Beyond Structured Settlements

SSP President Responds to AIG Class Action Lawsuit

Based upon the history of the Society of Settlement Planners (SSP), and the role of Richard Risk (an SSP founder and member) as one of the plaintiff attorneys, structured settlement industry participants might assume that SSP, as an association, supports the recently filed AIG Class Action Lawsuit. When asked by S2KM, however, SSP President Joe Tombs provided an unexpected response. Tombs' detailed response appears below. For context, however, S2KM first provides a brief background summary plus a summary of the AIG Class Action allegations.

Historic Industry Divisions

Although some structured settlement industry pioneers, including the late David Ringler, the first President of the National Structured Settlement Trade Association (NSSTA) envisioned NSSTA as "a place where everyone and anyone [could] sit down with each other and discuss the issues and viewpoints regardless of beliefs", that utopian environment never fully materialized as multiple divisions developed within both the structured settlement market and the larger personal injury settlement consulting market. Examples include:

• Plaintiff vs. defense structured settlement brokers.
• Primary vs. secondary structured settlement markets.
• Structured settlements vs. settlement planning.
• Settlement annuities vs. settlement trusts.
• Settlement planning vs. special needs planning.

Among other results, the structured settlement industry now has both a primary and a secondary market and structured settlement industry participants with alternative issues, viewpoints, beliefs and educational interests have formed two national associations in addition to NSSTA: the National Association of Settlement Purchasers (NASP) and SSP. Although numerous and divisive issues have created serious political conflicts among these associations historically, leaders of all three associations have increasingly recognized and addressed the problems created by these conflicts.

During his three successive one year terms as SSP President, Immediate Past President Neil Johnson served as a powerful advocate for structured settlement industry unity. For example, as a guest speaker during NSSTA's 2014 Fall Conference, Johnson condemned lack of structured settlement industry unity as "a drain - a drain on financial resources ... a drain on productivity ... a drain on our public image ... a drain on physical and emotional health. Lack of unity diverts attention from productive projects. It always focuses attention on the negative, never on the positive. Lack of industry unity shows no partiality or favoritism for either NSSTA or SSP."

At the same time, Johnson proposed a "solution" for achieving structured settlement industry unity including these core elements:

• Recognizing and accepting product and professional diversity.
• Identifying and pursuing permanent shared interests without necessarily agreeing on all issues.
• Engaging all perspectives to discuss industry problems and issues.
• Promoting and practicing settlement planning with the structured settlement annuity as a core strategic product.

Among other highlights and milestones, the Society of Settlement Planners (SSP) 2016 Annual Conference transferred association leadership from Johnson to Joe Tombs with Tombs promising to maintain Johnson's leadership direction, which focused on structured settlement "industry unity", and also, in a dramatic policy shift, to "pull SSP back completely from structured settlement politics."

AIG Class Action Lawsuit

Earlier this month, three plaintiff attorneys, including SSP founder and current SSP member Richard Risk, filed a Class Action Complaint in United States District Court District of Massachusetts. Among its allegations, the Class Action Lawsuit accuses Defendant American International Group, Inc. (AIG), a NSSTA member, and several of its affiliates of: 1) RICO violations; 2) fraudulent conduct; and 3) unjust enrichment.

Although not named as Defendants, the Class Action Complaint also identifies multiple structured settlement brokers (most, if not all, members of NSSTA) who, according to the Complaint, are "known as 'Agency Partners' [and] have been on the AIG Approved Broker List within periods relevant to this Complaint, and are part of the racketeering enterprise at issue..."

Plaintiffs characterize the primary AIG business practice they allege is illegal as a "short-changing scheme" which they describe as follows: "Defendants’ practice to fail to disclose to Plaintiffs and other members of the Class numerous material facts concerning how AIG conducted its Structured Settlement Program including, among other things, that:

• "Defendants participated in a short-changing scheme designed to allow them to recover the cost of their own structured settlement brokers, by deducting the brokers’ fees from that portion of the settlement that the settling parties had previously agreed would be one hundred percent (100%) invested in future payments;
• "Defendants accomplished this “short-change” by bundling the amount of the broker’s commission—namely, four percent (4%)—into the illustrated annuity cost;
• "Even when the broker’s fee was not 4%, AIG would keep for itself whatever portion of the commission was not paid to the broker; and,
• "As a result of the scheme undertaken by Defendants, the actual financial value of the settlement was materially lower than the value represented to injury claimants since four percent (4%) of the full amount of cash to be invested in annuity was, in fact, diverted by AIG to pay for its own Approved Brokers and In-House Brokers."

Other Plaintiff allegations:

• "AIG uses a structured settlement annuity software and quoting system that is represented by it and the Approved Brokers (and In-House Brokers) as illustrating future projected payments based on the amount of funds previously agreed between the settling parties to be invested in the annuity. But this representation is not true, because it does not reflect the commission that is paid to the broker, which is hidden in the cost or present value of the annuity communicated to the claimant or claimant’s attorney."
• "In fact, AIG trains its employees in the Structured Settlement Program, as well as its Approved Brokers and In-House Brokers, not to disclose to claimants (or their attorneys when retained) the fact that the broker’s fee is bundled into the represented annuity investment cost."
• "AIG’s employees, its Approved Brokers, and In-House Brokers are also trained to conceal this scheme, in the event of claimant inquiries about the payment of commissions, by avoiding a direct answer to the question or, sometimes, by indicating that payment of annuity premiums from the defendant’s AIG-affiliated liability insurer to American General avoids commission as a cost to claimant."
• "The AIG Approved Brokers are also required to fund periodic payments with an American General or other AIG-related annuity, if at all possible. This requirement is called the 'first and last right of refusal'.”

The Complaint includes a footnote #1 (page 1) explaining/alleging that: 1) most structured settlement "producers" are inappropriately referred to as "brokers" when in fact they are "agents" appointed by life insurance companies; 2) Use of the term "broker" is misleading and communicates a false duty of loyalty to the consumer/injury victim; 3) although a producer may hold a life agent's license, he/she cannot bind the life company when writing an annuity application; and 4) this distinction becomes important for defining a racketeering "enterprise" under the RICO Act when considering the relationship of structured settlement producers to issuers.

SSP President Joe Tombs Responds

Based upon the political history of the SSP, and role of Risk as plaintiff attorney, the AIG Class Action Lawsuit appears to present a significant test for SSP - especially in light of Immediate Past President Neil Johnson's advocacy for structured settlement unity and current President Joe Tombs' promise for SSP to avoid structured settlement politics. When asked by S2KM whether or not SSP supports the AIG Class Action Lawsuit, however, Tombs provided the following response (with S2KM emphasis):

• "We are neutral – SSP has no position at all and we will not take one in the future. A year ago, we decided to abandon taking “political” positions. Advocacy for victim’s financial rights had been a central mission of the SSP since its founding and so it was hard to let that go. A pillar of the “old” SSP’s advocacy mission was opposition to many of the features of some of the casualty company programs. Therefore, many people are confused that we don’t have a dog in this fight. Everyone expects the SSP to rush out and take its normal spot in the circular firing squad and start blastng away or at least provide the forum for a mob to form. I’m sorry to disappoint people but we are neutral - on the AIG Class Action Lawsuit or any political issue such as single claimant 468B Qualified Settlement Funds. Individual SSP members have the option to support or oppose specific political issues. SSP, as an association, however, will not. Our priorities are growth and the promotion of professionalism in the practice of settlement planning - both of which we are accomplishing successfully.
• "Dick Risk is a founding member and we once honored him with a lifetime achievement award at which time we granted him lifelong membership. The SSP makes no attempts to muzzle or restrain our members. They are free to think, say, or do what they wish. We used to carefully guard our roll and membership was open only to plaintiff-only structured settlement brokers. Today, membership is open to anyone interested in comprehensive settlement planning as long as they are not engaged in factoring. Our membership includes a diverse group of structure brokers from most of the larger groups, trust company officers, financial planners, special needs trust attorneys, plaintiff attorneys and many others.
• "Separate from my role as President of SSP, I have my own opinion about the AIG Class Action Lawsuit. Part of my opinion is based upon a lunch I was honored to have in 1997 or 1998 with Hank Greenberg (then CEO of AIG) and Ernie Stempel (then President of North American Operations for AIG Life & Annuity). I remember Mr. Greenberg talking about a huge high-rise building with several floors full of nothing but lawyers. He then informed me AIG spent millions on outside counsel and had other AIG lawyers scattered across the globe. In my opinion, if AIG is right, they are more than adequately equipped to handle this case without help from me or anyone else.
• "Another part of my personal opinion is that I hate structured settlement politics and I am not smart enough or educated enough to know which side is right in this lawsuit. It is a fact, however, that many of my clients cannot chose from a full selection of structured settlement products or product providers - and another fact that my market quotes include fewer companies than they did a few years ago. I wish I could still quote Hartford, for example, but we know what happened after their class action settlement. So, although I can see the AIG battle lines forming, I don't have time for the fight myself. I have an appointment with a widow this afternoon and I only wish I could offer her and her freshly fatherless children a greater assortment of structured settlement options. And if a lawsuit against AIG should ever cause American General to withdraw from the structured settlement market, I would have a still shorter list of companies to offer my clients."

