Beyond Structured Settlements

Reliance Structured Settlement Annuities - 2

Pennsylvania Commonwealth Court Judge Bonnie Brigance Leadbetter has signed an Order approving a Transfer and Assumption Agreement whereby Reliance Insurance Company will transfer all Reliance-owned structured settlement annuity contracts and corresponding payment obligations issued by Genworth Life Insurance Companies to a new corporation, the Genworth Annuity Service Corporation.

Reliance was declared insolvent in 2001 and the Pennsylvania Insurance Commissioner was appointed as Liquidator. The Reliance Estate, however, remains open and its current assets, prior to the Transfer Order, included approximately 3,400 structured settlement annuity contracts of which approximately 3093 involve annuity contracts issued by Genworth and owned by Reliance.

Many of these Genworth funded structured settlements involve annuity contracts issued by United Pacific Life Insurance Company, a former Reliance subsidiary which Reliance sold in 1993 and which is now known as Genworth Life Insurance Company.

According to the November 4, 2013 Transfer Application which Judge Leadbetter's Order approved:

• The transferred structured settlements will continue to satisfy the corresponding periodic payment obligations and Reliance will be discharged from its obligation for those future periodic payments.
• Based upon a private letter ruling from the Internal Revenue Service:
  • Neither Reliance nor Genworth will incur any adverse tax consequences as a result of the transfer.
  • The tax treatment of the periodic payments to the structured settlement recipients will remain unchanged.
• Genworth Annuity Service Corporation will be owed 80 percent by Genworth and 20 percent by Reliance.

In an earlier Transfer Application filed with the Liquidation Court on September 10, 2012, the Reliance Liquidator had requested an Order approving transfer of ownership of all Reliance-owned structured settlement annuity contracts to the annuity payees. In many cases according to that transfer application, these payees included factoring companies and investors who had purchased structured settlement payment rights from factoring companies.

Judge Leadbetter never approved the September 10, 2012 Transfer Application and on February 28, 2013 ordered that Transfer Application “be held in abeyance until further order of this Court.”

The September 10, 2012 Transfer Application noted:

• The Liquidator did not have a complete list of current names and addresses of Reliance structured settlement payees.
• This failure resulted, in part, because Reliance did not retain copies of either the annuity contracts or other structured settlement documents issued by United Pacific Life Insurance Company when it sold the company to Genworth in 1993.
• The Liquidator assumed Reliance structured settlement annuity issuers had the ability to furnish individual notice.

For an earlier S2KM report about Reliance structured settlement annuities, see this blog post.

Global Insurance Capital Standard

The International Association of Insurance Supervisors (IAIS), whose members constitute nearly all of the world's insurance supervisors including the United States Treasury's Federal Insurance Office (FIO) and the National Association of Insurance Commissioner (NAIC), has committed to develop and implement the first-ever risk based global insurance capital standard (ICS), according to Peter Braumüller, chairman of the IAIS Executive Committee.

This development was reported by the Duane Morris law firm in an October 11, 2013 Alert which also identified a 2016 target date for development of the ICS with full implementation expected in 2019 following two years of testing and refinement.

Established in 1994, IAIS is "the international standard setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector", according to its website.

IAIS' mission is "to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability."

The Duane Morris Alert additionally reported conflicting reactions to the ICS from representatives of the FIO and the NAIC.

• FIO - Michael T. McRaith, director of the FIO and chairman of the IAIS Technical Committee, offered this assessment: "[f]rom the [2008] financial crisis, we learned that our global financial regulatory regime should be more robust and comprehensive in scope, and jurisdictions should share a commitment to global standards."
• NAIC - Ben Nelson, CEO of the NAIC, issued this response to the IAIS's announcement: "Although U.S. state insurance regulators continue to have serious concerns about the timing, necessity, and complexity of developing a global capital standard given regulatory differences around the globe, we intend to remain fully engaged in the process to ensure that any development augments the strong legal entity capital standards in the U.S. that have provided proven and tested security for U.S. policyholders and stable insurance markets for consumers and industry."

The United States structured settlement industry played an important historical role influencing the development of risk based capital requirements for insurance companies and will likely be impacted by related national and international developments.

Historical Background

• The United States insurance industry historically has been regulated almost exclusively by the states whose regulatory responsibility was reaffirmed in 1945 when Congress passed the McCarran-Ferguson Act.
• Following the collapse of First Executive Corporation and its two Executive Life subsidiaries in 1991, which had invested heavily in "junk bonds" and had sold a substantial number of structured settlement annuities, the NAIC adopted several model reforms including risk based capital (RBC) requirements.
• RBC requires insurance companies with higher amounts of risk to retain higher amounts of capital and surplus.
• Prior to the Executive Life collapse, state insurance regulators had used fixed capital standards to monitor the financial solvency of insurance companies.
• Under fixed capital standards, depending upon the state and its line of business, insurance companies were required to maintain the same minimum amount of capital, regardless of the financial condition of the company.
• As a result of the 2008 global financial crisis and huge exposures to subprime real estate mortgages incurred by one its non-insurance subsidiaries, American International Group, Inc. (AIG), a significant structured settlement annuity provider, required a $182 billion government bailout to avoid collapse.
• The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted in response to the 2008 global financial crisis, created changes in the United States financial regulatory system that impact all aspects of the financial services industry including insurance.
• Among many provisions, Dodd-Frank, according the U.S. Treasury website, "vested FIO with the authority to monitor all aspects of the insurance sector ... and to represent the United States on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors [IAIS]."
• The Financial Stability Board (FSB),an international body that monitors and makes recommendations about the global financial system, published a list of nine insurers on July 18, 2013 that it identified as “global systemically important”.
• The FSB list includes three United States insurers, AIG, MetLife and Prudential - each of which currently sells structured settlement annuities in the U.S. market.
• Although these insurers insist they are nothing like banks in terms of insolvency risks, "regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities", according to a July 27, 2013 article in The Economist titled "Global Systemic Insurers".
• "But it is not clear", The Economist article adds, "which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers."
• The Duane Morris Alert also reported the IAIS announcement "that by late 2014 it will have finalized and made ready for implementation 'straightforward, backstop capital requirements' for insurers that are designated as global systemically important insurers."

CMS WCMSA Reference Guide - 2

The Centers for Medicare and Medicaid Services (CMS) published an 88-page WCMSA Reference Guide (WCRG) on its website  March 29,2013. Its intended purpose: to help WCMSA professionals, beneficiaries and other stakeholders "understand CMS' [WCMSA] amount approval process and to serve as a reference for those electing to submit such proposals to CMS for approval."

A prior S2KM blog post highlights selected excerpts from the WCRG addressing and summarizing non-structured settlement specific issues. This blog post identifies and discusses structured settlement issues, including rated age information requirements for determining WCMSA beneficiary life expectancy, featured in the WCRG.

Arguably, the most important WCRG statement for structured settlements is the following comment about CMS WCMSA policy memorandums which appears in WCRG Appendix 4 - WCRC Proposal Review Reference Tools: "CMS has issued policy memorandums since 2001 on a variety of topics related to WCMSAs, such as review thresholds, pricing of services and prescription drugs, rated ages, life expectancy, and more. "The WCRG follows all CMS policy memorandums currently in effect. The memorandums are published on the CMS website."

