Beyond Structured Settlements

Uniform Fiduciary Standard

What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?

Dodd-Frank

Among other reforms, Dodd-Frank created the Consumer Financial Protection Bureau  (CRPB) and the Federal Insurance Office (FIO). CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....."

In addition to creating the CFPB and the FIO, Dodd-Frank directed the SEC to study the need for a new, uniform, federal fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary. The SEC:

• Released its fiduciary standard study in January 2011.
• Concluded that a uniform standard of care “at least as stringent” as the fiduciary standard currently applied to investment advisors should extend to all brokers, dealers and investment advisors.
• Is expected to release its proposed regulation for a uniform fiduciary standard this year.

Historically, brokers, dealers and insurance producers have been held to a "product suitability" standard which is less stringent than a fiduciary standard. As defined at uslegal.com, "[A] fiduciary duty is an obligation to act in the best interest of another party..... A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client." (emphasis added)

NAIC Annuity Suitability Regulation

For comparison purposes, the NAIC "Suitability in Annuity Transactions Model Regulation" (Suitability Regulation) provides: "In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to his or her investments or other insurance products and as to his or her financial situation and needs, including the consumer's suitability information ..." (emphasis added)

The NAIC Suitability Regulation defines "suitability information" to include: age; annual income; financial situation and needs, including financial resources used for the funding of the annuity; financial experience; financial objectives; intended use of the annuity; financial time horizon; existing assets, including investment and life insurance holdings; liquidity needs; liquid net worth; risk tolerance; and tax status.

Significantly for structured settlements, however, the NAIC Suitability Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process". By way of explanation, the legislative history of the NAIC Suitability Regulation specifically references "structured settlements" and adds: "[a] regulator pointed out that this type of contract did not generally result from a recommendation by an insurer or producer but agreed that it did not hurt to have the exemption there."

Impact on Insurance Professionals

Although the SEC's anticipated uniform fiduciary standard has received limited publicity within the structured settlement and settlement planning industries, it has generated significant controversy and disagreement among financial planners, broker dealers and life insurance professionals.

A recent article by Brian Anderson titled "Impact of a Universal Fiduciary Standard" looks at the related issues from the perspective of "insurance producers". Part of a series of articles about threats to the independent life insurance distribution channel, Anderson's article includes the following summary of arguments for and against a universal fiduciary standard:

• "Proponents of a universal fiduciary standard — including many financial planner and consumer groups — claim consumers who rely on the financial advice of experts are confused by the different standards of care. These consumers are at an information disadvantage, they say, and vulnerable to exploitation by advisors who are not required to make recommendations in the best interest of the customer."
• "Opponents of a fiduciary standard — including many life insurance industry trade associations — say a universal fiduciary standard is unnecessary because the current suitability standard is effective. Opponents also say the imposition of a universal fiduciary standard would result in higher costs and reduced choices and service for consumers."

Some life insurance representatives have expressed concern, according to Anderson's article, that the anticipated SEC fiduciary standard could potentially ban commission-based compensation for insurance product sales and thereby destroy the traditional life insurance business model.

Others disagree. Anderson quotes Jill Hoffman, NAIFA assistant vice president of federal government relations, as stating: “The language of Dodd-Frank specifically says that a fiduciary standard can be met, and a person can still receive commissions, and a person can still sell proprietary products. In other words, the language says you cannot violate a fiduciary standard just because you sell proprietary products and get paid commission.”

Structured Settlements and Settlement Planning

Will the SEC uniform fiduciary standard impact settlement planners and structured settlement professionals? Here are some reasons why leading settlement planners and structured settlement professionals should study, and anticipate the need to adopt, whatever uniform fiduciary standard the SEC ultimately adopts:

• Blended products - Structured settlement annuities increasingly are paid into trusts that also include financial products.
• Multiple licenses - In addition to structured settlement annuities, settlement planners increasingly sell securities as well as multiple life insurance and annuity products.
• Competition - To successfully compete in today's economic and legal environment, structured settlement sales persons must adjust upward to match the higher product suitability standards and best business practices of their competitors including settlement planners, financial planners and trustees.
• Clients and Stakeholders - As a matter of self-protection as well as consumer protection, many structured settlement clients (defendants; plaintiff attorneys) and stakeholders ( judges; mediators) will increasingly demand higher product and sales standards for injury victims.
• Lawsuits - In this era of accountability and compliance, all structured settlement participants are likely to be held to higher legal standards.

What issues might a uniform fiduciary standard create for structured settlement and settlement planning professionals? At their worst, as S2KM has previously observed, certain traditional structured settlement business practices fail to meet any fiduciary standard. For example:

• Misrepresentations or omission of material facts
  • Cost or Value - From a claimant's perspective, a core strategy for traditional structured settlements often appears "to make a little money look like a lot of money". The Spencer v. Hartford class action allegations outline one "sophisticated" variation of this strategy which often depends on hiding or misrepresenting annuity "cost" and/or settlement "value".
  • Guaranteed payments - Many structured settlement sales brochures continue to promise "guaranteed payments" without specifying who guarantees what if and when an annuity provider like Executive Life of New York (ELNY) becomes insolvent.
  • Managed account - Many structured settlement recipients do not understand important product details when their case is settled including how structured settlements differ from managed accounts and why they cannot access funds without court approval pursuant to state structured settlement protection acts.
  • Structured settlement myths- historically used to promote sales such as:
    • Studies show that nine out of 10 lump sum recipients squander the entire amount within five years.
    • Structured settlements enable injury victims to live free of reliance on government assistance.
• Conflicts of interest - without written, informed client and/or customer consent
  • Single product - The danger of single product structured settlement sales persons is not limited to whether his or her product is in the "best interest" of a particular claimant/customer. The danger is also that single product sales persons are inherently conflicted in recommending how much of any settlement should be allocated to their product.
  • Multiple roles - A structured settlement sales person introduced into a case by a defendant or liability insurer frequently plays four separate roles each of which potentially conflicts with the other roles: agent for the annuity provider; broker for the defendant; broker for the plaintiff; and agent for the defendant in helping to negotiate and settle the case.
  • Compensation sharing - Unless all parties to a settlement are informed about whether and how structured settlement annuity commissions are shared, a structured settlement creates a variety of potential conflicts of interest.
  • Funding alternatives - Based upon traditional structured settlement business and compensation models, the potential availability and applicability of 468B qualified settlement funds for "appropriate cases" creates inherent conflicts of interest between defendants and their structured settlement brokers.