Joe Tombs is currently completing the first year of a two-year term as SSP President. SSP's 2017 Annual Educational Conference is scheduled for March 1-3 in Las Vegas. As Tombs is preparing for this event, he agreed to answer a few additional S2KM questions about SSP's current status and future direction. That interview will appear in a follow-up S2KM blog post.

PFAC 2016 Annual Conference

Fiduciary standards, as they relate to product suitability specifically, and to business practices generally, can be expected to become more significant factors in product sales for the traditional structured settlement market as it continues to expand into, and interact with, the larger, more complex personal injury settlement planning market.

Multiple developments support this prediction. They include the expanding role of fiduciaries as settlement planning stakeholders and decision makers. In that context, fiduciaries most often serve as trustees, but also as guardians, conservators and/or executors.

Any person acting in a fiduciary capacity has an obligation to act in the "best interest" of another party. A fiduciary duty requires a high standard of honesty and full disclosure including any potential conflicts of interests. A fiduciary must not obtain a personal benefit at the expense of his or her client.

Regardless of who sells/provides a financial or insurance product to a settlement trust, and what independent duties that product provider might have to a trust beneficiary (i.e. injury victim), the settlement trustee's own fiduciary duties arguably should require the settlement trustee to evaluate specific trust products, trust product providers and their related business conduct utilizing that same fiduciary standard which requires honesty, full disclosure, and best interest.

In personal injury settlement planning, several types of trusts are utilized - any of which may be funded with, or utilized to fund, structured settlements: qualified government bond trusts; reversionary grantor trusts; settlement preservation trusts; special needs trusts including pooled trusts; Medicare set-aside trusts; and IRC 468B Settlement Funds.

As one related result of the expanding use of settlement trusts, a unique settlement trust market is evolving in the United States characterized by:

• Specialized knowledge about government benefits required to serve "special needs" beneficiaries and their families.
• Willingness to consider structured settlements as trust assets and knowledge related thereto.
• Willingness to accept corpus amounts less than minimum requirements of traditional corporate trustees.
• Professional individual trustees as well as corporate trustees.

To S2KM's knowledge there does not yet exist any national association of settlement trustees. Instead, settlement trustees participate as members, speakers, sponsors and/or exhibitors at various structured settlement, settlement planning and special needs national conferences such as: NSSTA, SSP, NAMSAP, NAELA, ASNP, SN Alliance, Stetson SNT, University of Texas SNT among others.

PFAC Conference

There exist, however, state fiduciary associations the largest of which is the Professional Fiduciary Association of California (PFAC). To learn more about fiduciaries and fiduciary standards, from a structured settlement perspective, S2KM attended the 21st Annual PFAC Conference, which occurred June 1-4, 2016 in Indian Wells, California and featured 74 exhibitors, more than 600 attendees plus four days of speakers and breakout sessions covering a multitude of topics.

PFAC is an affiliate of the National Guardianship Association (NGA). California Court Rules define education and qualification requirements to serve as guardian, conservator or trustee in California. Attorneys and CPAs with current, active licenses to practice in California automatically qualify. To retain their license, professional fiduciaries must also meet continuing education requirements. Approximately 680 professional fiduciaries are currently licensed in California.

Not all professional fiduciaries, of course, work in personal injury settlement planning. In fact, relatively few of the PFAC Conference presentations and/or exhibits were even relevant to structured settlement and/or settlement planning professionals.

Uniform Prudent Investor Act

Perhaps the most important and relevant lessons S2KM learned during the PFAC conference concerned the duties of care and the investment considerations imposed upon trustees by the Uniform Prudent Investor Act (UPIA). Understanding these UPIA trustee duties and investment considerations will almost certainly help structured settlement and settlement planning professionals improve their sales success when personal injury cases include settlement trusts.

The UPIA , which was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1994, has been enacted, with some state-specific modifications, by 44 states and the District of Columbia. In those states, the UPIA, external to the trust document itself, serves as the most important reference defining a trustee's investment responsibilities.

Prior to the UPIA, courts applied the "prudent man rule" when evaluating trustee investment performance. The UPIA, by contrast, adopts "modern portfolio theory" as a different and more appropriate standard for trustees. Compared with the prudent man rule, modern portfolio theory promotes a holistic view of trust assets by focusing on the total return generated by a trust as opposed to viewing a trust's income and principal separately. This newer standard allows for greater investment diversification so long as the risk/reward ratio matches the purposes and terms of the trust instrument.

In his PFAC conference presentation titled "A Trustee's Duty of Care Under the UPIA", Josh Yager addressed how a trustee can demonstrate prudence and good faith, and thereby avoid a lawsuit, by fulfilling six trustee duties required under the UPIA:

• Duty to have a plan.
• Duty to monitor risk/return.
• Duty to diversify.
• Duty to pay only fair fees.
• Duty to prudently delegate.
• Duty to monitor agent's activities.

Yager never mentioned structured settlements or personal injury settlement planning during his discussion. Within the context of his presentation, however, here are some follow-up questions worth considering at future educational conferences:

• How should life contingent structured settlements be compared with other investment alternatives when trustees calculate rates of return needed to accomplish trust objectives?
• How can structured settlement and settlement planning professionals better anticipate and address trustee risk objections that many structured settlements include too much concentration, as well as a lack of liquidity?
• What are "asset classes" - and should structured settlements be promoted/evaluated as a distinct and necessary "asset class" within settlement trusts?
• Assuming trustees have a duty to evaluate compensation arrangements related to trust assets, should structured settlement professionals be required to disclose their case-specific compensation, including compensation sharing agreements? To whom? When?
• How do "industry standard" four (4%) percent structured settlement commissions compare with commissions and fees charged by other financial product providers? Are these commissions "fair" or "excessive"?
• Why was a given structured settlement design and/or settlement professional selected in a specific case? Does he/she possess appropriate licenses and credentials? Is he/she subject to any undisclosed conflicts of interest? Has he/she been the subject of any prior lawsuits or client complaints? Does he/she understand the trustee's duties under the UPIA? Has he/she accomplished what they promised?
• What legal options does a trustee have when confronted with a structured settlement or structured settlement consultant that the trustee believes violates a fiduciary standard or duty for a specific settlement trust under the UPIA?

Although not specifically discussed in any of the PFAC presentations S2KM attended, Section 2(c) of the UPIA identifies eight additional factors a trustee should consider when making any investment:

• General economic conditions.
• The possible effect of inflation or deflation.
• The expected tax consequences of investment decisions or strategies.
• The role that each investment or course of action plays within the overall trust portfolio.
• The expected total return from income and appreciation of capital.
• Other resources of the beneficiaries.
• Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
• An asset’s relationship of special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

When settlement trusts play a role in a personal injury settlement, structured settlement and settlement planning professionals should be prepared to address these factors as part of their sales strategy. Significant for structured settlements, the UPIA's list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a settlement planning perspective, injuries or diseases that create special needs or reduce an individual's normal life expectancy arguably should receive important consideration when a trustee makes investment decisions.

Comparative Business Standards

How do current business standards of structured settlement and settlement planning professionals measure up to the "best interest" standards required of trustees and other fiduciaries? Although various members of both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) are appointed as independent agents representing many of the same structured settlement annuity providers, the two associations address the issue of product suitability differently.

NSSTA, whose members include defense and plaintiff brokers, has adopted a "Statement of Ethics and Professional Responsibility" (Code of Ethics) with "guiding principles" for its members and member organizations. The Preamble provides: "Implicit in the acceptance of this Statement is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services." Although Principle VI directs NSSTA members to:"…comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided", NSSTA's Code of Ethics does not specifically address either fiduciary or product suitability standards.

By comparison with NSSTA, SSP's Mission Statement provides, in relevant part, that "[m]embership is open to all individuals with a genuine interest in the profession of settlement planning." However, "[c]andidates for membership must attest to their .......striving to ensure plans are consummated to a fiduciary standard." (emphasis added). Unlike NSSTA, almost all of SSP's members represent injury victims and their families and attorneys as opposed to defendants and liability insurers. Many SSP members also sell financial products as well as structured settlement annuities.

Plaintiff structured settlement brokers generally, and SSP members more specifically, regularly face direct competition from non-structured settlement financial advisors. Currently some financial advisors (Certified Financial Planners and Investment Advisors) are held to a fiduciary ("best interest") standard while other financial advisors (broker-dealers) provide services under a “suitability standard” which requires only a reasonable belief that any recommended product is suitable for a client.