Why is this statement so important for structured settlements?

• First, because one of the policy memorandums (dated: October 15, 2004) includes the following questions and answer:
  • "Q4. Inflation Adjustment/Discount for Present Value/Change in Policy - Must the WC Medicare Set-aside Arrangement include an upward adjustment for inflation? May the WC Medicare Set-aside Arrangement include a downward adjustment as a discount for the present-day value of the total WC Medicare Set-aside Arrangement?"
  • "A4. Effective with the issuance of this memorandum, CMS's position is that the WC Medicare Set-aside Arrangement does not need to be indexed for inflation and may not be discounted to present-day value."
• Second, as a result of this CMS policy:
  • Structured settlement annuities have had an inherent cost advantage over lump sum alternatives for funding WCMSAs; and
  • Structured settlement annuities have underfunded WCMSAs, because they do not include any inflationary component, with Medicare ultimately responsible for the underfunded amount.
• For a simplified example, assume the projected WCMSA payments are $10,000 per year for 10 years.
  • Lump sum - Without any inflation index or discounting, the lump sum present value will be $100,000 which will be invested in an interest-bearing account.
  • Structured settlement - Ignoring "seed money" (see below), the cost of a certain only annuity to fund $10,000 per year for 10 years (even with today's low interest rates) is approximately $94,000 - which is $6,000 less than the lum sum present value because the annuity incorporates a discount rate. Without inflationary increases (which CMS' October 15, 2004 policy memorandum does not require), however, the annuity payments of $10,000 per year will not keep pace with future increases in medical costs. Note also: other types of annuities (eg. temporary life) could cost less than a certain only annuity.
  • Medicare responsibility - If the $10,000 per year proves insufficient, Medicare will make up the difference (see below) and once the WCMSA is fully paid out, Medicare becomes responsible for any further Medicare-related medical expenses.
• Third, the WCRG does not address the inflation-discount issue. The Glossary in Appendix 4 defines "present-day value" as "the cost to fund a WCMSA annuity". Therefore, it appears the October 15, 2004 CMS WCMSA policy memorandum remains in effect and that annuities will continue to represent a lower-cost funding alternative than lump sums for many, if not most, WCMSAs.
• Bottom line: during this era of low interest rates and declining structured settlement sales, WCMSAs have represented, and apparently continue to represent, a singular sub-market where structured settlements enjoy an inherent cost advantage compared with lump sums. The new CMS WCRC appears to maintain that cost advantage by re-affirming the applicability of the October 15, 2004 policy memorandum.

The WCRG further underscores the continuing importance of structured settlements for WCMSAs by the considerable attention structured settlements receive in the in the following sections:

• Section 5.0 - WCMSAs Can Be Funded in Two Ways: a Lump Sum or Structured Payments
• Section 5.2 - Structured WCMSAs
• Section 10.1.1 - Cover Letter - E. Settlement Details
• Section 10.1.3 - Rated Age Information or Life Expectancy
• Section 19.3 -Structured WCMSA Topics
  • 19.3.1 - Funds Left Over / Carried Forward
  • 19.3.2 - Funds Used in a Given Period
• Appendix 3 - Glossary - entry for "structured settlement"
• Appendix 5:15 -Rated Age Information or Life Expectancy - includes sample:
  • Rated Age Statement
  • Annuity Provider Underwriting Assessment
  • Annuity Broker Statement
• Appendix 5: 25 -Settlement Agreement or Proposed or Court Order
  • Includes annuity payout

What follows are non-sequential S2KM comments about selected structured settlement issues addressed in the WCRG. Quotes are excerpted from the WCRG.

Definition - The WCRG Glossary defines "structured settlement" as "[a] settlement in which the agreed-on funds are paid from an initial deposit and subsequent deposits on a regular basis for a given amount of time." Although other sections of the WCRG discuss annuities in the context of structured settlements, this definition fails to mention annuities. In addition, there is no specific link in the WCRG to either structured settlement tax law generally or the tax definition for “structured settlement” in IRC 5891(c)(1) more specifically.

WCMSA cover letter - When a WCMSA is funded with a structured settlement, the cover letter seeking CMS approval must identify the following:

• Name of the carrier
• Cost of the annuity
• Proposed initial deposit (seed money)
• Minimum annual deposit for the balance of the claimant’s life
• Annuity starting date
• Length of annuity
• Annual payout of annuity
• Annual funding date

Settlement amount - "Medicare determines the value of the annuity based on how much the annuity is expected to pay over the life of the settlement, not on the Present Day Value (PDV) or cost of funding that annuity." The WCRG includes an example calculation and requires submission of annuity rate sheets to support calculations of settlement amounts.

Initial deposit - If a WCMSA is funded with structured settlement, the WCRG requires an initial deposit "to cover the first surgical procedure or replacement and two years of annual payments" and provides an example to illustrate how to calculate this seed money. The WCMSA cover letter must disclose whether any portion of the projected prescription drug expenses has been included in the initial deposit.

Scheduled periodic payments - With a structured settlement, the initial deposit is followed by subsequent annual payments to the WCMSA account (or a shorter time period if CMS agrees), to cover projected expenses for a fixed number of future years on the anniversary of the first deposit. It is significant that the CMS WCRG requires annuities with fixed numbers of future years despite allowing/encouraging the use of rated ages to determine reduced life expectancies.

Over-and-under funding - If structured settlement deposit for a given year is not used up, the remaining amount is carried forward to the next payment period. Medicare's threshold to begin paying claims in any subsequent period would then be increased by the amount of the carry-forward. Alternatively, if a WCMSA fund is appropriately exhausted (including roll-over amounts) in a given time period, Medicare will become the primary payer for the remainder of that period assuming CMS receives proper verification. The WCRG includes an example to help explain this over-and-under funding process. When the entire WCMSA fund is exhausted, including all future structured settlement payments, Medicare will pay primary for any future WC-related medical expenses. Obviously, any such over-and-under funding requires additional work for both CMS and the WCMSA administrator compared with lump sum funding.

Rated age information

The WCRG Glossary does not provide any definition for "rated age". Generally the terms "rated age" and/or "substandard age rating" refer to an annuity provider's determination that an annuitant's life expectancy is less than normal. A rated age generally results in a lower premium for life contingent annuities compared with an annuitant having a normal life expectancy. CMS, however, utilizes rated age information from annuity providers ("insurance companies") to determine the fixed number of years for which a WCMSA must be funded.

