff according to Ralph Stone, the lead plaintiff attorney.

During a March 31, 2006 podcast interview with Mark Wahlstrom  currently featured on The Settlement Channel,  Stone provided his perspective on the decision. 

Here are highlights from Mark Wahlstrom's audio interview with Ralph Stone:

“The defendants have very little to be happy about", according to Stone. "The reasoning of the Connecticut Supreme Court had nothing to do with what the defendants were seeking in their appeal of class certification.”

In considering the Macomber case for a second time, the Connecticut Supreme Court reached two decisions.  Stone characterized the first decision, that the plaintiff Lisa Macomber does not have a claim against Solomon Smith Barney, as “trivial”. “We have always had our sights on Travelers. Travelers is really the wrongdoer here.”

Stone described the second decision as criticism of the trial court, as well as the parties, for limiting discovery. The Connecticut Supreme Court determined the discovery process was inadequate to certify a larger class under Connecticut law and remanded the case to the trial court for additional proceedings. Stone pointed out the defendants, not the plaintiff, wanted to limit discovery. The trial court agreed with the defendants and limited discovery to 28 cases out of potentially thousands nationwide.  On remand, the discovery process is expected to be more comprehensive.

Stone would not predict any timetables for discovery noting the Macomber case in now eight years old. The new trial judge will be the fifth trial judge in the case according to Stone.

Acknowledging the Macomber case is one of the most important and divisive within the structured settlement industry, Stone said he hopes the case will raise awareness among plaintiff attorneys about the structured settlement conduct of some defendants and insurance carriers that Stone and his client, Lisa Macomber, allege is illegal.  “A number of insurers have already abandoned these practices,” Stone said.

Stone characterized the alleged improper business conduct by Travelers as “kickbacks” involving the purchase of annuities to fund structured settlements. He called the practices unfair and abusive  violations of Connecticut’s Unfair Trade Practices Act and Unfair Insurance Practices Acts.  "When people settle their claims, they want to know what their claims are worth. We hope to improve disclosure in the structured settlement industry.”

Stone predicted more litigation involving structured settlements.  Referencing investigations by New York Attorney General Eliot Spitzer, Stone said “insurers will be exposed and called to task for conduct they have been trying to hide."

Additional Resources for Macomber v. Travelers:

• Mark Wahlstrom's audio interview of Ralph Stone

• Opinion of the Connecticut Supreme Court

• Prior S2KM weblog posts:
  • March 28, 2006
  • December 3, 2004

 

Macomber v. Travelers - Update 1

The Connecticut Supreme Court has reversed the most recent trial court order In the Macomber v. Travelers case (certifying the case as a class action and certifying the plaintiff as representative of the class) and remanded the case to the trial court with a direction to deny the plaintiffs’ motion for class certification and for further proceedings according to law. 

For additional background about the Macomber case, see this December 3, 2004 weblog post .

For additional commentary about the Connecticut Supreme Court decision:

• Audio podcast interview of plaintiff attorney  Ralph Stone by Mark  Wahlstrom - this interview also appears on The Settlement Channel;

• S2KM  April 1, 2006 weblog post summarizing the audio interview.

The Macomber case was argued December 1, 2005. Although the Connecticut Supreme Court decision will not be officially released until April 4, 2006, a copy of the decision is posted on the State of Connecticut website.

The Macomber complaint alleges that the defendants routinely engaged in two types of wrongdoing (rebating and shortchanging) while utilizing structured settlements to resolve personal injury cases. The defendants include: Travelers Group, Inc.; Travelers Property and Casualty Corporation; Travelers Equity Sales, Inc; Travelers Life and Annuity Company; and Soloman Smith Barney Holdings, Inc. 

This most recent decision represents the second time the Connecticut Supreme Court has considered the Macomber case. In an earlier appeal, the court held that plaintiffs’ complaint alleged legally cognizable damages and remanded the case for further proceedings. Following the remand, one of two plaintiffs withdrew her claim leaving Lisa Macomber as the sole plaintiff. 

In the subsequent trial court action, plaintiff Macomber moved for class certification and requested that she be certified as representative of the class.  The proposed class included: “all persons who [since 1982] settled claims with [Travelers Casualty] insureds through structured settlements that involved rebated commissions on the annuities used to fund the settlements, and/or …as to which [Travelers Casualty] spent amounts less than the sums it represented as the costs or then-present values of the annuities used to fund the structured settlements.” 