Consumer protection concerns appear to be favoring broader application of the fiduciary standard. Acting under authority of Dodd-Frank, the SEC submitted a "fiduciary standard" study to Congress in 2011 recommending the adoption of a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers. Congress has not yet adopted this uniform standard. More recently the U.S. Department of Labor has proposed a rule requiring fiduciary accountability for all investment advice related to retirement assets.

CONCLUSION

For most of its history, the primary structured settlement market has developed its business standards and practices based upon a "claim management" model which limits the scope of its representatives' duties of care toward injury victims - the ultimate customers for its products. Within the larger "settlement planning" market, which encompasses structured settlements, fiduciaries and other participating professionals are superimposing a more demanding "best interest" duty of care. To successfully compete in the settlement planning market place, therefore, structured settlement professionals need to acquire a better understanding of fiduciary and UPIA duties and requirements - and learn to re-shape their product sales accordingly.

SSP/ASNP 2016 Annual Conferences

Joint overlapping educational conferences hosted by the Society of Settlement Planners (SSP) and the Academy of Special Needs Planners (ASNP) March 9-12, 2016 in Tucson, Arizona provided S2KM and other attendees an opportunity to evaluate the current status of structured settlements within the larger, more complex personal injury settlement planning market. The SSP conference also transferred association leadership from Neil Johnson to Joe Tombs with Tombs promising to maintain Johnson's leadership direction and to "pull SSP back completely from structured settlement politics."

Among S2KM's conference conclusions: Many personal injury settlement planners characterize structured settlements as a strategic product, and recognize new marketing opportunities for structured settlements resulting from recent legislation such as the Affordable Care Act and the ABLE Act . The traditional and collective structured settlement industry should similarly embrace an important opportunity to grow its premium volume in this larger, more complex, more dynamic market than it has in the past by more effectively:

• Analyzing the evolving personal injury settlement and special needs planning markets;
• Addressing concerns and issues about structured settlements identified by plaintiff and special needs attorneys; and
• Re-positioning structured settlements from a single product sale to the core component of an integrated settlement solution.

SSP TOPICS AND SPEAKERS

• Introduction - Neil Johnson
• Comprehensive Settlement Planning - Joe Tombs; Charly Schell; Joe DiGangi; Tim Denehy
• Rules that Apply to Insurance Brokers - David Childers; Jeremy Babener
• The Grillo Case - Craig and Josephine (Grillo) Sullivan
• The Mraz Case - Mark Wilson and Patrick Hindert
• Sudden Money - John Darer
• Alternative Products - Martha Hunt; John Arendt; James Creel; Chris Shumate; Michael Upchurch; Rick Miller.
• Medicare Compliance, Entitlement Planning and Lien Resolution Issues - Anthony Prieto
• Joint ASNP/SSP Session - Structured Settlements and Special Needs Trusts - Frank Johns; Joe Tombs; Jack Meligan.
• ELNY and Factoring Industry Lawsuits - Edward Stone
• Small Business Legal Strategies - Paul Valentine
• Missed Tax Opportunities at Settlement - Jeremy Babener
• Foreign Assignment Companies - Jeremy Babener
• NSSTA's Survey of Plaintiff Attorneys - Patrick Hindert
• SSP President's Statement - Joe Tombs

ASNP TOPICS AND SPEAKERS

• ABCs of Public Benefits - David Lillesand
• ABCs of Special Needs and Settlement Planning - Kevin Urbatsch and Michele Fuller
• Keynote: "Raising Special Kids" - Maureen Beyers & Michael Farrell
• SSI Update - David Lillesand
• SNTs and Retirement Benefits - Melanie Marmion
• Recent Trends in Special Needs Planning - Blaine Brockman
• Joint ASNP/SSP Session - Structured Settlements and Special Needs Trusts - Frank Johns; Joe Tombs; Jack Meligan.
• "Tricky Issues" in SNT Administration - Travis Finchum; Herb Thomas and Daniel Cutter.
• Ask the Experts Panel - Kevin Urbatsch (Moderator)

DISCLAIMERS: Because of overlapping conference schedules, S2KM was able to attend only three ASNP presentations but did receive and has reviewed all ASNP conference handouts. S2KM's Managing Director, Patrick Hindert, testified as an expert witness in the Mraz case concerning structured settlement and QSF issues on behalf of Adriana and Addison Mraz.

S2KM COMMENTS AND RECOMMENDATIONS

SSP Leadership

• In his closing message as SSP President, Neil Johnson continued to emphasize several positive themes including industry unification and increasing collaboration between SSP and NSSTA. Among Johnson's proposed solutions for industry unity: 1) recognizing and accepting product diversity; 2) focusing on client and customer service; 3) identifying and pursuing permanent shared interests without necessarily agreeing on all issues; 4) engaging all perspectives to discuss industry problems and issues; 5) improving relationships among stakeholder groups; 6) promoting and practicing settlement planning not settlement selling.
• Newly elected SSP President Joe Tombs promised to "maintain the direction of Neil Johnson's leadership and even accelerate it in every way possible." He identified the following "main themes" for SSP going forward: "to pull completely back from structured settlement “politics”, redouble our efforts at educating our members and promoting a Code of Ethics, and a membership push to quadruple our high water mark for number of members. We intend to actively encourage our members who sell structured settlement to join and to become actively engaged in NSSTA. We will continue to offer a hand of friendship and cooperation in their agenda although we will be decidedly apolitical. We will also make no attempt no manage our member’s opinions or their expressions of their opinions."
• As for structured settlements, Tombs stated: "we intend to emphasize comprehensive settlement planning which will have the natural result of de-emphasizing structured settlement annuities to some extent as we move alternatives including trusts, taxable annuities, investment accounts, etc. closer to the forefront. We will be increasingly product-neutral and more advice-driven and client-need-focused in the future." Note: despite Tombs' assertion, and perhaps somewhat counter intuitively, multiple SSP conference speakers maintained that settlement trust sales, in particular, have actually increased their sales of structured settlement annuities.
• Tombs also promised "to intensify [SSP's] efforts to stave off any further “infiltration" of our society by factoring companies and their employees. We will want to remain abreast of the goings on in that market as we have always attempted, but as a practical matter we are cutting off any new members or sponsors from that side of things."

Marketing Feedback - NSSTA Survey of Plaintiff Attorneys

• During 2014, the National Structured Settlement Trade Association (NSSTA) commissioned a three-part Structured Settlement Survey project, conducted by CLM Advisors, and previously reviewed by S2KM, of senior claims executives (Part 1), claims professionals (Part 2) and plaintiff attorneys (Part 3).
• Although NSSTA has made reports of all three surveys available to its members, and featured presentations about Part 1 and Part 2 at previous NSSTA educational conferences, NSSTA has not yet featured its Part 3 survey of plaintiff attorneys as an educational conference presentation. NSSTA has also prioritized "rejuvenating defense programs" as one of three preliminary "Growth Initiatives" with no equivalent current Growth Initiative focused specifically on plaintiff attorneys or personal injury settlement planning.
• As one SSP conference presentation, S2KM's Managing Director, Patrick Hindert, discussed S2KM's analysis of NSSTA's Part 3 Structured Settlement Survey which, in S2KM's opinion, provides valuable insights for improving structured settlement marketing and expanding and accelerating structured settlement premium growth. For example:
  1. Only 4% of the responding plaintiff attorneys viewed structured settlement consultants as adding value for negotiations and/or case evaluations separate from, or in addition to, their knowledge of structured settlements.
  2. 35% stated that structured settlement consultants fail to deliver value because they are concerned with structuring as much of a settlement as possible.
  3. 52% contact a structured settlement broker one week (possibly less) prior to a mediation.
  4. 38% make contact only after a case settles.
  5. Less than 25% are likely to have a client sign a letter acknowledging that they were exposed to the opportunity to structure a portion of their settlement before opting for an all cash settlement.
  6. Although 89% believe they "have adequate knowledge of structured settlements so that [they are] able to recognize when they would be in the best interest of an injured party...", only 28% said they suggest a structured settlement for cases involving Medicare set-asides (MSAs).
  7. Only 26% have ever structured their fees.