If rated age information is not provided, CMS will determine a claimant's life expectancy using the actual age. If, however, rated age information is submitted with a WCMSA for CMS approval, CMS requires the following:

• "Rated age confirmation with original proposal documents as outlined in current procedure memorandums. CMS will not accept any variation or substitute wording.
• "A stand-alone statement indicating that all rated ages obtained on the claimant are included.
• "Each rated age is presented on company letterhead for each insurance company (or companies) that made the rating and for each settlement broker that obtained them from the insurance company. Note: Letterhead includes the name and address of the insurance company or settlement broker.
• "All rated age sources shall be independent, in fact and appearance, of the submitter, carrier, and claimant.
• "If more than one rated age is submitted, CMS will use the median of all rated ages submitted.
• "When multiple rated ages are provided, the submitter becomes subject to enforcement of the requirement to use the median rated age and must provide all rated ages to CMS.
• "All rated ages shall be accompanied by a written justification on how such age was determined. For example, if a rated age obtained from life insurance companies for like injuries/illnesses is the method of evaluation, include documentation to support the life expectancy. CMS will project the cost of the claimant’s future treatment over the claimant’s life expectancy, using the Centers for Disease Control (CDC) Tables unless documentation from a medical professional provides justification for an alternative projection.
• "CMS uses the Centers for Disease Control (CDC) Life Tables for WCMSA life expectancy calculations. Please see the WCMSA site for information on the latest tables to use.
• "Do not include the following:
  • "Actuarial charts or life expectancy charts from the CDC or elsewhere, or statements that there are no rated ages.
  • "Do not include any documents on rated ages that contain redacted data. They will not be considered."

Submitting rated age information for CMS approval requires significant additional work compared with a typical structured settlement. The benefit of obtaining a rated age is a shorter WCMSA payout period resulting in a lower cost of funding whether the funding is lump sum or structured.

For additional S2KM reporting about government benefit issues, see the structured settlement wiki. For analysis of the interaction of structured settlements and government benefits, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

CMS WCMSA Reference Guide - 1

Thirty-three years following enactment of the Medicare Secondary Payer (MSP) Act and 12 years after the Centers for Medicare and Medicaid Services (CMS) issued its first workers compensation Medicare set-aside (WCMSA) memorandum, CMS has finally published a WCMSA Reference Guide (WCRG).

Enacted in 1980, the MSP Act requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries, with Medicare responsible only as a “secondary payer.”

CMS, the agency responsible for administering Medicare policies, failed to take practical steps to enforce the MSP rules until 2001 when it issued the first of several policy memorandums addressing WCMSAs. These policy memorandums created a format, checklists and procedures for seeking approval for WCMSAs to "protect Medicare's interests" when workers compensation cases are settled. The WCRG states: "The WCRG follows all CMS policy memorandums currently in effect. The memorandums are published on the CMS website."

Although CMS and its field offices have also issued informal guidance about the use of MSAs in liability cases, nothing comparable exists to the CMS WCMSA memoranda. As a result, there is no uniform position or consensus among tort practitioners as to whether and when MSAs are required in liability cases.

The WCRG continues a series of Medicare legislative and regulatory compliance initiatives which also include the Medicare, Medicaid and SHIP Extension Act (MMSEA) and the Strengthening Medicare and Repaying Taxpayers Act (SMART Act).

Published by CMS on March 29, 2013, the 88-page WCRG (including Appendices) applies only to workers compensation cases. Its intended purpose: to help WCMSA professionals, beneficiaries and other stakeholders "understand CMS' [WCMSA] amount approval process and to serve as a reference for those electing to submit such proposals to CMS for approval."

This blog post provides excerpts from the WCRG addressing and summarizing non-structured settlement specific issues. For a more complete understanding, read the entire 88-page WCRG. Subsequent S2KM blog posts will summarize and discuss WCRG structured settlement issues including rated age information requirements for determining WCMSA beneficiary life expectancy.

Overview

• Medicare's interests:
  • "Any claimant who receives a WC settlement, judgment,or award that includes an amount for future medical expenses must take Medicare’s interest with respect to future medicals into account."
  • "If Medicare’s interests are not considered, CMS has a priority right of recovery against any entity that received a portion of a third party payment either directly or indirectly."
  • "Medicare may also refuse to pay for future medical expenses related to the WC injury until the entire settlement is exhausted."
• Compromises: "CMS does not compromise or reduce future medical expenses related to a WC injury."
• WCMSA statutes and regulations: "There are no statutory or regulatory provisions requiring that you submit a WCMSA amount proposal to CMS for review."
• What are WCMSAs: "A WCMSA allocates a portion of the WC settlement for all future work-injury-related medical expenses that are covered and otherwise reimbursable by Medicare. When a proposed WCMSA amount is submitted to CMSfor review and the individual or beneficiary obtains CMS’approval, the CMS-approved WCMSA amount must be appropriately exhausted before Medicare will begin to pay for care related to the beneficiary’s settlement, judgment, award, or other payment."
• Benefit of WCMSA: "The primary benefit [of submitting a WCMSA] is the certainty associated with CMS reviewing and approving the proposed amount with respect to the amount that must be appropriately exhausted."
• Goal of WCMSA: "The goal of establishing a WCMSA is to estimate, as accurately as possible, the total cost that will be insured for all medical expenses otherwise reimbursable by Medicare for work-related conditions during the course of the claimant’s life, and to set aside sufficient funds from the settlement, judgment,or award to cover that cost."
• Creating a WCMSA: "Generally there are four steps involved in creating a CMS-approved WCMSA:
  • "Analysis of the claim and medical information in order to determine the amount of money required for the fund.
  • "Negotiation of a tentative settlement and preparation of draft settlement documents to settle the WC case incorporating terms for creation and administration of the WCMSA (CMS is not a party to the settlement).
  • "Obtaining approval from CMS regarding the settlement and the proposed WCMSA.
  • "Finalizing the settlement and funding the WCMSA."
• WCMSA funding:
  • "CMS has no process to accept up-front cash payments in lieu of a CMS reviewed WCMSA."
  • "WCMSAs may be funded by a lump sum or may be structured, such that a fixed amount of funds are provided each year for a fixed number of years."

CMS Review of WCMSAs - excluding structured settlement and rated age issues which S2KM will be address in subsequent blog posts.

