Beyond Structured Settlements

Product Suitability Standards - 2

Should structured settlement "consultants" be held to some "product suitability standard" when they recommend structured settlement annuities to resolve personal injury lawsuits? If the answer is "yes", to what standard should they be held accountable and by whom?

A prior S2KM blog post discussed these issues in the context of the Code of Ethics of the National Structured Settlement Trade Association (NSSTA), the Standards of Professional Conduct of the Society of Settlement Planners (SSP) and the Suitability in Annuity Transaction Model Regulation promulgated by the National Association of Insurance Commissioners (NAIC).

NSSTA's Code of Ethics does not directly address product suitability standards. It does, however, direct NSSTA members to: "…comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided."

SSP's Standards of Professional Conduct utilizes the words "appropriate" and "informed consent". In the event of a conflict between SSP's Standards of Professional Conduct and any "laws, court rules, licensure requirements or other standards imposed on any regulated profession", SSP's members are directed to "abide by the laws or professional standards imposed on the members discipline."

Although the NAIC Suitability Regulation applies "to any recommendation to purchase, exchange or replace an annuity made to a consumer by an insurance producer, or an insurer ...", the Model Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process" which presumably encompass structured settlement annuities.

What other legislation or regulations could impact whether a structured settlement annuity is suitable for a specific personal physical injury claimant - and why should it matter?

Several additional laws and regulations could be relevant to these questions including:

• Minors' Statutes
• State Structured Settlement Protection Statutes
• The Uniform Prudent Investors Act
• Dodd Frank Legislation

This blog post considers minor statutes and state protection statutes. A subsequent S2KM blog post will discuss the Prudent Investors Act and Dodd Frank.

Texas attorney Phillip McCrury addressed the topic "What Judges Look for When Approving a Minor's Settlement" during the SSP 2009 Annual Meeting. McCrury surveyed existing state legislation and concluded that most state minors' statutes require court approval but few, if any, specifically address structured settlements. Various states have adopted two alternative standards for judicial approval of minors' settlements: the "best interest" standard and the "fair and reasonable" standard. McCrury, however, did not identify a single state minors' statute that defined either "best interest" or "fair and reasonable".

Both McCrury's SSP presentation and the 2011 Hancock v. Share case highlight the potential for conflicting judicial interpretations when structured settlement annuities are part of a proposed minor's settlement. Assuming a structured settlement "binds the assets" of a minor beyond the age of majority:

• Under what circumstances is a structured settlement in a minor's best interest - or fair and reasonable under some state minors' statutes?
• Should it matter whether or not a minor has a debilitating injury?
• What justification should be required from a guardian who recommends a structured settlement for a minor?
• When a judge evaluates whether a proposed structured settlement transfer meets the "best interest" test, what importance should be given to the fact that a proposed transferor was a minor when he/she received the structured settlement and therefore never personally approved or consented to the structured settlement?

In addition to minors' statutes, the state structured settlement protection statutes provide an application of the "best interest" and "fair and reasonable" standards with which structured settlement consultants and settlement planners should be familiar. Both IRC section 5891 and the Model State Structured Settlement Protection Act (Model Protection Act) require a transfer to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents" as a condition for judicial approval.

Some state protection statutes require that structured settlement transfers also meet an additional "fair and reasonable" test. For example, under New York's structured settlement protection act, a judge must "determine whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable" (emphasis added) in addition to meeting the "best interest" test.

Neither IRC 5891 nor the Model Protection Act, however, define "best interest". California's revised structured settlement protection act, however, includes the following list of factors that California judges "shall consider" when deciding whether to approve a proposed transfer:

• The payee's age, mental capacity, legal knowledge, and apparent maturity level;
• The stated purpose for the proposed transfer;
• The payee's financial and economic situation;
• The terms of the proposed transfer, including the discount rate and transaction fees;
• Whether the payments are intended to pay for future medical care related to the payee's original injuries;
• Whether the payments are intended to pay for necessary living expenses;
• Whether the payee is likely to require future medical care for the payee's original injuries, and, if yes, whether the payee has other resources, including insurance, to pay for those expenses;
• Whether the payee has other income to meet his/her obligations to support dependents;
• Whether the payee has any court-ordered child support obligations;
• Whether the payee has attempted or completed prior transfers;
• Whether the payee or his/her family is facing any financial hardship;
• Whether the payee has received or should receive independent professional advice about the transfer; plus
• "Any other factors or facts that the payee, the transferee, or any other interested party calls to the attention of the reviewing court or that the court determines should be considered in reviewing the transfer."

Various courts have also identified factors to be considered when determining whether a proposed structured settlement transfer meets the "best interest" test. For example, a New York Supreme Court considered the following factors before denying a proposed 2003 transfer: the payee’s age; mental and physical capacity; maturity level; ability to show sufficient income that is independent of the payments sought for transfer; capacity to provide for the welfare and support of the payee’s dependents; the need for medical treatment; the stated purpose for the transfer; and the demonstrated ability of the payee to appreciate the financial terms and consequences of the proposed transfer based upon truly independent legal and financial advice. (In re Settlement Capital Corp.)