Settlement Planning - A Special Needs Perspective

• Most presentations by special needs attorneys at structured settlement conferences focus exclusively on special needs trusts. As one result, many structured settlement professionals fail to understand the broad and expanding scope of special needs planning - or how it impacts, overlaps with and differs from personal injury settlement planning. A similar misconception exists among special needs attorneys many of whom identify financial and insurance settlement planners exclusively with structured settlements. The title of the one joint SSP/ASNP presentation in Tucson ("Structured Settlements and Special Needs Trusts") re-enforced this misconception. Fortunately and positively, the actual presentation discussion, moderated my Jack Meligan and featuring Frank Johns and Joe Tombs, addressed a broader agenda.
• Separately, both the ASNP and SSP conferences featured multiple presentations which captured the expanding expertise of their respective members. For structured settlement professionals, S2KM found ASNP's two "Pre-Session" presentations ("The ABCs of Public Benefits" by David Lillesand and "The ABCs of Special Needs and Settlement Planning" by Kevin Urbatsch and Michele Fuller) especially informative. Also recommended for structured settlement professionals seeking a more comprehensive understanding of special needs planning: Blaine Brockman's presentation ("Recent Trends in Special Needs Planning"),
• Urbatsch and Fuller speak and write frequently about personal injury settlement planning and are recognized as leading national settlement planning experts among special needs attorneys. Their settlement planning presentations frequently discuss structured settlement "issues" - often with negative connotations and without rebuttal or explanations from structured settlement experts. What follows are structured settlement "issues" Urbatsch and Fuller identified in Tucson. In S2KM's experience: 1) many special needs attorneys agree with these issues; and 2) structured settlement proponents need to proactively respond to these issues - or risk continuing/increasing loss of potential annuity premium:
  • "Income stream is inflexible and cannot respond to emergency or major cash needs;
  • "High initial fees;
  • "Investment returns nearly always lower than what a diversified portolio would produce;
  • "Big ticket items, such as a home, cannot be easily acquired;
  • "Unscrupulous settlement planning brokers over-structuring because of high commission;
  • "Little regulatory oversight over industry – no fiduciary responsibility or licensing required to sell;
  • "Misleading statements about flexibility;
  • "How it fits into Plaintiff’s overall financial plan?

The Grillo Case

• The Grillo case, which establishes potential legal liability for plaintiff attorneys who do not advise their clients about structured settlements, was the subject of an SSP conference presentation by Craig and Josephine (Grillo) Sullivan. The Sullivans shared the remarkable life story of their daughter, Christina, the Foundation she inspired and the Texas State Statutory amendment her case helped to enact.
• For structured settlement brokers and settlement planners, the Grillo case provides a logical starting point for discussing structured settlements with plaintiff attorneys. As a point of comparison, consider response #5 above under "Marketing Feedback - NSSTA Survey of Plaintiff Attorneys."
• Another important settlement planning "takeaway" from the Sullivans' SSP presentation: both Craig and Josephine emphasized the value of Christina's original life care plan which served as a care management "roadmap" throughout Christina's life accurately predicting future needs and developments which the Sullivans would not otherwise have anticipated.
• This important observation, provided by the only care givers to appear as speakers at the combined SSP/ASNP conferences highlights an important settlement planning issue: Why do other settlement planning professionals ignore life care planners - especially considering their strategic role defining "future needs" for personal injury damage analysis, as well as future expense allocations for Medicare set-asides and Affordable Care Act coverage? For examples:
  • As leading nurse life care planner Wendie Howland stated in this 2014 S2KM interview: "I have never been asked to review a settlement plan to see how well it matches my recommendations."
  • The Urbatsch/Fuller presentation summarized above which identified multiple professionals for the "Settlement Planning Team", omitted life care planners.
  • "Comprehensive" settlement plans S2KM has reviewed typically don't include any life care plan, or other document, providing a detailed "needs analysis".
  • With the exception of the National Alliance of Medicare Set-Aside Professionals (NAMSAP), a majority of whose members are life care planners, none of the many structured settlement or settlement planning conferences S2KM has attended during the past several years has offered specific presentations addressing the topic of "needs analysis" - or, with rare exceptions, featured a life care planner as presenter.
  • Key related issues: 1) what does "needs analysis" mean in the settlement planning context? Who is qualified, if not life care planners, to provide "needs analysis" for settlement planning? What is the relationship between a life care plan prepared for trial (damage analysis) and a life care plan for settlement planning? Who, besides a life care planner, is qualified to transpose one to the other?

The Mraz Case

• The traditional objective and responsibility for plaintiff attorneys in personal injury cases has been to obtain the largest amount of compensation for their clients whether by judgment or settlement. By this standard, the law firm Lief, Cabraser, Heimann & Bernstein was notably successful in obtaining a $55 million verdict and subsequent $24 million settlement in 2009 against Chrysler in the Mraz wrongful death case.
• Settlement planning, in general, and structured settlements, more specifically, however, prioritize an additional set of objectives and responsibilities for plaintiff attorneys. As a result, when the Lief, Cabraser law firm failed to obtain a structured settlement for Addison Mraz, the minor daughter of the deceased, after her mother, Adriana Mraz, allegedly requested Lief, Cabraser to obtain a structured settlement on Addison's behalf, Adriana brought a lawsuit alleging Lief, Cabraser attorneys breached the duty of care they owed to Addison.
• On December 22, 2015, among other findings, a California trial court jury determined Lief, Cabraser attorneys did not breach the standard of care or any fiduciary duty they owed Addison Mraz. Nevertheless, unrelated to damages associated to the loss of the structured settlement, the jury awarded Addison Mraz $400,000 of fees and costs she previously paid to Lief, Cabraser. The case is currently on appeal.
• Mark Wilson, the attorney who represented Adriana and Addison Mraz in their lawsuit against Lief, Cabraser, was a featured speaker at the SSP conference. Based upon the Marz case, and regardless of what occurs on appeal, Wilson highlighted the following structured settlement responsibilities as potential duties of care for plaintiff attorneys and recommended that structured settlement professionals and settlement planners utilize CLE programs to educate plaintiff attorneys about their potential liabilities. Plaintiff attorneys should:
  • Educate themselves about structured settlement issues including how to avoid constructive receipt as well as the appropriate utilization of QSFs and non-qualified assignments.
  • Recommend competent structured settlement professionals to clients (and retain them for advice) prior to settlement negotiations.
  • Insert appropriate language in term sheets and/or settlement agreements to preserve clients' structured settlement options.
  • If and when necessary, know how to correct mistakes to preserve or re-establish their clients' structured settlement options.

Plaintiff Broker Diversification

• The most successful plaintiff structured settlement brokers appear to be diversifying their products and services. It works, according to SSP speaker Anthony Prieto, "because it changes the conversation from a marketing perspective. There are a lot more people who want to talk to me about updates in MSP compliance or lien resolution than structured settlements. You see more cases when you offer other services. You become a problem solver as opposed to a problem identifier."
• Prieto identified multiple sources of alternative revenue now available to settlement planners in 2016: alternative products (retail annuities, life insurance, managed money); trust company fees or referrals; lien resolution or verification fees or referrals; MSP compliance fees or referrals; attorney fee deferral programs; QSF referrals and administration fees.
• Although one SSP panel, discussing "Comprehensive Settlement Planning", emphasized the importance of "planning before products", another SSP panel spoke specifically about expanding opportunities for alternative (non-traditional structured settlement) settlement planning products: Martha Hunt (equity-indexed annuity riders); John Arendt (reinsurance); James Creel (settlement trusts); Michael Upchurch (rehabilitation facilities); Rick Miller (indexed annuities).
• Consistent with the themes of "diversification" and "changing the conversation", John Darer made a convincing case for "transition expertise" as a critical settlement planning skill.
• What potential professional liability issues accompany plaintiff broker product and service diversification? The SSP conference did not directly address this issue comprehensively.
  • Speaking about "ELNY and Factoring Industry Lawsuits", attorney Edward Stone asserted that the "New Normal" (i.e. personal injury settlement planning) will not work if the core product (i.e. structured settlements) does not work. Focusing specifically on structured settlements, Stone asked whether a broker (plaintiff and/or defendant) owed any duty of care - and to whom? Also whether split commission arrangements changed the analysis? Based upon ELNY, he offered several related lessons for settlement planners.
  • Insurance law expert David Childers provided SSP conference attendees with a traditional analysis of standards of care and duties of care for insurance brokers, agents and producers under Arizona law.

CONCLUSION: Personal injury settlement planning is a large, complex, dynamic marketplace within which structured settlements historically has represented a strategic, if arguably under performing, product. The traditional structured settlement industry has heretofore avoided the educational analysis and strategic association relationships necessary to help its "New Generation" membership successfully transition to the "New Normal". It remains to be seen whether, when and how successfully future industry leadership will figure out how to put old wine in new bottles. Based upon this year's joint SSP/ASNP conference (and mixing metaphors), it appears the "New Normal" train is already leaving the station with a diversified cargo of blended products and services.

For additional S2KM analysis about personal injury settlement planning, see the structured settlement wiki.

Structured Settlement Update - 2015 Annuity Sales

Structured settlement primary market annuity sales increased by $97,315,462 (approximately 2%) to $5,347,578,153 in 2015 compared with $5,250,262,691 in 2014 according to industry estimates compiled and recently distributed by Melissa Evola Price. Total 2015 structured settlement cases, however, decreased to 25,152 from 26,572 a year earlier for an average case premium of $212,610.