• Introductory note: CMS introduced a WCMSA internet portal in November 2011 for submission of WCMSA proposals.
• Review threshold: "CMS will review a proposed WCMSA amount when the following workload review thresholds are met:
  • "The claimant is a Medicare beneficiary and the total settlement amount is greater than $25,000.00; or
  • "The claimant has a reasonable expectation of Medicare enrollment within 30 months of the settlement date and the anticipated total settlement amount for future medical expenses and disability/lost wages over the life or duration of the settlement agreement is expected to be greater than $250,000.00."
  • "A claimant has a reasonable expectation of Medicare enrollment within 30 months if any of the following apply:
    • "The claimant has applied for Social Security Disability Benefits.
    • "The claimant has been denied Social Security Disability Benefits but anticipates appealing that decision.
    • "The claimant is in the process of appealing and/or re-filing for Social Security Disability benefits.
    • "The claimant is 62 years and 6 months old.
    • "The claimant has an End Stage Renal Disease (ESRD) condition but does not yet qualify for Medicare based upon ESRD."
• Review not required: "It is unnecessary for the individual or beneficiary to obtain CMS approval for a proposed WCMSA amount if all of the following are true:
  • "The facts of the case demonstrate that the injured individual is only being compensated for past medical expense
  • "There is no evidence that the individual is attempting to maximize the other aspects of thesettlement (e.g., the lost wages and disability portions of the settlement) to Medicare’s detriment; and
  • "The individual's treating physicians conclude (in writing) that to a reasonable degree of medical certainty the individual will no longer require any Medicare-covered treatments related to the WC injury. However, if Medicare made any conditional payments for WC-related services furnished prior to settlement, then Medicare will recover those payments. In addition, Medicare will not pay for any WC-related services furnished prior to the date of the settlement for which it has not already paid."
• Review process:
  • "If you choose to use CMS’ WCMSA review process, the Agency requests that you comply with CMS 'established policies and procedures."
  • "When a WCMSA is submitted for approval, CMS must have certain documentation available to complete a review of the proposal. Table 1 lists the documents normally submitted with a WCMSA proposal."
  • "Submit the gross total settlement amount as a single lifetime number and NOT the settlement amount minus attorney fees, expenses, etc."
  • "Once this information is received, the COBC will apply it to the beneficiary's Medicare record and assign the case to the Medicare Secondary Payer Recovery Contractor (MSPRC)."
  • "The MSPRC will send the beneficiary a “Rights and Responsibilities” letter that explains Medicare's recovery rights with respect to conditional payments and information regarding what steps the beneficiary should take next."
  • "Once the Rights and Responsibilities letter is received, all further inquiries must be made through the MSPRC."
  • "If the parties to a WC settlement stipulate a WCMSA but do not receive CMS approval, then CMS is not bound by the set-aside amount stipulated by the parties, and it may refuse to pay for future medical expenses in the case, even if they would ordinarily have been covered by Medicare."
  • "If CMS approves the WCMSA and the account is later appropriately exhausted, Medicare will pay related medical bills for services otherwise covered and reimbursable by Medicare regardless of the amount of care the beneficiary continues to require."
  • "You can see your case’s status on the WCMSAP, if the case was submitted on the Portal. For cases that were submitted via mail, case status can be obtained by contacting the WCRC."
  • "When CMS does not believe that a proposed set-aside adequately protects Medicare’s interests,and thus makes a determination of a different amount than originally proposed, there is no formal appeals process. However, there are several other options available."

Life Care Plans

• "A Life Care Plan is a dynamic document based on published standards of practice, comprehensive assessment, data analysis, and research that provides an organized concise plan for current and future needs with associated costs for individuals who have experienced catastrophic injury or have chronic health needs."
• "A life care plan is appropriate when the claimant’s injury or disease is extensive and serious, e.g., paraplegia, quadriplegia, brain damage."
• "Although submission of a life care plan is optional, you are required to include drug and dosage lists. Include all pricing charts, cost projections, pricing information, and explanatory narratives and analyses."
• "When the parties to a WC settlement present CMS with “life care plans” or similar evaluations prepared by non-treating physicians to support and justify their proposed WCMSAs, Medicare will consider accepting such evaluations if the physician does all of the following:
  • "Examines the claimant;
  • "Reviews the claimant's medical records;
  • "Contacts any of the claimant's treating physicians (if applicable);
  • "Is available to answer CMS’ questions;
  • "Prepares a report that summarizes the above; and
  • "Offers a written medical opinion as to all of the reasonably anticipated future medical needs of the claimant related to the claimant's work injury or illness/disease."

Future Treatment

• "Determine the cost of future medical expenses that are directly related to the injury or illness suffered by the worker. This amount can be determined by reviewing medical records and past medical expenditures. The WCMSA must show the amount of money that should be invested to provide the yearly expenses for the worker’s life expectancy."
• "Note: In order to protect Medicare’s interests, a WCMSA should be funded based on the life expectancy of the claimant unless state law specifically limits the length of time that WC covers work-related conditions. The key is that both the principal amount that is to be set aside and the anticipated interest that it will earn must be sufficient to provide for the worker’s future medical treatment and administration fees for the worker’s lifetime."
• "Identify specific types of medical services or items, the frequency and duration of the medical services or items, and the projected costs of the medical services or items related to the work injury or disease that are expected in the future in light of the claimant's condition."

Time Frame

• "When you submit a WCMSA for review, CMS tries to review and decide on proposed settlements within 45 to 60 days from the time that all relevant documents are submitted."
• "Parties to the settlement may settle the indemnity (non-medical-expenses) portion of the claim separately from the WCMSA portion, in order to avoid having indemnity payments continue while CMS is still reviewing the proposal. CMS will still consider the whole claim, including indemnity, in its threshold calculations."

Administration

• "Once a WCMSA is established and funded, it must be administered."
• "This can be done by the claimant, by the claimant’s representative payee, appointed guardian, or conservator, or by a professional administrator."
• "The administrator of the account will be responsible for keeping accurate records of payments made from the account."
• "The administrator must establish the WCMSA account, pay Medicare-covered services from the WCMSA account, and provide CMS with a reporting of the expenditures from the WCMSA."
• "Every year, beginning no later than 30 days after the 1-year anniversary of settlement the administrator must sign and send a statement that payments from the WCMSA account were made for Medicare-covered medical expenses and Medicare-covered prescription drug expenses related to the work-related injury, illness, or disease."

Death of the Claimant

• "If a claimant dies before the WCMSA is completely exhausted, the [Regional Office] and [Medicare Secondary Payer Recovery Contractor] will ensure that all claims have been paid."
• "Then any amount left over in the WCMSA may be disbursed pursuant to state law, once Medicare’s interests have been protected."
• "This may involve holding the WCMSA open for some period after the date of death, as providers, physicians, and other suppliers are permitted to submit their initial bill to Medicare for a period of 12 months after the date of service."
• "Often, the settlement itself will dictate the appropriate dispersal of funds up on the death of the claimant."

For additional S2KM reporting about government benefit issues, see the structured settlement wiki. For analysis of the interaction of structured settlements and government benefits, see Chapter 15 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2012 - 4

Executive Life of New York

At one time or another, each of us may have become acquainted with individuals who have overcome personal injuries and successfully transformed their disabilities and special needs into special lifetime accomplishments. Kyle Walsh, profiled in a 2012 S2KM blog post, is one such individual. The late Randy Snow, featured in a 2008 S2KM blog series, was another.

Structured settlements are supposed to provide economic security for people with serious injuries and disabilities - to help them rebuild their lives and, in many cases, to achieve special lifetime accomplishments. Instead of an all-cash personal injury settlement, structured settlement recipients accept a promise of future periodic payments.

What happens, if and when, that promise is broken? What happens when a structured settlement funding company, and the regulators and guaranty system responsible for protecting the structured settlement recipients, fail to make and/or insure full payment?

These questions are highlighted by the Executive Life of New York (ELNY) liquidation - the dominant structured settlement story of 2012 and one of the most important developments in the history of the United States structured settlement industry.

The story of ELNY, as well as its affiliate Executive Life of California (ELIC), and their parent company, First Capital Corporation (FEC), is long and complex. For background of events prior to ELNY's 1991 receivership, S2KM recommends Gary Schulte's 1992 book "The Fall of First Executive".