What relevance, if any, do state structured settlement protection statutes have for primary structured settlement product suitability standards?

Neither IRC 5891 nor any of state structured settlement protection statutes apply their "best interest" test to primary market structured settlement sales. Only four of the state statutes (New York, Florida, Massachusetts and Minnesota) establish any primary market sales standards, each requiring certain mandatory written disclosures.

The secondary market "best interest" test, however, does raise important issues for the primary structured settlement markets. Most importantly, If structured settlement transfers are required to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents", why shouldn't a "best interest" test apply to the original structured settlement sale? And, what impact would a "best interest" test have on primary market business standards and practices?

In a subsequent blog post, S2KM will consider whether, when and how the Uniform Prudent Investors Act and Dodd Frank require primary structured settlement sales to meet a "best interest" test and/or otherwise impact structured settlement business standards and practices.

For additional commentary and analysis of structured settlement business standards and practices, see the structured settlement wiki and Section 6.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2011 - 3

Prior S2KM 2011 year-end structured settlement blog posts have highlighted the historic significance of the ELNY liquidation and provided a strategic 2011 industry retrospective . This blog post summarizes additional important 2011 structured settlement developments and information.

Taxation

• IRS Audit Guides - The Internal Revenue Service published an Audit Guide in 2011 to assist its examiners in determining the tax treatment of proceeds from lawsuits, settlements and awards received after August 21, 1996. That date marked the enactment of the Small Business Job Protection Act of 1996 which added a "physical" requirement to IRC § 104(a)(2). The IRS had previously published an Audit Guide to assist its examiners in determining whether the IRC §5891 excise tax applies to specific structured settlement factoring transactions.
• JTC Structured Settlement Estimate - The Joint Committee on Taxation (JCT) in 2011 released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report). For the first time, the JCT Report calculated an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements". The JCT estimate projected structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.

Government Benefits

• Medicare Secondary Payer Protocol - Although no statutory or regulatory authority requires Medicare set-aside arrangements (MSAs) in third party liability settlements, confusion continues as to whether and when MSAs are necessary and/or appropriate for such cases. On May 6, 2011, the United States Attorney's Office for the Western District of New York (USAOWDNY) released a one page "Medicare Secondary Payer Protocol" (MSP Protocol) establishing a voluntary process by which that U.S. Attorney's Office will review MSA proposals for liability cases provided certain conditions are met.

• U.S. v. Stricker - In this case involving periodic payments and the MSP Act, a U.S. District Court in Alabama denied a motion by the U.S. Government to reconsider the court's earlier dismissal based upon its finding that the applicable statutes of limitations barred the Government's complaint. The Government had argued on appeal that the court erred in granting its motions to dismiss without considering the Government's theory of continuing accrual argument.

• WCMSA portal - The Centers for Medicare and Medicaid Services (CMS) announced the creation of an Internet portal for submission of workers compensation MSA (WCMSA) proposals. The new web-based application:
  • Enables WCMSA proposals to be submitted electronically for CMS review;
  • Accepts submission documents and supplemental information CMS may request;
  • Provides online status updates for MSA applications;
  • Generates email alerts when approval letters are issued.
• Conditional payment guidelines - CMS released guidelines during 2011 to provide certainty and finality for conditional Medicare payments. This "self-calculated final conditional payment amount" option, will be initiated in February 2012 for claims with a total settlement value of $25,000 or less allowing attorneys and/or claimants to receive a final amount owed number from CMS prior to settlements. For additional information see the Medicare Secondary Payer Recovery Contractor (MSPRC) website.

Minors Settlements - Whether a structured settlement annuity that extends beyond the age of majority is "suitable" for, or in the "best interests" of, a minor (especially a minor without a debilitating injury) represents an important industry issue. In his 2009 presentation to the Society of Settlement Planners (SSP) titled "What Judges Look for When Approving a Minor's Settlement", Texas attorney Phillip McCrury surveyed state minors' statutes and concluded many states require judges to consider the "best interest" of a minor even though very few states directly address structured settlement annuities. Two 2011 cases (only one involving a structured settlement) highlight the potential for conflicting judicial interpretations when annuities are part of a proposed minor's settlement.

• Hancock v. Share - A Florida Appellate Court reversed a Florida Trial Court ruling that denied approval of a proposed structured settlement for a minor. Although the trial court had found that the proposed structured settlement was in the "best interests" of the minor, it refused to approve the structured settlement citing a Florida statute that prohibits a guardian "to bind the assets" of a minor beyond the age of majority.
• In the Matter of Sandra McDuffie - A New York trial court ruled against an estate administrator who proposed to purchase an annuity for a minor child of the decedent stating "the Court cannot authorize the administrator to restrict funds due to an infant after the infant has reached the age of [majority]".

Executive Life Insurance Company of California - In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Structured Settlement Annuity Sales - S2KM acknowledges and appreciates receiving market recap reports highlighting quarterly structured settlement annuity sales (Melissa Evola) and weekly financial market data (Richard Nahill).