For additional S2KM reporting about structured settlement business standards and practices, see the structured settlement wiki.

Hartford Exits Structured Settlement Business - Again

Hartford Financial Services Group Inc. has announced it will stop selling individual annuities and seek buyers for parts of its life-insurance unit according to a report today by Bloomberg News.

Hartford had previously exited the structured settlement market following the Spencer v. Hartford class action lawsuit settlement in 2010 then re-entered the structured settlement market as an annuity provider in 2011.

According to the Bloomberg News report, Hartford is being pressed by hedge-fund manager John Paulson to break up its business units. In a statement issued today, Hartford said it will now focus on property and casualty insurance, group benefits and mutual funds. Hartford said it may sell its individual life, Woodbury Financial Services and retirement-plan operations.

The announcement concludes a strategic evaluation over the past several quarters by Hartford’s management and Board of Directors. Hartford will stop taking new annuity sales on April 27 and expects to report an after-tax charge of as much as $20 million in the second quarter.

For S2KM's complete coverage of the Spencer v. Hartford case, see the structured settlement wiki.

Structured Settlements in 2011 - 2

In a prior blog post, S2KM highlighted the historic significance of the ELNY liquidation as the dominant 2011 structured settlement industry development. This blog post offers a strategic perspective of the industry's status in 2011 focusing in part on the industry's three national associations and also providing a broader perspective for ELNY.

Strategic Overview - Primary Market

The National Structured Settlement Trade Association (NSSTA) celebrated its 25th anniversary in 2011. Among its 2011 accomplishments, NSSTA noticeably improved its marketing and educational programs while focusing substantial resources to help minimize problems related to the ELNY liquidation. NSSTA has attempted to balance the need to inform its members (not the public) about ELNY's status with the need to promote the strength of its life insurance markets and the state guaranty fund system.

Speaking at NSSTA's 2011 Annual Meeting, Thomas Ronce, Chairman of NOLHGA, described the current life and health guaranty system in the United States as experienced, well-financed and armed with a multitude of optional legal and financial tools. Applied to ELNY, this state guaranty system will substantially improve the recovery for many ELNY structured settlement recipients. The state guaranty system, however, will not make whole every ELNY structured settlement recipient. Unfortunately, even with guaranty fund payments and additional enhancements, many ELNY structured settlement recipients are expected to experience shortfalls.

NSSTA's 2011 Annual Meeting and Fall Educational Conference also showcased the current strength of the structured settlement market and its product providers.

• Jim Morris, President, Chairman and CEO of Pacific Life Insurance Company, accentuated the current financial strength of U.S. life insurance companies generally and explained why structured settlement annuities represent an excellent strategic product for life companies. Confirming Morris' assessment, three new product providers (Mutual of Omaha, National Indemnity and Hartford) entered (or re-entered) the structured settlement marketplace during 2011.
• William T. Robinson III, President of the American Bar Association (ABA) strongly endorsed structured settlements as "professional and dignified solutions" for injury victims based upon his first-hand experience as a litigation attorney. Robinson also suggested the ABA and NSSTA should identify shared interests and lobbying opportunities.
• American General Life President Mary Jane Fortin described AIG, a structured settlement product provider that received more than $180 billion of loans and investments from the United States government in 2008, as "a strong, stable and resilient company dedicated to keeping our promises". Fortin also dispelled several "myths" about AIG, summarized AIG's recovery from the 2008 financial crisis and expressed optimism about the future of life insurance industry and structured settlements.

Despite these positive assurances, however, primary market structured settlement annuity sales have continued to trend downward for the past three years, arguably because of the 2008 financial crisis and historically low interest rates which many experts predict will continue for the foreseeable future. What has been missing from NSSTA's leadership during 2011 has been a positive vision for NSSTA's own future and the future of structured settlements.

David Ringler, NSSTA's first President, spoke during the NSSTA 2011 Annual Meeting. Ringler stated the most important reason for creating NSSTA was "having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs."  Sometime during the past 25 years, NSSTA lost sight of this original vision and now generally excludes industry voices and perspectives that challenge traditional structured settlement business models and practices.

As one result, two additional professional associations have formed with alternative structured settlement perspectives:

• The Society of Settlement Planners (SSP) - SSP espouses the claimant's right to select his or her own structured settlement adviser and funding company. SSP promotes structured settlement annuities as a core product for special needs settlement planning and favors greater utilization of IRC 468B Qualified Settlement Funds (QSFs).
• The National Association of Settlement Purchasers (NASP) - NASP promotes the right of structured settlement recipients, in compliance with federal and state laws, to sell their payment rights provided a state judge approves the sale in advance as being in the "best interest" of the transferor/payee taking into account the welfare and support of the payee's dependents.

To its credit, NSSTA expanded the scope of its educational programs in 2011 to discuss QSFs and to provide its members with more detailed information about structured settlement secondary market. The perspective for these NSSTA discussions, however, remains defensive and protective without any attempt to envision or discuss new business opportunities or product improvements.