Significantly, neither the 1991 ELNY Rehabilitation Order nor the 1992 Order approving the ELNY Rehabilitation Plan declared ELNY to be insolvent. When then New York's Insurance Commissioner Salvatore Curiale seized control of ELNY on April 16, 1991 and placed it in receivership, he stated: "The company is currently neither in an insolvent or impaired condition. . . . I have not petitioned the Court to make a finding of insolvency. ELNY is a company well able to meet its current obligations."

Exactly twenty-one years later, on April 16, 2012, following 11 days of hearings at the Nassau County New York Supreme Court, presiding Judge John M. Galasso approved an Order of Liquidation and a Restructuring Agreement for ELNY as proposed by the Superintendent of the New York State Department of Financial Services (Superintendent), as ELNY's Receiver, and the National Organization of Life and Health Guaranty Funds (NOLHGA).

The result of the ELNY Liquidation Order and Restructuring Plan, even following contributions from state guaranty funds and voluntary life insurance company contributions, is a $900 million shortfall allocated entirely (and arguably inequitably) to more than 1400 ELNY payees out of a total of approximately 9700 current ELNY payees. The remaining ELNY payees expect to receive 100 percent of their promised future payments. The average individual shortfall is estimated to exceed $600,000 present value. Although an ELNY Hardship Fund has been created, it has not yet been funded.

An appeal was filed May 30, 2012, on behalf of 18 ELNY structured settlement shortfall payees, challenging the ELNY liquidation order and restructuring agreement on the basis of due process. The appeal also alleges that immunities and injunctions granted under the liquidation order are improper. Oral arguments occurred on November 15, 2012 in Brooklyn before the Appellate Division of the Supreme Court of the State of New York, Second Department. No decision has been announced.

Another legal challenge to the ELNY liquidation order occurred June 14, 2012 when attorneys for several liability insurers filed a Motion asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. The motion indirectly raises the issue of whether qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the ELNY liquidation? Judge Galasso denied the Motion without further explanation. 

In a subsequent development, somewhat related to the liability insurers' motion, the ELNY website announced an ELNY Facilitation Plan to assist owners of ELNY structured settlement annuities (SSAs) make supplemental payments to ELNY SSA payees and to coordinate those payments with the ELNY benefit payments scheduled to be made by the Guaranty Association Benefits Company (GABC) under the ELNY Restructuring Plan approved by Judge Galasso on April 16, 2012 as part of the ELNY liquidation order.

The same attorneys who filed the ELNY appeal, Edward Stone and representatives of the Christensen & Jensen law firm, filed a class action lawsuit November 8, 2012, on behalf of ELNY shortfall victims, against Benjamin M. Lawsky, Superintendent of Financial Services of the State of New York, and his predecessor ELNY Rehabilitators, as well as MetLife and Credit Suisse. The class action allegations provide a critical litany of mismanagment and non-disclosure during the 21 years ELNY's estate was being supervised by these defendants.

In response, attorneys representing Benjamin M. Lawsky, in his capacity as ELNY's Receiver, filed a Notice of a Motion with the Nassau County New York State Supreme Court requesting oral argument on January 4, 2013 at 9:30 a.m. or as soon thereafter as the parties may be heard:

• to enjoin three ELNY structured settlement shortfall payees and their legal counsel from proceeding with a class action lawsuit in the United States District Court Southern District of New York;
• to hold in contempt of court the shortfall payees' legal counsel; and
• to require their payment of the related costs and attorney's fees incurred by the Superintendent.

Although the ELNY liquidation has so far received limited coverage in the mainstream media, specialty insurance experts and analysts have not been silent. Examples:

• Peter Bickford - In his article titled "The Elephant in the Court Room" (summarized here by S2KM), Bickford argues New York’s receivership system has failed ELNY, its policyholders and beneficiaries, as well as the insurance industry and its customers due to a lack of basic accountability standards. Although the ELNY restructuring plan may solve the immediate ELNY problem (at the expense of the remaining ELNY shortfall victims), Bickford maintains it does not address the broader, underlying systemic defects inherent in the New York life insurance receivership system. Without an act of the New York legislature, according to Bickford, "there will be no life insurance guaranty fund coverage in New York" following ELNY. Bickford's article also provides succinct summaries of objections raised by ELNY shortfall victims and ELNY legal issues which he states "could linger in the courts for years"
• LifeHealthPro - In an article titled "The Complete ELNY Saga: 21 Years of Mismanagement, Corruption, Broken Promises and Shattered Lives", (summarized here by S2KM), the authors assign primary blame for ELNY insolvency to the NYLB which they describe as "a rogue agency known for its codes of secrecy and characterized by many who spoke for this story as ineffective and mismanaged at best, and a snake pit of corruption at worst". In a companion article (reviewed here by S2KM), writer Warren Hersch asks: "is the structured settlement process in need of reform"?  In a follow-up oped article titled "Governor Cuomo I'm Calling You Out", (summarized here by S2KM), Bill Coffin, LifeHealthPro's Group Editor, charges New York Governor Andrew Cuomo with personal responsibility to clean up the "ELNY debacle".

The final results of the ELNY liquidation will depend upon the outcome of the continuing litigation highlighted in this article. It also remains to be seen what reforms, if any, will result from the failed ELNY receivership process.

In conclusion, it should also be noted that ELIC-related litigation continued in 2012 (Garamendi v. Altus Finance S.A.) when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

For S2KM's complete and continuing reporting about the ELNY liquidation, see the structured settlement wiki.

This blog post completes S2KM's series "Structured Settlements in 2012":

• Part 1 - Primary market
• Part 2 - Settlement planning
• Part 3 - Secondary market
• Part 4 - Executive Life of New York

Stone Street Capital v. McClendon

A Louisiana state court has ruled in Stone Street Capital v. McClendon that MetLife and Travelers had no right to withhold a structured settlement payment from Stone Street Capital which Stone Street had previously purchased, with court approval pursuant to the Louisiana structured settlement protection act, despite the original annuitant/payee's death prior to the payment date.

This 2012 case, which was featured in a presentation by Earl Nesbitt at the NASP 2012 Annual Conference, reinforces the finality of settlement transfer orders. According to Nesbitt, it also calls into question other cases where Travelers, as owner of structured settlement annuities, has ordered structured settlement annuity issuers to stop making payments to transfer companies following the death of the original annuitant/payees despite existing court orders approving those transfers.