After limited discovery and an evidentiary hearing, the trial court granted the plaintiff’s motion for class certification as to four counts: 

• Breach of contract

• Violations of Connecticut’s Trade Practices and Insurance Practices Acts

• Civil conspiracy

• Unjust enrichment

The defendants appealed the trial court’s decision claiming the trial court abused its discretion by: 

• Certifying the case as a class action because individual issues of law and fact overwhelm any issues common to the class;

• Certifying the plaintiff’s claims as typical of absent class members and certifying her as an adequate class representative;

• Ruling that a class action is superior to other methods of adjudication. 

In reversing the trial court’s certification ruling, the Connecticut Supreme Court criticized the discovery process used for class certification. The trial court had randomly selected 28 cases from among thousands. The Connecticut Supreme Court refused to endorse the discovery procedure because the trial court record did not establish the selected cases were materially representative of the proposed class. 

Although the Connecticut Court acknowledged that doubts regarding the propriety of class certification should be resolved in favor of certification, it determined the trial court had abused its discretion because the trial court: 

• Did not undertake the requisite analysis to determine whether individual issues predominated;

• Ruled preliminarily that Connecticut law would govern the case. 

Significantly, the Connecticut Supreme Court declined to rule that the Macomber case is inappropriate for class certification at this stage of the proceedings. To the extent the files do not disclose representations concerning class certification, the court held plaintiffs responsible for establising the necessary representations by virtue of oral testimony from the absent class members and the appropriate claim adjustors or other agents. 

Attorneys arguing the case included: 

• For the plaintiff: Ralph M. Stone, John C. Matulis, Jr., and Thomas G. Ciarlone, Jr.;

• For the defendants:  Thomas J. Groark, Jr., John A. Neuwirth, Michael Shea, James K. Robertson, Jr., Jonathan Margolis, and Adam Schloss; 

• As amici curiae, on behalf of the Connecticut Business and Industry Association, Inc.: Katherine A. Scanlon and Peter J. Vodola.

Macomber v. Travelers

For a more recent update on the Macomber case, see this March 28, 2006 weblog post.

In addition to single claimant 468B settlement funds, one of the most significant recent developments in the structured settlement and personal injury settlement planning industries is Macomber v. Travelers Insurance (Macomber case), a lawsuit which has been certified as a class action by the Superior Court in New Britain, Connecticut. The Macomber case was the subject of a recent program on the Settlement Channel where host Mark Wahlstrom interviewed lead plaintiff counsel Ralph Stone. Although still in the discovery stage, Ralph indicated the Macomber case may eventually involve tens of thousands of personal injury claimants nationwide.

The Macomber case is significant because it highlights and legally challenges structured settlement business practices which are common among many defendants and defendant insurance companies. These practices include commission-sharing on the sale of structured settlement annuities which frequently is not disclosed to plaintiffs or their legal counsel. With structured settlements, the cost of the annuity (plus up front cash) has become the accepted basis for calculating settlement value. Undisclosed commission-sharing arguably results in a lower net cost of settlement to defendants and undercompensates claimants. Plaintiff attorney fees in personal injury cases generally are based upon a percentage of the settlement or verdict value. Settlement value also is important for calculating insurance coverage and settlement contributions by co-defendants.  Undisclosed structured settlement commission-sharing by defendants, therefore, creates potential legal problems for multiple participants in personal injury cases.

Following the recent legal actions by New York Attorney General Eliot Spitzer against prominent insurance companies and brokers, the National Association of Insurance Commissioners (NAIC) released draft model legislation on November 15, 2004 calling for broker disclosures. According to the NAIC, these new disclosure requirements are “designed to ensure consumers are provided the information necessary to understand the manner in which brokers are compensated for the sale of insurance products”. Although not specifically applicable to structured settlements, the NAIC requirements should be applicable to all participants (including defendants and their insurers) who receive commissions resulting from structured settlements.

Regardless of the outcome of the Macomber case, all structured settlement participants should reconsider their basic business practices and standards to address recent legislative and regulatory changes. Disclosure of all structured settlement compensation arrangements represents one obvious and important first step toward improved and updated "best practices".

               See this weblog post for an update about the Macomber case.

For additional information about structured settlements see: “Structured Settlement Definition”, "Introduction to Annuities", “Advantages and Disadvantages of Annuities” as well as “Structured Settlements and Periodic Payment Judgments”.

For recent developments impacting the structured settlement and personal injury settlement planning industries, see "Structured Settlement Factoring", “Medicare Set-aside Arrangements”, “Special Needs Trusts” as well as “Knowledge Management and Structured Settlements” and "How Standards Impact Structured Settlements".