The 2015 annual premium totals still fall substantially short of the historic 12 month industry high ($6,226,578,725 in 2008) after consistently averaging close to $6 billion annually from 2001-2007.

Adding these 2015 results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru 2015:

• Total annuity premium: $150 billion.
• Total structured settlement cases: 853,800
• Average annuity premium: $175,700.

Berkshire Hathaway continued its recent primary market leadership in 2015 by generating $1.306 billion of structured settlement annuity premium - an eight (8%) percent decline from 2014 but still 24% of the 2015 industry total. Evola Price's report did not indicate how much of Berkshire Hathaway's premium was attributable to reinsurance and/or non-qualified structured settlement sales.

The U.S. structured settlement market now consists of eight annuity providers (down from more than 20 as recently as 2002) which are members of the National Structured Settlement Trade Association (NSSTA). 2015 sales results (rounded in millions) for the seven other structured settlement annuity providers (per Evola Price's report) plus the rounded percentage increase (+) or decrease (-) from comparable 2013 results:

• Pacific Life: $871 MM (+13%)
• MetLife: $772 MM (-11%)
• Prudential: $772 MM (+8%)
• Amgen: $613 MM (+29%)
• Liberty Life $548 MM (-10%)
• New York Life: $368 MM (+18%)
• Mutual of Omaha: $98 MM (+113%)

Evola Price's 2015 compilation also reports an annual increase in annuity premium for non-qualified structured settlement assignments (from $182.3 million in 2014 to $190.3 million in 2015) as a portion of the overall structured settlement numbers. Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC sections 130 and 104(a)(1) or (2) including deferred attorney fees.

Although Evola Price's report does not indicate the percentage of structured settlement premium and/or annuities attributable to workers compensation Medicare set-aside (WCMSA) cases, WCMSAs have become an increasingly important submarket for structured settlements. S2KM has previously estimated that as much as eight (8%) percent of recent structured settlement premium and 24 percent of recent structured settlement annuities are attributable to WCMSAs.

Evola Price's reports do not provide information about the structured settlement secondary market. For S2KM's most recent estimates of secondary market metrics, see this prior blog post.

Structured Settlements 2015 - 1

Market Metrics

Although its new "Growth Initiative" has represented a well-publicized, number one priority of the National Structured Settlement Trade Association (NSSTA) during 2015, the results of this initiative have not yet produced a noteworthy impact on structured settlement annuity sales.

As reported by Melissa Evola Price, the United States structured settlement primary market has continued to slowly recover from its 2012 nadir during 2015 with first nine months annuity sales of $3.96 billion resulting from 18,635 cases - a premium increase of 3% compared to $3.86 billion resulting from 19,778 cases for the same period in 2014. The average per case annuity premium has increased to $212,703 from $195,305.

Based upon these results, 2015 annual structured settlement annuity sales can be expected to approximate $5.4 billion. The projected 2015 annual premium totals, however, will still fall substantially short of the historic 12 month industry high ($6.2 billion in 2008) after consistently averaging close to $6 billion annually from 2001-2007.

Recent Annual Structured Settlement Annuity Premium

• 2015 (third quarter) - $3.96 billion
• 2014 - $5.25 billion
• 2013 - $5.13 billion
• 2012 - $4.82 billion
• 2011 - $4.97 billion
• 2010 - $5.5 billion
• 2009 - $5.4 billion
• 2008 - $6.2 billion

Adding the 2015 Third Quarter results to historic U.S. structured settlement totals, S2KM estimates the following primary market metrics from 1976 thru September 2015:

• Total annuity premium: $148.7 billion.
• Total structured settlement cases: 847,200
• Average annuity premium: $175,600.

Nine month 2015 sales results (in millions) for individual structured settlement annuity providers (per Price's report) which are members of the National Structured Settlement Trade Association (NSSTA) plus the rounded increase (+) or decrease (-) from comparable 2014 results:

• Berkshire Hathaway: $974 MM (-12%)
• Pacific Life: $642 MM (+16%)
• MetLife: $592 MM (-13%)
• Prudential: $563 MM (+22%)
• Liberty Life: $422 MM (-2%)
• Amgen: $408 MM (+8%)
• New York Life: $298 MM (+45%)
• Mutual of Omaha: $65 MM (+63%)

Low Interest Rates

Many structured settlement industry participants attribute decreased sales to low interest rates. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981. Here are several historic average annual rates for 30 year Treasury securities (source: U.S. Department of the Treasury):

• 2015 (as of December 28) - 2.95%
• 2014 - 2.97%
• 2013 - 3.96%
• 2012 - 2.95%
• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

Submarkets - Multiple noteworthy submarkets, each with significant structured settlement growth potential, are incorporated within the annuity production numbers set forth above. With the exception of non-qualified assignments funded with life insurance annuities sold by NSSTA members, S2KM is not aware of published metrics for these submarkets.

• Non-Qualified Assignments
  • Non-qualified assignments represent transfers of periodic payment obligations that do not meet the requirements of IRC section 130. They are generally used to defer taxable damage awards such as punitive damages as well as contingent attorney fees. Because they do not benefit from the favorable tax treatment of IRC 130, most non-qualified assignees are "off-shore" companies located in jurisdictions which do not tax the funds received by the assignee as income.
  • Two NSSTA-member annuity providers (Liberty Life and American General) currently offer and separately report non-qualified sales
  • Reported nine month 2015 non-qualified structured settlement sales by Liberty and Amgen totaled $159.0 million compared with $113.2 million in 2014 - a substantial increase which does not include non-qualified sales by a growing number of non-NSSTA member companies.
  • Release 58 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) features an expanded analysis of the non-qualified market.
• Medicare Set-Asides
  • A Medicare set-aside (MSA) is an administrative and funding mechanism utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute.
  • Although Federal law does not define MSAs, or mandate specific types of MSA funding mechanisms, CMS (the responsible federal agency) has established certain basic requirements for workers compensation MSAs (WCMSAs).
  • Under current CMS rules, structured settlement annuities have an inherent cost advantage over lump sum alternatives for funding WCMSAs resulting from the method CMS prescribes for calculating present values.
  • Although industry reporting does not currently separate MSA annuity sales, S2KM has previously estimated that eight (8%) percent of 2013 structured settlement premium and 24 percent of 2013 structured settlement annuities were attributable to WCMSAs.
  • Although no specific CMS rules or requirements currently exist for liability MSAs, one professional MSA administrator has informed S2KM that liability MSAs now represent 30% of his company's cases and the percent is growing.
• Special Needs Trusts
  • Established by Congress in 1993 as part of the Omnibus Budget and Reconciliation Act, Special Needs Trusts (SNTs) provide an authorized method for disabled individuals to hold an unlimited amount of assets in trust without disqualification for certain means-tested government benefits including Social Security Income and Medicaid.
  • When utilized as part of a personal injury settlement, SNTs are frequently funded with structured settlement annuities.
  • Similar to MSAs, industry reporting does not currently separately report SNT annuity sales.
  • Although an important strategic relationship clearly exists between structured settlement brokers and special needs attorneys, neither professional community have fully embraced the other for reasons explained in prior S2kM blog posts.
  • As a result, continuing opportunities exist to expand structured settlements funding of SNTs as well as other government benefit programs promoted by special needs attorneys such as the ABLE Act and the Affordable Care Act.

How large is the potential U.S. annual structured settlement market?

Based on recent Towers Watson studies, S2KM has previously estimated that more than $170 billion of United States tort costs (excluding workers compensation) represented payments to injury victims and their attorneys during 2014. Within that framework, and in the context of an S2KM interview, NSSTA President Michael Goodman recently stated his own estimate of potential market size for the structured settlement industry to be $8 to $10 billion range per year.

Secondary Market

Unlike the primary structured settlement market, which has experienced modest annual sales increases since 2012, the secondary market appears to have regressed according to industry experts. As a point of reference, based on interviews with industry experts in 2012, S2KM estimated 2012 structured settlement secondary market activity to be:

• 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
• $360 million of total secondary market purchases (money paid to transferors).
• $30,000 average individual transfer.

Following zero (0%) percent growth in 2013, the number of secondary market transfers appears to have declined as much as 15% during 2014 with another decrease of as much as 7% predicted in 2015, according to various industry sources.

This decline in secondary market transfers received further confirmation from:

• An exhibit to J.G. Wentworth's December 10, 2015 SEC Form 8-K which indicates a $48 million drop in structured settlement revenue for the first three quarters of 2015 compared with the same 2014 period ($764MM vs. $812 MM).
• J.G. Wentworth's current stock price - which closed on the New York Stock Exchange at $1.82 per share on December 28, 2015 down from its historic high of $19.59 on February 28, 2014.