Background

• In 1990, Shelia McClendon entered into a structured settlement in which Travelers Insurance Company, as assignee, purchased an annuity from Travelers Life and Annuity Company, which later became MetLife Annuity Company of Connecticut in 2006.
• On July 27, 2007, Shelia McClendon entered into a purchase and sale agreement with Stone Street Capital to sell her right to a $51,800.51 payment due October 15, 2010.
• On September 20, 2007 the same court which subsequently heard the Stone Street v. McClendon case signed an order approving the transfer.
• In the 2007 transfer proceeding, Stone Street gave proper notice to MetLife (as annuity issuer) and Travelers (as annuity owner) neither of whom raised any objections.
• MetLife subsequently sent a letter to Stone Street advising that MetLife would make the assigned payment to Stone Street in compliance with the order.
• The transfer order provided an indemnity, allegedly requested by Travelers and MetLife, to protect them from any further suit by any party asserting an ownership claim or a right to the assigned payment.
• Shelia McClendon died in 2008.
• Pursuant to instructions from Travelers, MetLife did not pay Stone Street the October 15, 2010 payment when due.
• Following Stone Street's inquiry, MetLife and Travelers informed Stone Street that other persons had competing demands for the October 15, 2010 payment and, to resolve the conflict, Stone Street must file a declaratory judgment action which Stone Street did file.
• On July 15, 2011, Travelers filed a preemptory exception of nonjoinder of indispensable parties.
• Travelers' exception claimed Shelia McClendon had passed away and that both her estate and the estate of Peatrice Jackson, whom Travelers claimed was the annuity beneficiary, were indispensable parties to Stone Street's declaratory judgment lawsuit.
• On August 4, 2011 MetLife answered Stone Street's petition and included a reconventional demand for consursus (a form of interpleader).
• None of the parties disputed, either at the time of the 2007 transfer hearing or at the time of the subsequent declaratory judgment suit, that Stone Street properly complied with Louisiana's structured settlement protection act.

Stone Street's Argument

• The declaratory judgment action was filed against MetLife and Travelers and also against the parties Travelers told Stone Street to file against.
• Stone Street subsequently asserted, however, that MetLife was the only party against whom Stone Street needed a judgment in this lawsuit.
• Therefore, Stone Street asked that everyone else be dismissed from Stone Street's motion for summary judgment.
• According to Stone Street, the declaratory judgment proceeding should not have been necessary.
• Stone Street fully complied with the Louisiana structured settlement protection act and a transfer order was previously entered without objections from MetLife or Travelers.
• The 2007 transfer order required MetLife to make the October 15, 2010 payment to Stone Street.
• MetLife ignored their own prior letter wherein MetLife stated it received the order and agreed to comply.
• The principle of res judicata should prevent MetLife from pleading concursus because its claim was previously prosecuted to judgment.
• Traveler's request for a declaratory judgment and MetLife's consursus proceeding represented "improper accumulations of actions".
• Although some state structured settlement protection statutes require a change of annuity beneficiary, the Louisiana statute does not because beneficiaries are not required to receive notice or be named parties.
• Louisiana law further holds:
  • Until a person dies that person has the right to sell assets that person owns.
  • Except for irrevocable beneficiaries, no one has a vested right to the status of a beneficiary under a life insurance contract if the death of the insured has not occurred.

MetLife's Argument

• Neither MetLife nor Travelers were parties to the 2007 transfer order so that order had no res judicata effect on MetLife.
• Travelers, the annuity owner, told MetLife not to make the October 15, 2010 payment to Stone Street.
• Nothing in the 2007 transfer order addressed what would happen to the October 15, 2010 payment if Shelia McClendon died prior to that date.
• When Shelia McClendon died, her named beneficiary in the annuity contract was Peatrice Jackson who predeceased McClendon.
• Peatrice Jackson's heirs filed a competing claim for the October 15, 2010 payment.
• Although Stone Street alleges Shelia McClendon filed a request to change her annuity beneficiary, neither MetLife nor Travelers had any record of receiving this request.
• Because a discrepancy existed among the documents submitted to MetLife, a concursus proceeding became necessary and appropriate.

Travelers' Argument

• The Louisiana structured settlement protection act did not impact Shelia McClendon's settlement agreement.
• The settlement agreement remained valid even following the transfer agreement.
• The transfer agreement did not change either the settlement agreement or the annuity contract beneficiary designation.
• The settlement agreement and the annuity contract both provide that Peatrice Jackson, the named beneficiary, would receive the future payments in the event of Shelia McClendon's death.
• If Stone Street and Shelia McClendon had followed through on their request to name Stone Street the annuity beneficiary, this declaratory judgment lawsuit would not have been necessary.
• Travelers had no proof that Shelia McClendon made any attempt to initiate a beneficiary change.
• Therefore, material issues of fact existed concerning: 1) who was Shelia McClendon's rightful beneficiary; and 2) who was entitled to the October 15, 2010 payment.

Judgment - Louisiana District Court Judge Kay Bates:

• Dismissed MetLife's concursus with prejudice and costs payable by MetLife.
• Denied Travelers' exception of failure to join indispensable parties with costs payable by Travelers.
• Granted Stone Street's motion for summary judgment with costs payable by MetLife.
• Granted Stone Street's motion to dismiss the other defendants without prejudice.
• Ordered MetLife to remit the October 15, 2010 payment to Stone Street within 15 days of the mailing of the judgment.

Judge Bates' Reasoning

• In the 2007 transfer proceeding, Shelia McClendon and Stone Street were parties, and MetLife and Travelers were properly notified and served with the petition and order.
• Under the Louisiana structured settlement protection act, Shelia McClendon was clearly entitled to sell the October 15, 2010 payment.
• The 2007 transfer order was valid, final, and not subject to appeal as all delays had passed.
• MetLife's claims against Stone Street arose out of the same subject matter as the 2007 transfer proceeding.
• MetLife's issues existed when the 2007 transfer order was signed and neither MetLife nor Travelers objected at that time.
• Therefore, MetLife's concursus is barred by res judicata.
• Neither MetLife, nor Travelers, nor any of the other claimants had any continuing interest in the October 15, 2010 payment.
• Because Stone Street established it was entitled to the October 15, 2010 payment as a matter of law, no genuine issue of material fact remained.

Additional Resources

• For a 2009 California appellate case addressing the finality of structured settlement transfer orders, see Henderson v. Ramos reported in "Fresno County Factoring Cases" - Part 1 and Part 2 .
• For S2KM's complete reporting about the structured settlement secondary market, see the structured settlement wiki.
• For a more comprehensive and updated analysis of structured settlement transfers, see Chapter 16 of "Structured Settlements and Periodic Payment Judgements" (S2P2J).

NASP 2012 Annual Conference - 3

The National Association of Settlement Purchasers (NASP) hosted its 8th annual educational conference October 16-19, 2012 in New Orleans with a record number of attendees consisting of transfer company executives and staff, in-house and outside legal counsel, investors, service providers and, for the first time, primary market participants.

NASP President Matthew Bracy set the conference theme by challenging speakers and attendees to continue to improve the structured settlement secondary market: "We have some of the brightest minds in the country assembled here to discuss the status of this industry and how to improve what we do. And, as is our habit, we have invited people who might have critical things to say about how we are doing and what we can do better. Improvement can only come from the honest and sometimes harsh assessment of outside critics."

One of those critics was keynote speaker Jan Schlictmann who called out "cash now" advertizing as a "primitive denomination". Schlichtmann's broader message echoed Bracy's theme of bettering oneself through self-criticism and the need for higher industry goals. "It is not just who we serve that matters, but how we serve", Schlictmann stated. Schlictmann reviewed his client experience with structured settlements and acknowledged a personal paradigm shift resulting from recent industry developments including low interest rates and the ELNY liquidation.