By comparison, SSP's vision for the the future of structured settlements is defined and supported by its "Standards of Professional Conduct". SSP views structured settlements as a core product for personal injury settlement planning. SSP's vision agrees with and encompasses the business model Joseph DiGangi introduced to NSSTA in 2009 as "Settlement Consulting" which he characterized as "a wake up call for the industry." SSP's educational conferences continue to push structured settlement industry thinking beyond its historic boundaries and the inevitability of its path dependence.

In addition to SSP, three national legal associations are developing special needs business practices and models that expand the framework and opportunities for structured settlements:

• Academy of Special Needs Planners (ASNP)
• National Academy of Elder Law Attorneys (NAELA)
• Special Needs Alliance (SNA).

Faced with the ELNY crisis, declining annuity sales and the continuing prospect of low interest rates, some primary market structured settlement stakeholders now recognize that business practices and models that made sense in the past may have survived despite the eclipse of their earlier justification.  S2KM believes more primary market stakeholders should expand their strategic perspectives and re-think structured settlements in the context of the changing legal and financial landscape.

For example, here are four 2010 developments with important consequences for structured settlement stakeholders that have heretofore received inadequate primary market educational attention:

• Patient Protection and Affordability Care Act - how does health care reform impact injury victims and what opportunities does it create for structured settlements?
• Dodd-Frank Wall Street Reform and Consumer Protection Act - how will the Consumer Financial Protection Bureau (CFPB) address structured settlement complaints?
• NAIC Suitability in Annuity Transactions Model Regulation - what does "suitability" mean for structured settlement annuities and how does "suitability" differ from the "best interest" standard applicable to trustees, investment advisers and structured settlement transfers?
• Spencer v. Hartford class action settlement - what are the lessons learned and resulting new best practices for structured settlements?

Strategic Overview - Secondary Market

The ELNY liquidation is also having a negative impact on the secondary structured settlement market. Some industry experts have estimated that as many as 1000 of ELNY structured settlement annuities (out of the 4168 total) have undergone transfers of some or all payment rights. Investors who have purchased ELNY annuity payment rights may not be eligible to receive contributions from state guaranty funds which historically protect "consumers". The NYLB's December 7, 2011 letters warned ELNY payees "if you have transferred any part of your right to receive ELNY SSA benefits to a third party, you may not be eligible to receive benefits from CABC related to the benefits you transferred."

Although the financial crisis of 2008 had a devastating short term impact on the structured settlement secondary market, the market has experienced robust sales in 2011 as institutional investors continue to be attracted to the relatively high rates of returns generated by restructured (post transfer) payment right obligations. More individual investors, including personal injury claimants and their attorneys, have also begun purchasing restructured payment rights although some industry experts caution against potential tax and securities law uncertainties.

The structured settlement secondary market changed dramatically in 2011 with the announced merger of  J.G. Wentworth and Peachtree Settlement Funding. The merger combined the two largest purchasers of structured settlement payment rights with an estimated 80-85 percent of the market.

The merger highlights a remarkable turnaround for Wentworth whose shareholders control the majority of the combined companies. In 2009, Wentworth and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market". Wentworth laid off 120 of its 200 employees and closed its office in Las Vegas. Its general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar. Less than six months later, Wentworth emerged from bankruptcy with an announcement that JLL Partners (Wentworth's owners) had invested an additional $100 million in the firm.

In a significant case (Symetra v. Rapid Settlements) highlighting controversial business practices which were opposed by NASP as well as structured settlement annuity providers, a Texas court issued injunctions during 2011 prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.

Check the structured settlement wiki for additional S2KM structured settlement reporting:

• ELNY liquidation
• Annual industry reports
• Professional association meetings

ADDENDUM (12/12/2011) - S2KM's report above omits at least one important 2011 strategic structured settlement development. NSSTA and its product provider members launched the first-ever industry metrics study during 2011. For more information about metrics, see S2KM's "Structured Settlement Metrics" series featured on the structured settlement wiki.

Structured Settlement Metrics - 4

A 2011 National Litigation Management study sponsored by the Council on Litigation Management (CLM):

• Identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives;
• Determined that more than 74 percent of the study's participants rated their available litigation management metrics as "Fair" or worse for measuring the effectiveness of their litigation management programs; and
• Concluded that, to be successful, national litigation management service programs must deliver metrics and analytics that justify the quality, performance, and satisfaction levels litigation management executives are seeking.

S2KM addressed structured settlement "quality" metrics and analytics in a prior blog post and highlighted the historic payout performance of structured settlement annuity providers which has been excellent though not perfect. Fulfilling the promise to pay future periodic payments has represented a primary mission of the United States structured settlement industry for more than 30 years.

This blog post addresses structured settlement "performance" metrics and analytics from the perspective of litigation management executives and focuses upon three issues:

• Structured settlement premium;
• Structured settlement "success ratios"; and
• The cost or cost savings structured settlements generate for defendants and liability insurers.

Structured Settlement Premium

Based upon industry input and sources, S2KM estimates the structured settlement industry has produced approximately $124 billion of annuity premium from 1976 to 2010. For the past five years (2006-2010), the total average annual structured settlement annuity premium has been approximately $5.8 billion per year.

To help evaluate these numbers, compare the Annual Studies of United States Tort Costs published by Towers Watson (formerly Towers Perrin) since 1985. These studies:

• Calculate tort costs resulting from five insured plus uninsured business lines: 1) commercial multi-peril; 2) medical malpractice; 3) product liability; 4) other liability; and 5) commercial auto.
• Exclude: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs.
• In 2002, Towers Watson also translated overall tort costs for 2001 into the following categories and percentages: 1) administrative costs (21%); 2) defense costs (14%); plaintiff attorneys (19%); economic loss (22%) and non-economic loss (24%). Towers Perrin discontinued this portion of its analysis in 2002. It was "devilishly difficult" according to Russ Sutter, a Towers Watson principal and actuary who directs their annual tort cost studies, "primarily because we lack reliable information from plaintiff attorneys". These percentages therefore represented Tower Watson's "best estimate" in 2002.