• Annuity sales - Evola's most recent quarterly compilation of 2011 structured settlement annuity sales (thru September 30) indicates 21,846 cases have been structured for a total premium of $3,633,489,474. These numbers represent a significant decrease from 2010 (also thru September 30) of 23,578 cases and $4,140,704,642 of premium.
• Interest rates - Nahill's most recent 2011 financial market recap (for week ending December 16) shows interest rates of 1.86 percent for 10-year U.S. Treasury bonds compared with 3.30 percent as of December 31, 2010.

For prior S2KM annual reports summaring structured settlement industry developments, see the structured settlement wiki.

SSP and NSSTA 2010 Annual Meetings - 9

The Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) should be congratulated - especially immediate past-Presidents Joseph Tombs and Daniel Durbin - for excellent 2010 annual meetings.

S2KM's complete coverage of the SSP and NSSTA 2010 annual meetings is available on S2KM's structured settlement wiki.

Continuing post-meeting S2KM commentary:

• Both the SSP and NSSTA 2010 meetings occurred in Washington, D.C. at nearby hotels during the same week - May 2-7.
• Attendance at both the SSP and NSSTA meetings was good (not great) - despite the economic downturn in structured settlements.
• Approximately 10 persons attended portions of both the SSP and NSSTA meetings.
• The scheduling conflicts between SSP and NSSTA occurred primarily on the morning of May 4 - which created difficult choices for persons attending both conferences.
• Unless otherwise indicated, S2KM's comments are limited to educational programs Patrick Hindert, S2KM's Managing Director, personally attended.
• For pre-program educational listings (topics and speakers) for both the SSP and NSSTA meetings, see this prior S2KM blog post.
• S2KM opted to attend NSSTA meetings on May 4 and missed valuable SSP presentations including two Medicare set-aside arrangement (MSA) panels organized by Jason Lazarus, SSP's new President for 2010-2011.
• Both SSP and NSSTA prioritized MSAs in 2010 with four MSA educational programs - three by SSP.
• Douglas Brand, a featured SSP speaker about MSAs, has also served as the key NSSTA Director in developing NSSTA's government benefits committee and educational program.
• Joseph Tombs, SSP's 2009-2010 President, and Director of SSP's settlement planning certification program, continued SSP's educational series about "Minors Settlements" initiated by Texas attorney Phillip McCrury during the SSP 2009 annual meeting.
• As positive hallmarks of their SSP and NSSTA presidencies, both Tombs and Durbin successfully played to their personal and association strengths. For Tombs, learning, improvement, and industry growth. For Durbin, public policy, lobbying, protect and preserve during industry transition.
• As SSP President, Joseph Tombs continued and elevated SSP's excellent educational programs, including the Registered Settlement Planner Program,which Tombs developed and manages in partnership with SSP and Texas Tech University.
• Jason Lazarus, a respected knowledge leader within multiple settlement consulting communities, succeeds Tombs as SSP's President.
• SSP's educational and political strategies continue to espouse "improve and grow" - for both the structured settlement and settlement planning industries.
• Daniel Durbin led NSSTA's leadership transition from Joseph Ricci to Eric Vaughn and Peter Arnold. During this transition, NSSTA sharpened and expanded its political focus and delivered on its promise to "protect and preserve" IRC sections 130 and 104(a)(2).
• Michael Kelly succeeds Durbin as NSSTA's 2010-11 President and will be joined on the NSSTA Board of Directors by five newly (re) - elected Directors - Joseph Barnet; Len Blonder; Randy Dyer; James Ebel; and John Machir.
• Karen Meyers continues her industry role as director of NSSTA's Certified Structured Settlement Consultant (CSSC) program in partnership with the University of Notre Dame.
• Among retiring NSSTA Directors, S2KM's Managing Director Patrick Hindert, a NSSTA member, has interacted primarily with former NSSTA Directors Joseph Shannon and Douglas Brand.
• Both Shannon and Brand (and all retiring NSSTA Directors) deserve industry thanks:
  
  • Shannon served as liaison between NSSTA's Board of Directors and NSSTA's legal committee.
  • Brand served as liaison between NSSTA's Board of Directors and NSSTA's government benefit committee.
• The SSP and NSSTA 2010 annual meetings highlighted the need for new Internet-based structured settlement educational strategies and resources.
• The combined SSP and NSSTA structured settlement learning experience was overwhelming. Incredibly rich structured settlement knowledge was crammed into less than 5 days without any announced (to date) knowledge capture and/or post-conference knowledge distribution.
• Except for NSSTA references to the new NSSTA website, neither SSP nor NSSTA offered any Internet educational ideas or discussions at their 2010 annual meetings.

Post-conference leadership questions:

• How will SSP's and NSSTA's new leaders respond to industry changes, challenges and opportunities?
• Who are the young (under age 40) structured settlement industry leaders?
• When and how will SSP and NSSTA transition their educational strategies to embrace the Internet?
• What shared interests exist between SSP and NSSTA to improve and grow the structured settlement industry?