The Judges Panel has become a regular and popular feature of NASP educational conferences. Moderator Earl Nesbitt encouraged this year's panel members, Judge Patricia Wise, Chancery Court Judge, Hinds County, Mississippi and Judge Dean Lum, Superior Court for King County, Washington, to share their concerns about structured settlement transfers and their advice for transfer company representatives and attorneys. Selected highlights:

• Judge Wise: "We (Mississippi judges) have a good relationship with transfer attorneys. I don't look at transfers as inherently good or bad. I don't have any preconceived notion whether to approve or disapprove."
• Judge Lum: "It is not my job to talk someone into or out of a transfer. Judges, however, think about the worst case scenario - a recipient who has just turned 18. The closer to this worst case scenario, the more scrutiny a person receives."
• Judge Wise: "What judges are looking for is credibility and what structured settlement payees say they will do with the funds. We do focus on whether prior transfers have occurred. Also, the older the payee, the more likely they have the ability to make a good decision."
• Judge Lum: "Attorneys should prepare the structured settlement payee for his or her court appearance - how to dress and behave; how the best interest test applies; what the impact will be on dependents."
• Judge Lum: "We have a saying in King County: 'there is no party like ex parte'. In unopposed cases, people try to run things by you. Its kind of like the wild west. In unopposed cases, it is important for attorneys to go the extra mile. Your reputation matters. There are two degrees of separation in the legal profession."

Another regular and popular feature of NASP educational conferences are the small group break out sessions. The individual breakout sessions S2KM attended addressed participants' state-specific experience with:

• Court Approval Issues - judicial negotiation of discount rates; the meaning of full disclosure; statutory history of the "best interest" test; independent professional advisor qualifications and fees; transfer application exhibits; and the importance of judicial education.
• Underwriting Issues - annuity provider transfer requirements; "applicable state laws" requirements; judgment creditor issues including bankruptcy and child support; annuity provider administrative fees; and problems related to incompetent payees, identity theft and relatives or friends coercing payees.

The NASP conference doubled down on underwriting issues with an informative presentation about "Life Contingent Transactions" by NASP President-elect Patricia LaBorde. LaBorde, who also served as Chairperson for the 2012 NASP conference and was credited with upgrading the NASP website, discussed the two paths for funding life contingent transactions:

• Purchasing a life insurance policy to hedge against the risk of an early annuitant death; or
• Evaluating the risk and pricing the risk into the transaction.

Jack Kelly, a federal lobbyist who assisted NASP in securing enactment of IRC 5891 in 2002, provided a Legislative Update. Kelly summarized NASP's 2012 involvement with legislative proposals in Vermont, Minnesota and New Hampshire. Vermont, in 2012, became the 48th state to enact a structured settlement protection statute. The new Vermont statute is generally based upon the NCOIL Model Act with some variations related to independent professional advisors, notice requirements for certain state agencies and the required court appearance by the structured settlement payee.

Earl Nesbitt, NASP's Executive Director and General Counsel, presented the 2012 Litigation Update. Among several important court decisions, Nesbitt highlighted the Stone Street v. McClendon case which he characterized as an "important victory" for NASP and the structured settlement industry in general. In McClendon, a Louisiana state court found that Travelers Insurance and MetLife had no grounds for withholding payments following a valid transfer of payment rights pursuant to the Louisiana structured settlement protection statute. The court ordered MetLife to pay interest from the date the payments were originally due. Note: S2KM will publish a more detailed review of the McClendon case in a subsequent blog post.

Attorney Joseph Feltes' 2012 NASP presentation titled "Privacy Issues in Structured Settlement Transactions (Part 2)" supplemented his 2011 NASP presentation on the use and disclosure of confidential information by transfer companies. This year, Feltes discussed privacy issues related to electronic and digital communications, especially Internet-based communications. Among other issues, Feltes highlighted: cyber-bullying; the increase in defamation cases; the blurred boundaries between public and private communications; FTC blog rules requiring disclosures of paid endorsements; social media policy and practices; limits on constitutional rights; cloud technology issues; and the importance of company Internet policies.

In his "Primary Market Update", Mark Wahlstrom emphasized why the primary and secondary structured settlement markets are part of the same business. He called the primary market "the secondary market's best friend" despite the primary market's criticism of, and "needless obstacles" for, the secondary market. As one example of "needless obstacles", Wahlstrom mentioned Chartis for aggressively promoting an anti-factoring pledge among its structured settlement brokers.

Wahlstrom described 2012 as "another bad year for the primary market". He characterized declines in primary market annuity premium as a "negative trend that will eventually impact the secondary market" and identified the following causes:

• The structured settlement is an insular, closed community with aging leadership and a shrinking sales force.
• Structured settlement annuity providers, and most brokers, lack marketing and innovation skills.
• Primary market participants are intimidated by the Internet.
• Instead of offering customer solutions, the primary market continues to sell a single product.
• With historically low interest rates, that product produces a zero return when you consider inflation.
• The primary market has not responded strategically to tort reform and increasing competition from other professionals.
• By continuing their "factoring wars", the primary market has missed opportunities to cooperate with the secondary market.
• The ELNY liquidation means the primary market can no longer claim all structured settlement recipients have received 100% of their payments.

Kira Brereton, an attorney who specializes in asset-backed securitizations, provided a comprehensive introduction to "Financing Structured Settlements". Her presentation: reviewed a typical transaction structure; provided a market overview including legal and regulatory developments; summarized rating agency considerations; discussed split payment issues; addressed the creditworthiness of insurers backing the collateral pools; considered bankruptcy and receivership issues; and highlighted relevant securities laws and regulations including the Investment Company Act of 1940, private placements, Dodd-Frank and Regulation AB 2.0.

Elizabeth Yingling, a securities law expert, discussed "Implications of Federal and States Securities Laws on Structured Settlements". She addressed fundamental issues such as: What statutes govern securities? What is a "security"? What is an "investment contract"? and How do promotional materials impact the analysis? In addition, Yingling offered a detailed analysis of the "Howey test" and provided practical tips.

Alexander Hamilton Award

NASP also named S2KM blog author, Patrick Hindert, as the 2012 recipient of its Alexander Hamilton Award. NASP has bestowed this award five times "to distinguished individuals who have supported and defended the right to free alienability of property rights. This right is the corner stone of NASP and the foundation of the structured settlement factoring business." Previous Alexander Hamilton Award recipients:

• State Senator Alan Sanborn of Michigan.
• U.S. Representative Eric Cantor of Virginia.
• State Representative Van Tran of California.
• Earl S. Nesbitt, Esq., of Texas.

In announcing the 2012 award, NASP President Matt Bracy stated: "Hindert was chosen to receive this award based upon his longstanding support of the factoring business and option. In particular, his position as a founder and leader in the primary structured settlement business, who early on recognized the legitimacy and value of the secondary market, led to this honor."

For complete S2KM reporting on NASP conferences plus other structured settlement and settlement planning conferences, see the structured settlement wiki.

ELNY Qualified Assignments

Do qualified assignments extinguish the liability of defendants and/or liability insurers for shortfall payments resulting from the liquidation of Executive Life of New York (ELNY)?