Industry experts estimate J.G. Wentworth currently controls between 65-72% of the U.S. secondary structured settlement market.

Based upon the 2013-2015 transfer estimates indicated above, S2KM further updates its estimates of historic (1986-2015) structured settlement secondary market metrics as follows:

• 168,000 transfers - involving 84,000 structured settlement recipients.
• $5 billion - aggregate sums paid to transferor structured settlement recipients.
• $12.9 billion - aggregate periodic payments purchased by secondary market companies.

For S2KM's summary of 2015 structured settlement issues and developments, see this blog post.
For S2KM's prior year summaries of the structured settlement market, see the structured settlement wiki.

Brief Filed in ELNY Contempt Appeal - 2

Did New York State Supreme Court Judge John M. Galasso violate the Supremacy Clause of Article VI of the United States Constitution when he ordered three Executive Life of New York (ELNY) structured settlement shortfall payees and their legal counsel in civil contempt for filing a federal class action lawsuit against ELNY's Receiver in the United States District Court Southern District of New York in violation of existing ELNY anti-lawsuit injunction orders?

This constitutional question is one of three issues the ELNY shortfall payees have raised in appealing Judge Galasso's January 25, 2013 Contempt Order , which also imposed a $5000 fine and threatened additional fines, plus imprisonment of their legal counsel, if the shortfall payees did not dismiss their Federal action - which they did (without prejudice) on February 7, 2013.

In their prior federal class action lawsuit, the shortfall payees asserted causes of action against ELNY's Receivers, in personam, for breach of fiduciary duty and fraudulent concealment, for not conducting the ELNY rehabilitation in good faith, for self-dealing, for material misstatements, and for fraudulently concealing and failing to disclose material information regarding ELNY financial status. See: ELNY allegation timeline.

S2KM's prior blog post (Part 1) about the shortfall payees' appellate brief summarized background developments resulting in the appeal of Judge Galasso's Contempt Order including the alleged statutory responsibilities of, and mismanagement by, ELNY's Receivers and the strategic options available to ELNY shortfall payees following Judge Galasso's April 16, 2012 ELNY Liquidation Order.

In his Liquidation Order, Judge Galasso found ELNY to be insolvent, approved a Restructuring Agreement proposed by ELNY's Receiver and NOLHGA, converted the ELNY proceeding from rehabilitation to liquidation and appointed the Receiver as ELNY's liquidator. The Liquidation Order also contained broad immunity and injunction provisions proposed by ELNY's Receiver. The injunction provision provided the basis for Judge Galasso's subsequent Contempt Order.

Under the ELNY Restructuring Agreement, payments to 1456 structured settlement payees will be cut by $920 million (present value) even following contributions by state life and health guaranty associations and various life insurance companies. During the hearing that proceeded the Liquidation Order, Judge Galasso refused to entertain efforts by ELNY shortfall payees and their legal counsel to determine how and why ELNY had suffered such significant losses.

This blog post highlights and summarizes the following issues raised by the ELNY shortfall payees in their appeal of Judge Galasso's Contempt Order with the New York Supreme Court, Appellate Division, Second Department which they view as a necessary step before re-filing their Federal class action.

• Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with the shortfall payees' constitutional right to bring a class action lawsuit against the ELNY Receiver in Federal court?
• Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunction order when the order does not clearly and unequivocally bar personal capacity lawsuits against the Receiver?
• Did the ELNY liquidation court err in holding that the shortfall payees conceded the order barred personal capacity lawsuits by appealing the order and using this alleged concession as the basis to hold the shortfall payees in contempt?

Constitutional Issue

The ELNY shortfall payees argue the ELNY Liquidation Court violated the Supremacy Clause of Article VI of the United States Constitution when it interfered with their federal class action lawsuit. In his order, Judge Galasso recognized he did not have authority to dismiss the federal lawsuit outright, but concluded he could punish the shortfall payees for bringing and continuing the federal action by holding them in contempt, fining them $5000, and threatening them with further fines.

To support their appeal, the ELNY shortfall payees cite two U.S. Supreme Court cases: Donovan v. City of Dallas (1964) which held "[s]tate courts are completely without power to to restrain federal court proceedings"; and General Atomic Company v. Felter (1997) which held "[a] plaintiff's right to pursue an in personam action in federal court cannot be restricted by a state court." Among other cases, they also cite Johnstown Min. Co. v. Morse (1904) in which a New York court stated: "[t]his prohibition applies whether the state court restrains the federal court proceeding directly by, for instance, ordering the federal case be dismissed, or whether that interference is indirect by compelling a party to dismiss the case by threatening or holding them in contempt."

Because Judge Galasso allegedly had no authority to enjoin their federal class action lawsuit, the ELNY shortfall payees maintain he could not properly use an injunction order to hold them and their counsel in contempt which, along with the threat of fines, effectively prevents them from pursuing their federal action. Because this issue is jurisdictional, the ELNY shortfall payees further maintain it can be raised at any time, even on appeal.

Personal Capacity Lawsuits

To be enforceable, a contempt order cannot be ambiguous and/or vague. Contrary to Judge Galasso's ruling, the shortfall payees argue the ELNY injunction does not "clearly and unequivocally" bar lawsuits that are not against ELNY assets but rather seek to collect damages from the ELNY Receiver in his personal capacity. They point out the injunctive language does not prohibit all actions against the Receiver, but only actions "with respect to this proceeding or the discharge of [his] duties under [New York] Insurance Law Article 74."

Based on New York case law and the language of Article 74, the shortfall payees argue ELNY's Receiver operated beyond his Article 74 duties because he did not "act in good faith, with care and prudence commensurate with the situation as it exist[ed] at the time." As a result, they maintain a personal capacity lawsuit is appropriate. In addition, according to the shortfall payees, barring all claims against the ELNY Receiver is inconsistent with Article 74's express purpose of protecting policyholders and payees.

Alleged Shortfall Payee Concession

In their appeal of Judge Galasso's Liquidation Order, the shortfall payees unsuccessfully asked the appellate court to either construe the injunction language narrowly or, alternatively, to reverse the Order because the injunction language violated Article 74. During the contempt proceeding, the Receiver argued the shortfall payees were judicially estopped from arguing that the injunction language should be interpreted more narrowly because of their alternative appellate argument that the language violated Article 74 by enjoining personal capacity suits. Judge Galasso agreed with the Receiver.

Judicial estoppel, according to the shortfall payee's brief, rests on the principle that "a litigant should not be permitted ... to lead a court to find a fact one way and then contend in another judicial proceeding that the same fact should be found otherwise." However, they maintain, submission of alternative legal arguments (as opposed to inconsistent factual pleadings) is not a basis for judicial estoppel. Therefore, by appealing the injunction language in the ELNY Liquidation Order, the shortfall payees argue they did not concede that the Liquidation Order barred their federal action and Judge Galasso erred in using this "concession" to hold the shortfall payees in contempt.

For S2KM's complete Executive Life reporting, see the structured settlement wiki.

Brief Filed in ELNY Contempt Order Appeal - 1

"People should know when they are conquered." - Quintus in "Gladiator"

"It ain't over till it's over." - Yogi Berra

Following 22 years of "Rehabilitation" supervised by various New York State Superintendents of Insurance and Financial Services, as Receivers, Executive Life Insurance Company of New York (ELNY) was officially liquidated August 8, 2013 pursuant to an Order of Liquidation signed by Nassau County New York State Supreme Court Judge John M. Galasso on April 16, 2012.

As part of his Liquidation Order, Judge Galasso also approved a Restructuring Agreement, as proposed by ELNY's Receiver and NOLHGA, whereby ELNY's remaining assets and ongoing liabilities have now been transferred to a successor company, Guaranty Associations Benefit Company (GABC), a not-for-profit Washington D.C.-based captive insurance company.

As a result of ELNY's liquidation and restructuring, approximately 1456 structured settlement payees will experience payment shortfalls totaling approximately $920 million (present value) following contributions from state life and health insurance guaranty associations and various life insurance companies.

ELNY Receivers' Responsibilities 

Significantly, ELNY's 1991 Rehabilitation Order did not result because of ELNY's insolvency. Instead, then New York Insurance Superintendent Salvatore Curiale's stated concern was a "run" on ELNY assets by policyholders.

Beginning with ELNY's 1991 Rehabilitation Order and continuing to ELNY's August 8, 2013 liquidation date, Superintendent Curiale and his successor New York Superintendents of Insurance and Financial Services managed ELNY's Rehabilitation (in their capacity as Receivers not regulators) with day-to-day management responsibilities assigned to their agent, the New York Liquidation Bureau (NYLB).