Based upon Towers Watson's most recent 2010 Annual Study and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates, that since 2006, more than $160 billion (65%) of United States tort costs annually have represented payments to injury victims and their attorneys.

Structured Settlement "Success Ratios"

In 2007, the National Structured Settlement Trade Association (NSSTA) reported the results of a survey titled "A Study of the Structured Settlement Process Conducted on behalf of the National Structured Settlement Trade Associations".

• The survey was directed by Robert E. Hoyt, the Dudley L. Moore, Jr. Chairman of Insurance at the Terry College of Business at the University of Georgia.
• It consisted of attorneys involved in structured settlements (43 telephone surveys) and structured settlement recipients (1275 telephone and Internet surveys).
• Among the conclusions and estimates: only 7% of personal injury settlements between $75,000 and $200,000 include structured settlements; and only 30% of personal injury settlements above $1 million include structured settlements.

Another perspective for structured settlement "success ratios" is provided by the 2011 report of the Joint Committee on Taxation (JCT) which the House Ways and Means Committee and the Senate Finance Committee use for determining the relative merits of achieving specific public policy goals through tax benefits or direct outlays. This 2011 report (which represents the first time the JCT has ever provided a specific category for structured settlements) estimated the Federal tax revenue loss resulting from structured settlements was "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year. Compare these numbers with S2KM's estimate of 716,500 structured settlement annuities sold between 1976-2010.

Structured Settlement Costs or Cost Savings

Since structured settlements were first introduced in the late 1970s, proponents have highlighted "claims cost savings" as a primary justification for defendants and liability insurers to promote and fund structured settlements.

In a 2011 research paper, Jeremy Babener did not discover much empirical evidence to support this premise. Babener's research, however, did uncovered plenty of historical anecdotal evidence providing industry estimates of defense structured settlement savings which Babener summarized as follows:

• From between 50% and 75% in 1974;
• To between 20% and 40% in 1978; and
• More recently to between 20% and 25%.

Based upon this historic anecdotal evidence, Babener concluded defendants and their liability insurers have proven themselves capable in the past of utilizing three structured settlement strategies to reduce their personal injury settlement costs:

• Negotiating with nominal terms rather than real value;
• Profiting from the purchase of a structured settlement; and/or
• Negotiating to benefit from the tax subsidy.

A prior S2KM blog post examines these three defense strategies in the context of the Spencer v. Hartford class action settlement and questions whether and how many defendants and liability insurers can actually save money promoting and funding structured settlements with current business models and traditional business practices in today's interest rate environment.

Compare the average yields on 30-year U.S. Treasury bonds for two five year time periods:

• 1980 to 1984 - 12.21%
• 2006 to 2010 - 4.47%

The impact of drastically reduced interest rates completely reverses the advantageous leverage defendants and liability insurers previously obtained from negotiating with structured settlements. Assuming good business practices (full disclosure, informed consent and no misrepresentations), how do litigation management executives:

• Expect to save money promoting and funding structured settlements?
• Justify the added claim costs generated by defense attorneys and claims adjustors reviewing structured settlement proposals prior to claimants agreeing to resolve a case with a structured settlement?

Perhaps it is time for litigation management executives to re-think structured settlements including the metrics and analytics they use to define success and measure performance as well as alternative structured settlement business models.

Delta Settlements 2011 Annual Meeting

When David and Dorothy Snyder sold Delta Settlements to Michael Upchurch in 2008, David Snyder stated: "One of the main reasons Dorothy and I selected Michael Upchurch to purchase our company is that we felt he will bring much needed "added value" to you, the [Delta] Producers. ... We are confident that once you have had a chance to work with Michael, you too will feel comfortable with his honesty and integrity, and will help him grow the company to become the foremost plaintiff firm in the business."

Based upon Delta Settlements 2011 Annual Meeting this past week on Amelia Island, Florida, the Snyders' evaluation of Upchurch and the "value added" he brings to Delta and its producers was justified. Upchurch has continued to focus Delta's marketing on injury victims and their attorneys while improving Delta's operating systems and technology.

Delta's producers and administrators were joined at their annual meeting by structured settlement representatives from Allstate, MetLife, Pacific Life, and Prudential, who separately highlighted their companys' financial strength, product innovations and servicing improvements.

Delta's guest speakers also included Patrick Hindert, Managing Director of The Settlement Services Group (TSSG), primary author of "Beyond Structured Settlements" and co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Titled "Structured Settlements and Settlement Planning", Hindert's presentation featured:

• Diagrams and maps to help explain transitional industry issues; 
• Highlights from the SSP and NSSTA 2011 Annual Meetings;
• Analysis of Spencer v. Hartford and Executive Life of New York; plus
• A private educational wiki for Delta to enhance and extend its Amelia Island learning experience.

Joseph Dehner Interview

Joseph Dehner is a partner in the Frost Brown Todd law firm and co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J). He has been studying and writing about structured settlements since 1977 and agreed to be interviewed for this S2KM blog post.

S2KM: Your Frost Brown Todd biography highlights your expertise in multinational securities and business disputes. How do structured settlements fit into your legal practice?

Dehner: Through some of my clients, I was part of the birth of the structured settlement industry many years ago. It is great to see the structured settlement industry evolve into a robust part of the U.S. economy. I continue to advise attorneys and firms on structured settlement and periodic payment judgment issues. One example was the honor of serving as the U.S. Government’s expert witness in the criminal trial of James Gibson, who besmirched the good names of structured settlements and US Government bond trusts, and is now serving a long prison term.