That issue is highlighted by a Motion filed June 14, 2012 on behalf of several liability insurers ("Motion") asking Judge John Gallasso to "clarify and/or correct" his April 16, 2012 ELNY Memorandum Decision. For additional background, see S2KM's blog post "ELNY Shortfall Payments".

Judge Galasso's ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

The Motion attempts to distinguish two types of structured settlement funding alternatives ("buy and hold" vs. qualified assignments). "Buy and hold" annuities, according to the Motion, "are those whereby the underlying insurer retained, or held the liability for future payments, and funded that liability through its ownership of a qualified funding asset, or annuity."

In contrast, the Motion states, "where a structured settlement includes a qualified assignment, the defendant and its liability insurer are fully released from future liability - which liability is assumed by the assignee, here, First Executive Corporation." (emphasis added). Of course, one of the problems for all ELNY stakeholders is that First Executive Corporation ceased to exist in 1991.

Regardless of whether Judge Galasso grants the liability insurers' motion, the legal rights and responsibilities of ELNY qualified assignments represents a critical issue that may subsequently be litigated. The Motion suggests that all qualified assignments release all defendants and liability insurers from future liability for promised periodic payments and that annuity ownership determines liability.

Those "suggestions" and/or "assumptions" are not necessarily or universally true. Legal rights and responsibilities resulting from attempts to create qualified assignments must be determined on a case by case basis for multiple reasons:

• IRC section 130, which defines a "qualified assignment", does not address whether the assignor's duty is discharged as a result of a qualified assignment.
• IRC section 130 does include requirements which must be met to successfully create a qualified assignment.
• The Monarch Capital case demonstrates some judges apply "creative" legal analysis to protect structured settlement payees following the bankruptcy of a qualified structured settlement assignee.

See "Structured Settlements and Periodic Payment Judgments" (S2P2J) Section 3.05[9] for information about life insurance insolvencies including ELNY; Section 3.06 for information about qualified assignments; and Section 5.04 which addresses the risk of non-payment to a structured settlement payee.

See the structured settlement wiki for S2KM's complete and continuing reporting about Executive Life of New York,

ELNY Shortfall Payments

Who has responsibility to make up the difference in annuity shortfall payments under the Executive Life of New York (ELNY) Liquidation Plan approved by New York State Supreme Court Judge John Galasso on April 16, 2012?

Attorneys representing several liability insurers who previously purchased ELNY structured settlement annuities have filed a Motion asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as the Memorandum Decision "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities.

The ELNY Memorandum Decision states in relevant part: "certain insurance companies such as Travelers, the Fireman's Fund Companies and Hartford have assured the Court that they will make up the difference to those identified shortfall payees for any settlement obligation where they purchased an ELNY annuity on behalf of an injured party."

In their June 14, 2012 Motion, attorneys Seiger Gfeller Laurie, representing those liability insurers, as well as Jefferson Insurance Company, Allianz Global Risks US Insurance Company dba Allianz Global Corporate and Specialty North America, John Hancock Property and Casualty Insurance Company and John Hancock Indemnity Company, ask the Court to "amend its decision to omit what the Court likely intended as an aside, or background, which is not material to the Court's approval" of the ELNY Liquidation Plan.

The Motion attempts to distinguish two types of structured settlement funding alternatives: "buy and hold" vs. qualified assignments. The Motion maintains that "at no time" did the liability insurers "undertake liability following qualified assignments - liability was extinguished pursuant to the qualified assignment arrangements."

The Motion further attempts to clarify statements made during the ELNY Liquidation hearings by Fireman's Fund attorney Peter Vodola. According to the Motion, Vodola's promise on behalf of Fireman's Fund that structured settlement shortfall payees "will receive a hundred percent of their benefits regardless of what happens here" was specifically limited to ELNY annuitants "who are entitled to payments under annuities owned by Fireman's Fund."

At least one ELNY shortfall victim has already requested that Fireman's Fund make up the difference on a structured settlement funded with a qualified assignment.  The Motion highlights as an Exhibit an April 25, 2012 letter written by attorney Edward Stone to Fireman's Fund's Chief Counsel on behalf of ELNY shortfall victim Jeanice Dolan.

Stone's letter states that Dolan anticipates a 47 percent payment reduction under the ELNY Liquidation Plan resulting in a present value loss of $815,162.62. After quoting the Memorandum Decision language the Motion seeks to "clarify and/or correct", Stone's letter requests Fireman's Fund to compensate Dolan for her ELNY shortfall.

Stone has indicated to S2KM he plans to file opposition papers and a cross motion.

A copy of the Motion to Clarify and/or Correct the Court's Memorandum Decision is posted on the structured settlement wiki.

ELNY Losses by State

The anticipated shortfalls resulting from the liquidation of Executive Life of New York (ELNY) are expected to total $920,641,977 on a present value basis - assuming promised state guarantee association payments and enhancements but prior to any possible payments from the ELNY Hardship Fund and/or from structured settlement defendants who negotiated and promised to pay future periodic payments funded with ELNY annuities.

To make matters worse for anticipated ELNY shortfall payees, most of whom are personal injury victims, the entire anticipated $920,641,977 shortfall will be allocated among approximately 15 percent of the ELNY annuitants - an average present value loss of more than $600,000 per annuitant. The remaining ELNY annuitants are not expected to experience any reduction in their payments.

How are the anticipated ELNY shortfall distributed by state based upon the current residence of ELNY shortfall payees?

Daniel Hindert, co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J), provided a state-specific analysis of total anticipated ELNY shortfall losses as part of his presentation ("How the ELNY Liquidation Impacts Settlement Planners") at the Society of Settlement Planners (SSP) 2012 Annual Meeting. Hindert based his SSP comments on a spreadsheet analysis of Schedule 1.15, now posted on the structured settlement wiki, which was compiled by attorney Edward Stone and his audit team.

According to Stone's spreadsheet analysis, here are the 10 states whose residents will suffer the largest cumulative ELNY losses:

1. California

• $343,098,363 - Annuity present value
• $173,929,372 - Benefits cut
• 51% - Percentage cut

2. New York

• $217,671,882 - Annuity present value
• $94,996,566 - Benefits cut
• 44% - Percentage cut

3. Michigan

• $191,758,830 - Annuity present value
• $91,966,861 - Benefits cut
• 48% - Percentage cut

4. Florida

• $176,892,255 - Annuity present value
• $89,379,868 - Benefits cut
• 51% - Percentage cut

5. New Jersey

• $157,708,648 - Annuity present value
• $69,892,957 - Benefits cut
• 44% - Percentage cut

6. Texas

• $107,503,620 - Annuity present value
• $44,750,691 - Benefits cut
• 42% - Percentage cut

7. Pennsylvania

• $76,571,781 - Annuity present value
• $32,737,043 - Benefits cut
• 43% - Percentage cut

8. Ohio

• $74,494,174 - Annuity present value
• $34,796,854 - Benefits cut
• 47% - Percentage cut

9. Washington

• $53,108,488 - Annuity present value
• $26,861,644 - Benefits cut
• 51% - Percentage cut

10. Georgia

• $44,179,076 - Annuity present value
• $20,097,401 - Benefits cut
• 45% - Percentage cut