As ELNY's Receiver, these Superintendents undertook fiduciary responsibilities toward ELNY's policyholders and payees. Their duties, pursuant to Article 74 of New York's Insurance law, included: conducting ELNY's business, safeguarding ELNY's assets, and removing the causes and conditions that made ELNY's rehabilitation necessary.

Until December 17, 2010, however, when Judge Galasso issued an ex parte Order to Show Cause seeking an ELNY liquidation plan, ELNY's Receivers had not filed a single report with the court or made any efforts to inform policyholder or payees about ELNY's declining financial position. As of December 31, 2010, ELNY's audited financial statements show ELNY had assets of $905,945,200 compared with liabilities of $2,474,317,342, resulting in a negative surplus of $1,568,372,142.

During ELNY's March 2012 Liquidation Hearing, Judge Galasso ruled against ELNY shortfall payees' attempts to determine how and why ELNY had suffered such losses reasoning such issues were beyond the scope of the hearing. To further protect the Receiver, Judge Galasso's April 16, 2012 ELNY Liquidation Order contained immunity and injunction provisions proposed by ELNY's Receiver.

Although the Receiver represented these provisions did not immunize him from liability outside his Article 74 duties, structured settlement shortfall payees expressed concern the broad language of the immunity and injunction provisions could insulate the Receiver from liability beyond the scope of Article 74. They also believed, contrary to the Receiver's representations, that Article 74 prohibits not just bad faith conduct but also conduct without appropriate care and prudence.

ELNY Shortfall Payees' Options 

Faced with significant payment reductions resulting from ELNY's liquidation and restructuring agreement, ELNLY's structured settlement shortfall payees were left with three options:

1. Accept their payment reductions under the ELNY Restructuring Agreement and do nothing; or,
2. Appeal Judge Galasso's Order and ask the Appellate Court to send ELNY's Receiver back to drawing board; or,
3. Bring a separate legal action against the Receiver personally for bad faith conduct, breach of fiduciary duty and fraudulent concealment or waste.

The ELNY structured settlement shortfall payees chose options 2 and 3.

Option 2 failed. The Appellate Division of the Supreme Court of the State of New York, Second Department denied the ELNY shortfall payees' appeal of Judge Galasso's Order on February 6, 2013. New York State Court of Appeals denied a subsequent motion by ELNY shortfall payees for Leave to Appeal the Second Department decision on May 3, 2013.

Option 3 faces a significant judicial roadblock - a Contempt Order with the threat of fines plus imprisonment of legal counsel.

Prior to this Contempt Order, several ELNY structured settlement shortfall payees pursued Option 3 by filing a federal class action lawsuit November 8, 2012 in the U.S. District Court for the Southern District of New York against the ELNY Receiver (New York Superintendent of Financial Services Benjamin Lawsky) in his personal capacity. In response, the Receiver filed a motion December 7, 2012 asking the Liquidation Court (Judge Galasso) to find the shortfall payees in contempt for violating the injunction provision of the ELNY Liquidation Order.

Judge Galasso issued a Contempt Order on January 25, 2013. He also imposed a $5000 fine and threatened additional fines plus imprisonment of legal counsel if the ELNY structured settlement shortfall payees did not dismiss their Federal action which they did (without prejudice) on February 7, 2013. 

Bottom line: so long as Judge Galasso's Contempt Order and continuing threat of additional fines and imprisonment of legal counsel remain in effect, ELNY structured settlement shortfall payees are effectively barred from pursuing Federal legal action against ELNY's Receiver for alleged mismanagement of ELNY's assets during ELNY's 22 year Rehabilitation. 

Appeal of Contempt Order

As a result, ELNY's shortfall payees are currently pursuing an appeal challenging "each and every part" of Judge Galasso's January 25, 2013 Contempt Order as a necessary step before re-filing their Federal action against the Receiver and his agents.

On August 9, 2013, Attorney Edward Stone filed a preliminary brief with the New York Supreme Court, Appellate Division, Second Department on behalf of ELNY structured settlement shortfall payees Jeanice Dolan, Keith Vincent, Daniel Malin and their attorneys.

The appellate brief filed on behalf of the ELNY shortfall payees addresses three legal issues:

• Did the ELNY Liquidation Court exceed it subject matter jurisdiction or otherwise err by interfering with shortfall payees' constitutional right to bring suit against the Receiver in Federal court?
• Did the ELNY Liquidation Court err in holding the shortfall payees in contempt for violating its injunctive Order when the order does not clearly and unequivocally bar personal capacity suits against the Receiver?
• Did the ELNY Liquidation Court err in holding that the shortfall payees conceded the Order barred personal capacity lawsuits by appealing the order and using this alleged concession as the basis to hold the shortfall payees in contempt?

S2KM will summarize the ELNY shortfall payees' arguments for each of these issues in a subsequent blog post. For S2KM's complete ELNY reporting, see the structured settlement wiki.

NASP 2013 Annual Conference - 1

The National Association of Settlement Purchasers (NASP) has announced its 2013 Annual Conference will take place November 5-7 at The Cosmopolitan Las Vegas. Non-NASP members, including participants in both the primary and secondary structured settlement markets, are invited to attend.

Topics and Speakers

• Legislative and Regulatory Developments - Jack Kelly
• Litigation Update - Earl Nesbitt
• Capacity Issues in Structured Settlement Transactions - Rajiv Goel
• Executive Life of New York - Edward Stone
• Financing Structured Settlement Transactions - Boris Ziser
• Life Contingent Transactions - Brian Robinson
• Breakout Sessions
  • Non-traditional Secondary Market Financing
  • Ethical and Legal Marketing Standards
  • Avoiding Problem Payees
  • Addressing Judicial Challenges
• Primary Market Panel - Patrick Hindert (moderator), William Schemmel, Anthony Prieto and Daniel Hindert
• Judges' Concerns about Transfers - Judges Nancy Allf, James McCarthy and Carter Bise

The Primary Market Panel has been one of the continuing featured presentations at NASP conferences. Primary market structured settlement topics addressed at previous NASP conferences include:

• How the primary market views the secondary market
• Primary market criticisms of transfers and factoring companies
• Reasons annuity providers oppose transfers
• Common interests among annuity providers and factoring companies
• Brokers' roles in transfers
• Pre-settlement discussions about transfers
• Improving and growing the primary market
• How large is the potential primary market
• Why plaintiff attorneys and injury victims reject structured settlements
• Why annuity providers are leaving the primary market
• Financial viability of annuity providers
• Primary market strategic priorities
• Roadblocks to primary market expansion
• Issues dividing the primary market
• Has the primary market abandoned the structured settlement brand?
• Best and worst primary market business practices
• Who regulates primary market business practices
• Improving primary market knowledge and skill sets
• Impact of various factors and developments on the primary market:
  • Settlement transfers
  • Settlement planning
  • Changing market demographics
  • 2008 financial crisis
  • Spencer v. Hartford
  • ELNY and Reliance insolvencies
  • Deficit Reduction Act
  • Affordable Care Act
  • Dodd-Frank
  • 468B qualified settlement funds
  • The Internet

For S2KM's reporting about previous NASP Conferences and structured settlement secondary market issues, see the structured settlement wiki.

For more comprehensive analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) including upcoming Release 54.

ELNY Liquidation Date Announced

New York Superintendent of Financial Services Benjamin Lawsky, as Receiver for Executive Life Insurance Company of New York (ELNY), has announced the proposed liquidation date and the proposed date of closing of the ELNY Restructuring Agreement will be August 8, 2013. ELNY's shortfall payees, including hundreds of structured settlement recipients, can expect their payment reductions to take effect shortly thereafter.

ELNY first entered rehabilitation in 1991 when then New York Insurance Commissioner Salvatore Curiale obtained a Court Order seizing control of the company. The Nassau New York State Supreme Court approved a Plan of Rehabilitation for ELNY in 1992. Neither the ELNY Order of Rehabilitation in 1991 nor the ELNY Plan of Rehabilitation in 1992 determined that ELNY was insolvent.

Under the Rehabilitation Plan, owners of ELNY single premium deferred annuities (SPDA), interest sensitive life policies, whole life policies and term policies were given the option to have Metropolitan Life Insurance Company (MetLife) assume their policies. However, all of ELNY's single premium immediate annuities (including all ELNY structured settlement annuities) remained with ELNY under the supervision of the Insurance Superintendent and his agent, the New York Liquidation Bureau (NYLB). The Rehabilitation Plan named MetLife as Administrator of the ELNY single premium immediate annuities (SPIAs) and payees continued to receive their scheduled annuity payments as part of the Rehabilitation Plan.

The first public announcement that ELNY was experiencing financial problems during its Rehabilitation occurred in December of 2007 when then New York Governor Eliot Spitzer reassuringly announced an “Agreement in Principle” designed to continue paying all ELNY annuitants 100 percent of their benefits. Unfortunately, the “Agreement in Principle” never materialized.