S2KM: William T. Robinson lll, your Frost Brown Todd partner and President-Elect of the American Bar Association (ABA), was be a featured speaker at the NSSTA 2011 Annual Meeting. In addition to Robinson and yourself, does Frost Brown Todd have other attorneys with structured settlement expertise?

Dehner: We have a large litigation department, but I am the primary person specializing in structured settlement matters within our firm.

S2KM: You and your co-authors have been writing and updating S2P2J since 1986. Who is your target audience and how to you track new developments?

Dehner: Our target audience includes attorneys, as well as structured settlement consultants, judges and funding providers. We review on a monthly basis all reported cases and news reports about structured settlements and periodic payment judgments, and follow information as it flows about case and other developments.

S2KM: Having recently completed S2P2J Release 49, what important legal issues and developments do you see emerging?

Dehner: There is a growing experience of post-settlement issues emerging from a variety of directions – including fights among beneficiaries of holders of structured settlement rights, factoring company fights and disputes arising from Protection Act hearings, tax rulings (e.g., wrongly incarcerated persons can receive tax-free payments, despite prior uncertainty whether they suffered a “physical” injury), rights in bankruptcy, whether structured settlement rights are marital property, and many other issues that are being resolved over time by individual case rulings. The growing use of structured settlements outside the “tax-free” arena represents recognition that settlement is a time to put into place good financial planning.

S2KM: How do structured settlements in the United States differ from structured settlements in other countries?

Dehner: Many countries have more of a safety net philosophy and less of a litigation-driven means of addressing the needs of injured persons. But for common law countries, many have moved well ahead of the USA in insisting that compensation meet needs – meaning that payments should correspond over time to the actual needs of injured persons. So, in the UK, Ireland and elsewhere, we are seeing a conversion from the ancient lump-sum one-time system to what we in the USA would find normal in the workers compensation context. This is a real sea shift in thinking.

S2KM: Are there any lessons or ideas the United States structured settlement industry can gain from other countries?

Dehner: Sure – read Chapter 1 of our book about other country experiences and approaches.

S2KM: How do you view the secondary market? Are structured settlement transfers good or bad for the industry generally - and more specifically for structured settlement recipients?

Dehner: It’s not a question of bad or good. It’s a question of how individuals react in the real world. People who hold structured settlement rights chose to take money over time at one point, and then decide for various reasons to get cash now in exchange for giving up future rights that have greater value overall. But that’s their choice. The reality is that high-pressure tactics, coupled with what would have been viewed as usury and heresy in the Middle Ages, robbed those individuals of a truly fair and efficient secondary market when the factoring industry arose. Protection Acts now exist in 47 states. When you review the reported decisions about transfers of structured settlement rights, virtually every case where a judge wrote an opinion rejects the transfer and recites in pointed language why discount rates and other factors compel denial of a transfer application. Most transfers go through anyway because of no real contest and no real focus by the court on the underlying issues. I would hope that the impact of factoring over time does not dissuade Congress from maintaining favorable government support for structured settlements through a continuation of 104(a)(2) treatment.

S2KM: What factors, in your opinion, have contributed to the recent decline in growth of the structured settlement annuity premium?

Dehner: It’s pretty simple really. Interest rates are so low for so long that structured settlements have not stood out as bargains compared to receiving a lump sum and investing it for potentially greater returns (though the performance of the US equity markets should cause a reasonable observer to think twice).

S2KM: Do you have any thoughts or ideas about how to improve and/or grow the structured settlement industry?

Dehner: Greater focus on its basic point is where to start. Regardless of tax treatment, putting into place a compensation plan that actually aims to match needs with resources makes sense. Although there is no solid statistical evidence to support the concept that recipients of windfalls have nothing left after five years, we all know the realities that confront anyone who obtains a large sum as a first time experience with wealth. Charities, friends and relatives want a piece. It’s easy to spend money sitting in the bank. And then at some point there is nothing left to deal with what in some cases is a lifetime of needs. My favorite structured settlement example was an elderly fellow I represented who was pushed over in a grocery store, broke his hip and ended up in a nursing home that at the time cost about $1100/month. He would have run out of money from his savings in about two years. Instead of getting a small lump sum settlement for what happened, the insurer provided a structured settlement that paid $1400/month for the rest of his life. The cost was minimal, given his age and the magic of actuarial science. He died 15 years later, but never had to worry about his nursing home bills. Keep the focus on this example and what it represents, and the structured settlement industry merits a bright and expanding future.

S2KM: What lessons, if any, do the Spencer v. Hartford and Macomber v. Travelers class action settlements provide for the structured settlement industry?

Dehner: Transparency. As long as underlying economic realities are known and disclosed to those involved, I don’t see an issue. One can argue about Spence and Macomber should ultimately have been decided, but there is an easy solution to the issues that underlay both cases – being up front and clear in documentation and negotiation as to what was going on. When we wrote "Structured Settlements and Periodic Payment Judgments" in 1986 (since updated 49 times), our negotiation chapter talked about how a good structured settlement negotiation should be about how much a claimant would receive when over time. It was not about negotiating an amount first, and then finding out what it would buy. Focusing on what payments will be received when (and the reliability of the financing mechanism) and disclosure of who does what and receives what are consistent with best practices, and should not be subject to later court challenges about what participants earned how much in the process.

S2KM: What impact, if any, would the expanded use of 468B funds in single event tort cases have on structured settlements?

Dehner: It would simplify matters for a defendant, of course, but would require clear IRS or statutory guidance that is missing now. It would give greater leverage to the claimant than exists now, so the defense side understandably is reluctant to embrace the tool generally, and absent clear guidance on the efficacy of single-claimant 468B funds, there is no point in the rhetorical debate that rages about this issue.

S2KM: Assuming federal malpractice reform legislation is enacted, should periodic payment of judgments be included?

Dehner: Of course. Read the recent paper of the Irish judiciary, or the UK Government’s papers that led to widespread use of periodic payment judgments there as a matter of course. Or just think about what the law really accomplishes at its best – matching compensation with actual need. This is not about favoring the defense or plaintiff side of the bar. And it is not about who wins and loses. This is about trying to make sure as well as possible that injured persons receive compensation that meets their needs. If it lowers cost, fine. If it increases cost, fine. I would argue that this is unknowable, but it is obvious to a rational individual that trying to match compensation against need is better than the equivalent of a lottery, where some people lose completely, others win it big, and many get a lump sum that does not last enough to get them through their lifetimes.

S2KM: Are there any opportunities for the structured settlement industry to benefit from proposed changes (including budget decreases) for Medicare, Medicaid and/or Social Security?

Dehner: Yes, and one can expect both further pressures for Medicare and Medicaid reimbursement at settlement time, as well as increasingly sophisticated settlement planning. Our book tries to keep abreast of these rapidly changing areas and how attorneys and other participants in the structured settlement industry can do a good job for their clients (and not make serious mistakes in the process).

S2KM: From an historic legal perspective, what impact have structured settlements and periodic payment judgments had on the U.S. tort system?

Dehner: The rule thought to be enunciated first in England in Fetter v. Beale that an injury should be compensated with a single one-time payment – the lump-sum system – has been met with deviation when it matters most – in workers compensation systems, in vaccine cases, in other applications. And even in England, the lump sum award system is slowly disappearing based on statutory changes. Structured settlements in the US have continued to chip away at lump sum thinking in America. History should show that structured settlements and periodic payment judgments will prove to be a far better alternative to the jackpot theory of litigation. Do we really want injured people to go to courthouse casinos for justice?

SSP and NSSTA 2011 Annual Meetings - 1

This blog post begins S2KM's reporting and outlines results from the 2011 annual meetings of the Society of Settlement Planners (SSP - May 15-17) and the National Structured Settlement Trade Association (NSSTA - May 18-20).

Elections

• NSSTA
  • President - Dan Finn
  • New Directors - Tom Donahue; Christine Logan; Kevin Silo; Mike Wostoupal
• SSP
  • President - Jack Meligan
  • New Directors - Tony Alfieri; Tim Denehy; Charles Schell; Michelle Whitmore.

Honors - NSSTA

• President's Award - Betty Gregware
• Leadership Award - Toni Warbington
• CSSC Designation Certificates
• NSSTA Past Presidents - honoring NSSTA's 25th Anniversary

Educational Programs - speakers by topic with recommended related resources from "Structured Settlements and Periodic Payment Judgments" (S2P2J), S2KM wikis and prior S2KM blog posts.

Legislative Update

• NSSTA - Eric Vaughn: Washington Update
  
• SSP - Roy Franco: HR 1063
  

Government Benefits

• NSSTA
  • MSA Panel -Toni Warbington; Doug Brand; David Korch; David Hayes
  • Special Needs Trusts - Jay Sangerman
• SSP
  • Liability MSAs - Jason Lazarus; Roy Franco; Mark Pololizio; Doug Shaw
  • Liens Panel - Roy Franco; Tevra Johnson
• Recommended resources
  • S2P2J Chapter 15 - "Government Benefits and Structured Settlements"
  • S2 wiki - "Government Benefits"

Taxation

• NSSTA: 468B QSF Funds - Martin Jacobson
• SSP
  • 468B QSF Funds - Robert Wood
  • Taxation of Damages - Robert Wood
  • Medical Expense and Estate Tax Issues - Jeremy Babener
• Recommended resources
  • S2P2J Chapter 2 - "Taxation of Damages"
  • S2P2J Section 3.08B - "Section 468B Settlement Funds"
  • S2 public policy wiki pages featuring: Robert Wood and Jeremy Babener

Stakeholder Perspectives

• NSSTA
  • Attorneys - William Robinson lll, President-Elect of the American Bar Association
  • Legal Committee Update (including secondary market) - Peter Vodola; Amy Ravitz; Kathy Scanlon
  • Financial Planners - Laura Tarbox
  • Judges - Peter Vodola, Edward Burke, Stephen Denton
  • Unions - Michael Rott
• SSP
  • Special Needs Attorneys - Kevin Urbatsch; Michele Fuller
  • Plaintiff Attorneys - Jay Fisher
• Recommended resources
  • S2P2J Chapter 4 - "Defense Counsel"
  • S2P2J Chapter 5 - "Plaintiff Counsel"
  • S2P2J Chapter 6 - "Case Preparation"
  • S2P2J Section 16.05 - "Judicial Review of Transfer Applications"
  • S2 wiki - "Secondary Market"
  • S2KM blog - "Ceron v. Henderson"

Marketing

• NSSTA: Business Communications - LuAnn Reeb
• SSP
  • Marketing to Personal Injury Attorneys - Joe Didier
  • Electronic Media and Social Networking - Mark Wahlstrom
• Recommended resources
  • S2 wiki - "S2 and KM"
  • Web 2.0 for Lawyers wiki

Practice Improvement and New Products

• NSSTA: CSSC Continuing Education Online - Karen Meyers; Kathy Moghadas
• SSP
  • Dissecting a Settlement Plan - Jack Meligan; Joseph Tombs
  • Non-qualified Assignments - Brian Michael
  • Indexed Annuities - Rick Miller
  • Re-cycling Structured Settlement Payment Rights - Anthony Prieto; Tim Denehy
• Recommended resources
  • S2P2J Section 3.06A - "Non-Qualified Assignments"
  • S2 wiki - "Re-thinking Structured Settlements"
  • S2 wiki - "Settlement Consulting"
  • S2 wiki - "Business Standards and Practices"
  • S2 wiki - "Spencer v. Hartford"
  • S2KM blog - "Online S2P2J" 

Strength of Life Companies

• NSSTA
  • Strength of Life Insurance Companies - Jim Morris, Chairman, President and CEO of Pacific Life Insurance Company
  • State Guarantee Associations - Tom Ronce; Craig Ulman
  • ELNY Update - Len Blonder; Randy Dyer; Dan Finn; Craig Ulman

• Recommended resources
  • S2P2J Section 3.05[9] - "Life Insurance Guaranty Associations"
  • S2P2J Section 3.05[10] - "Executive Life Insolvency"
  • S2KM blog - "Executive Life of New York"

For S2KM reporting and analysis of prior SSP and NSSTA meetings, see S2KM's structured settlement wiki.

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.

Structured Settlements in 2010 - 2

Beginning in 2004, S2KM has utilized this blog ("Beyond Structured Settlements") and related web 2.0 publications to report and analyze strategic developments impacting the structured settlement and special needs settlement planning (aka settlement consulting) industries.

Featuring industry leaders, commentators and professional association conferences, S2KM has attempted to highlight how legal and technology changes are redefining the traditional (pre-2001) structured settlement market including structured settlement public policy as well as structured settlement business standards, business practices and business models.

From S2KM's perspective, the following categories, people and developments defined the structured settlement and special needs settlement planning industries in 2010:

Professional associations

• S2KM attended seven professional educational conferences during 2010 which addressed structured settlement and/or special needs settlement planning issues:
  • National Structured Settlement Trade Association (NSSTA) - 2
  • Society of Settlement Planners (SSP)
  • National Association of Settlement Purchasers (NASP)
  • National Alliance of Medicare Set-Aside Professionals (NAMSAP)
  • National Academy of Elder Law Attorneys (NAELA)
  • Academy of Special Needs Planners (ASNP)
• As a general observation, all of these conferences were valuable and complementary. For S2KM's 2010 (plus historical) conference reports, see S2KM's structured settlement wiki.
• SSP, NASP and NAMSAP deserve special recognition for their 2010 strategic educational discussions featuring industry leaders, commentators and critics who offered alternative perspectives for improving and growing the structured settlement and special needs settlement planning markets.
• By comparison, NSSTA remains reluctant to openly discuss strategic industry issues or to include alternative perspectives in their educational programs. More positively, NSSTA representatives and members increasingly attend and speak at non-NSSTA structured settlement and special needs settlement planning conferences.
• NAELA's educational conferences are noteworthy because they regularly feature sections or entire programs titled "unprograms". NAELA's unprograms are moderated group discussions about specific topics. NAELA's 2010 Special Needs Summit included six separate one hour unprograms with a concluding unprogram wrap-up session. One example of a 2010 NAELA unprogram was titled "Collaboration Opportunities for Special Needs Attorneys and Financial Planners".

Industry leaders

• NSSTA promoted Eric Vaughn, who previously served as NSSTA's lobbyist, to replace Joseph Ricci as NSSTA's new Executive Director effective July 1, 2010. Peter Arnold, previously NSSTA's Marketing Director, was similarly promoted to serve as NSSTA's Associate Executive Director. NSSTA's Board of Directors elected Michael Kelly as its 2010 President and Dan Finn as its President-elect. NSSTA honored Congressman Peter Stark during its Annual Meeting as its 2010 Legislator of the Year. NSSTA also gave special recognition to Karen Meyers and Joseph Bornstein for their contributions to NSSTA's CSSC and NSSTAPAC programs respectively..
• SSP elected Jason Lazarus as its President for 2010-11 and Charles Schell as Vice President. SSP honored Richard Risk with the designation of "life member" for his contributions to SSP and the settlement planning industry. Joseph Tombs continues as Director of SSP's RSP certification program.
• NASP named Matthew Bracy as its new President succeeding Robin Shapiro. Earl Nesbitt continues as NASP's Executive Director.
• NAMSAP elected Michael Westcott as its President.
• NAELA honored Dick Traum as the first recipient of NAELA's Special Needs Leadership Award. Traum is the founder and CEO of Achilles International, a non-profit organization providing community support for athletes with disabilities with members in more than 70 countries.
• Amy Palmiero-Winters, ultra-marathoner and lower-leg amputee, was named during 2010 as the winner of the 2009 James E. Sullivan Award given annually to the top amateur athlete in the United States.

Industry commentators

• For the past several years, Robert Wood has been the preeminent tax commentator and author for the structured settlement and settlement planning industries. Wood's publications appear on the Wood & Porter website.
• During 2010, Jeremy Babener emerged as an important new structured settlement tax commentator and author specializing in public policy and proposing an expanded structured settlement tax subsidy. In addition to authoring several structured settlement articles for tax and legal journals, Babener participated as a featured speaker at both the SSP and NASP 2010 Annual Meetings and authored two blog posts for S2KM during 2010. Babener discussed his structured settlement writing (accessible on S2KM's structured settlement public policy wiki and Babener's Tax Structuring website) in this 2010 S2KM interview.
• Additional authors who wrote and published 2010 legal articles about structured settlement and special needs settlement planning issues included: Daniel Hindert, Matt Garretson, Sylvius von Saucken, Peter Wayne, Mark Popolizio, Gregg Polsky and Brant Hellwig.
• Both the Legal Broadcast Network and Ringler Radio continued to produce and distribute podcasts featuring structured settlement commentators during 2010.
• An increasing number of structured settlement and special needs settlement planning professionals published blogs during 2010 joining industry blogging pioneers such as John Darer, Mark Wahlstrom, Matthew Bracy and Jack Meligan.
• Incisive Media published two new updates (Release 47 and Release 48) for "Structured Settlements and Periodic Payment Judgments" during 2010.

Legislation

• Both the Patient Protection and Affordable Care Act (Health Care Reform) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) redesign the legal environment in which the structured settlement and personal injury settlement planning markets operate.
• Among the anticipated strategic consequences of health care reform:
  • An estimated 16 million more Medicaid participants - and therefore:
  • More special needs trusts;
  • More special needs attorneys;
  • More structured settlement annuities payable to trustees.
• Dodd-Frank re-writes federal banking law and creates a new Bureau of Consumer Financial Protection. A key question, as yet unanswered, is whether the sale and/or purchase of structured settlement annuities constitutes a "financial product or service" under Dodd-Frank requiring regulatory supervision by the Bureau.

Regulations

• The United States Department of Treasury held a public hearing on February 23, 2010 focused on proposed new regulations for Internal Revenue Code section 104(a)(2). The proposed regulations, if enacted, would:
  • Eliminate the requirement that damages be based on “tort or tort type rights” in order to qualify for the section 104(a)(2) tax exclusion, and
  • Incorporate 1996 legislation requiring that personal injuries and sickness damages be “physical” in order to qualify for the section 104(a)(2) tax exclusion.
  • A subsequent S2KM interview featured John McCullough and Richard Risk, two of the structured settlement industry members who spoke at the hearing.
• The Centers for Medicare and Medicaid Services (CMS) continued to issue administrative guidance during 2010 for enforcement of the Medicare Secondary Payer (MSP) Act of 1980 and the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) reporting requirements for insurers. Featured discussions during the NAMSAP 2010 Annual meeting highlighted:
  • The increasing importance and complexity of the MSP statute for all personal injury stakeholders;
  • The need for these personal injury stakeholders (and their professional associations) to cooperate politically and educationally;
  • The challenges of integrating structured settlements, including rated ages, with Medicare set-aside arrangements (MSAs) in the context of health care reform, CMS MSA regulations and related judicial rulings;
  • The evolving business models, claim management strategies and professional skill sets which are now emerging to address these challenges.

Case law

• The Spencer v. Hartford class action lawsuit which settled in 2010 represents one of the most important legal developments in the history of the structured settlement industry.
• Hartford's gross settlement payment of $72.5 million represents 4.5% of total premium dollars Hartford used to purchase structured settlement annuities for class members from January 1, 1997 to June 7, 2010.
• Among the plaintiffs allegations:
  • 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 structured settlements were priced so Hartford retained 15% of the value of the structured settlements.
  • Hartford and its attorneys, brokers and agents misrepresented structured settlements including explicit or implicit reference to:
    • The "cost" of the annuity or structured settlement or portion of the settlement being structured; and/or
    • The "value" of the annuity or structured settlement or portion of the settlement being structured.
• Hartford, which stopped writing new structured settlement business in 2009, denied the allegations.

Technology

• Despite the accelerating technology advances revolutionizing society generally, the structured settlement and special needs settlement planning industries have been slow to study and incorporate these advances into their educational programs and business models.
• The best industry-sponsored technology education programs during 2010 were offered by Mark Miller during a NAELA webinar and Harry Margolis at the ASNP 2010 Annual Meeting. Both presentations provided introductory overviews of web 2.0 and including recommendations for integrating specific social networking tools into special needs legal practices.
• NSSTA initiated a NSSTA blog during 2010 and offered an educational program about Internet marketing during its 2010 Fall Education program.

Public policy

• Both SSP and NASP featured specific discussions and presentations about structured settlement public policy during their 2010 Annual Meetings. The discussions included industry commentators representing diverse viewpoints and priorities.
• Jeremy Babener followed his 2009 paper debunking industry myths concerning "structured settlement dissipation studies" with several 2010 articles and papers addressing structured settlement public policy issues. Babener's public policy writing is featured on S2KM's structured settlement public policy wiki.
• Release 47 of "Structured Settlements and Periodic Payment Judgments" re-examined several structured settlement public policy issues related to single claimant 468B funds, structured settlement factoring transactions, dissipation by personal injury victims, the Deficit Reduction Act of 2005, special needs trusts and Medicare set-aside arrangements.
• In a 2010 Boston College Law Review article, professors Gregg Polsky and Brant Hellwig challenged the application of any structured settlement tax benefit for deferring attorney fees or payments to non-physically injured tort plaintiffs under general common law tax principles.

Business standards and practices

• The Spencer v. Hartford case raises many issues about structured settlement business standards and practices which require greater education and analysis if the primary market expects to improve and grow. For example;
  • Is the primary structured settlement market capable of self-regulation?
  • Why shouldn't key elements of the state structured settlement protection statutes (judicial approval; best interest test; compensation disclosure) be applied to primary market transactions?
  • As an additional requirement, or as an alternative, why haven't plaintiff attorneys and plaintiff consultants insisted upon a claimant's written informed consent before entering into a structured settlement?
  • Why haven't the SSP's Standards of Professional Conduct received more public discussion and analysis within the structured settlement industry?
• "Cash now" advertising represents one of the most highly criticized secondary market business practices. Although this practice continues to exist, NASP took an important educational step during its 2010 Annual Meeting by highlighting this issue and inviting secondary market critics to participate in the discussion.

Business models

• While other segments of, and products within, the special needs settlement planning market have expanded and improved in recent years, the structured settlement primary market in general has stagnated and retrenched.
• During 2010, however, representatives of the primary structured settlement market increasingly recognized their interdependency, and interacted, with other settlement planning professionals and professional associations such as special needs attorneys, life care planners, Medicare set-aside professionals and secondary structured settlement market participants.
• Future industry improvement and growth will require even greater appreciation and identification of shared interests as well as expanded implementation of shared political strategies, educational programs and business models.

Prior S2KM annual reports about the structured settlement industry and reports about industry association conferences are available on S2KM's structured settlement wiki.