The first audited financial statements for ELNY during its Rehabilitation were released in 2009 for years 2006 and 2007. Those financial statements showed that, as of December 31, 2007, ELNY had assets of $1,344,729,904 and liabilities of $2,538,548,125 resulting in a negative surplus of $1,193,818,221. Subsequent financial statements for years 2008-2010 indicated a deteriorating financial condition. As of December 31, 2010, ELNY had assets of $905,945,201 and liabilities of $2,474,317 resulting in a negative surplus of $1,568,372,142. 

On December 17, 2010, Nassau County New York State Supreme Court Judge John M. Galasso issued an Order to Show Cause requiring New York's Insurance Superintendent to present the Court with a proposed Order and Plan of Liquidation for ELNY on or before July 1, 2011. As justification for ELNY's proposed liquidation, the Petition, which was ultimately filed September 1, 2011, stated: “ELNY's financial condition is progressively deteriorating” and “ELNY will be unable to pay its outstanding lawful obligations as they mature in the regular course of business and further efforts to rehabilitate ELNY are futile . . . . the unprecedented global economic crisis and resulting market collapse of 2008 had a significant negative impact on ELNY's retained assets and made continued implementation of the Rehabilitation Plan without a liquidation unfeasible."

The ELNY Restructuring Plan submitted to, and approved by, Judge Galasso was jointly prepared by the Superintendent and the National Organization of Life and Health Guaranty Associations (NOLHGA). Under the Restructuring Plan, participating state life and health guaranty associations (PGAs) and certain life insurance companies have formed a new special purpose not-for-profit captive insurance company under the laws of the district of Columbia to replace ELNY once it is liquidated. The PGAs have agreed to supplement the ELNY benefit payments for annuity contracts eligible for state guaranty association coverage up to the maximum allowable by their state guaranty association laws. The various participating life companies have agreed to provide additional enhancements and have set up an ELNY Hardship Fund.

The Restructuring Plan includes Schedule 1.15 listing all of ELNY's current annuities, with the names of the annuity owners and payees redacted. Schedule 1.15 includes additional information such as individual contract identification numbers, the proposed "uncovered amount" (shortfall) and "total percentage of contract protected" assuming contributions from state life and health insurance guaranty associations and certain supplemental enhancements. Following the Schedule 1.15 filing, the NYLB sent informational notices to each ELNY annuity payee and published weekly notices in the New York Times and the Wall Street Journal.

Judge Galasso signed the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement on April 16, 2012 (as proposed by the Superintendent and despite objections by several structured settlement payees and their attorneys) following a two week hearing March 15-30, 2012.

The anticipated shortfalls resulting from the ELNY liquidation and restructuring were expected to total $920,641,977 on a present value basis as of April 16, 2012. This figure assumed promised state guarantee association payments and enhancements but did not include 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. As a result, approximately 15 percent of the ELNY annuitants are expected to experience 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.

As part of his ELNY Liquidation Order, Judge Galasso granted judicial immunity "to the Receiver and his successors in office, the New York Liquidation Bureau, and their respective attorneys, agents and employees, ... for any cause of action of any nature against them, individually or jointly, for any action or omission by any one or more of them when acting in good faith, in accordance with this Order, or in the performance of their duties pursuant to Insurance Law Article 74 ..."

The Order also enjoined all persons "from commencing or further prosecuting any actions at law or other proceedings against ELNY or its assets, the Receiver or the New York Liquidation Bureau, or their present or former employees, attorneys, or agents, with respect to this proceeding or the discharge of their duties under Insurance Law Article 74."

Subsequent ELNY-related litigation and court filings followed:

• Appeal of Liquidation Order - On March 30, 2012, attorneys representing ELNY structured settlement shortfall payees filed a Notice of Appeal challenging the ELNY Liquidation Order and Restructuring Agreement. Both the Appellate Division of the Supreme Court of the State of New York, Second Department and the New York State Court of Appeals subequently denied this Appeal.
• Motion to Clarify and/or Correct - On June 14, 2012, attorneys representing several liability insurers who previously purchased ELNY structured settlement annuities filed a Motion asking Judge Galasso to "clarify and/or correct" his ELNY Memorandum Decision insofar as it "caused confusion or mistake" concerning responsibilities of those liability insurers to make up shortfalls on ELNY annuities. Judge Galasso denied the Motion.
• Class Action Lawsuit - On November 8, 2012, attorneys representing ELNY structured settlement shortfall payees filed a class action lawsuit in the United States District Court Southern District of New York against Superintendent of Financial Services of the State of New York, in his non-regulatory capacity as ELNY's Receiver, including predecessor ELNY Receivers, Metropolitan Life Insurance Company (MetLife) and Credit Suisse Group, AG (Credit Suisse) as defendants. The class action Complaint alleged  the defendants' mismanagement and misconduct had caused the plaintiffs' ELNY payment shortfalls.
• Contempt Order - On December 7, 2012, responding to the ELNY shortfall payees' class action lawsuit, Superintendent Lawsky filed a Notice of Motion seeking to enforce Judge Galasso's ELNY injunctions and to hold the ELNY shortfall payees' attorneys in contempt of Judge Galasso's ELNY Liquidation Order. On January 25, 2013, Judge Galasso issued an Order holding the ELNY shortfall payees' attorneys in contempt of court and imposing a fine for filing the class action lawsuit.
• Dismissal of Class Action - As a result Judge Galasso's Contempt Order, the ELNY shortfall payees voluntarily dismissed their class action lawsuit on February 7, 2013 without prejudice thereby preserving their right to re-file claims and tolling the statute of limitations.
• Appeal of Contempt Order - On February 14, 2013, three ELNY structured settlement shortfall payees and their attorneys filed a Notice of Appeal challenging Judge Galasso's Contempt Order. That Appeal currently remains unresolved.

For additional information about ELNY, see:

• Section 3.05[13] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).
• The structured settlement wiki.

S2P2J Release 54

Publisher Law Journal Press anticipates an October 2013 distribution date for hardcopy supplements for Release 54 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) with online S2P2J subscribers receiving their update simultaneously at no additional charge.

Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs. 

Release 54 Highlights - Release 54 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• Negotiating structured settlements vs. cashing out
• Defendant disclosure issues
• Business practices of consultants
• Insurance company insolvencies
• Medicare set-aside arrangements
• Re-cycled structured settlement payment rights
• Securitization of structured settlement payment rights
• Australia structured settlement update

Negotiating Structured Settlements vs. Cashing Out - Why and when should defendants agree to structured settlements as opposed to lump sum settlements? Do defendants save money using structured settlements and, if yes, why and how? Do structured settlements result in additional costs and risks for defendants and, if yes, how do defendants reduce these costs and risks? Release 54 examines these questions in the context of existing state statutes and case law and offers recommendations for defendants when they review their traditional structured settlement policies and business practices. The recommendations include new sample structured settlement Mission and Disclosure Statements for liability insurers.

Defendant Disclosure Issues - Release 54 substantially expands and re-organizes S2P2J's existing coverage of defendant structured settlement disclosure issues. Topics addressed:

• State structured settlement protection act requirements
• Product disclosures and representations
  • Cost or Value
  • NAIC Annuity Disclosure Model Regulation
  • NAIC Suitability in Annuity Transactions Model Regulation
  • Compensation disclosure
  • "Guaranteed" payments
  • Dissipation studies
  • Public assistance
  • Annuity ownership and rights
  • Taxation
  • Financial condition of funding entities
• Conflicts of interest
• Medicaid/Medicare disclosures
• Securities issues
• Class action lawsuits vs. defendants
• Meeting professional responsibilities

Structured Settlement Consultants - Release 54 expands and updates S2P2J's coverage of structured settlement consultants to address: consultant selection criteria; structured settlement product suitability; and consultant business practice issues including laws and regulations, industry standards, commission disputes, privacy rules, and disclosure and representation requirements.

Insurance Company Insolvencies - Release 54 expands and updates S2P2J's already extensive coverage of insurance company insolvencies including state insurance guaranty associations and the most recent developments impacting Executive Life of New York [ELNY] and Reliance Insurance Company. Following ELNY's 22 years of New York State supervised "rehabilitation", S2P2J's Release 54 identifies lessons that potential structured settlement recipients and their attorneys and advisers can and should learn from the ELNY debacle.

Medicare Set-Aside Arrangements - Release 54 re-organizes and promotes S2P2J's coverage of Medicare set-aside arrangements (MSAs) with updated materials for both workers compensation (WC) MSAs and liability MSAs. These updates include an extensive summary and analysis of the structured settlement provisions in the new CMS WCMSA Reference Guide as well as conclusions and recommendations for utilizing MSAs in personal injury liability cases.

Re-cycled Structured Settlement Payment Rights - As low interest rates continue to negatively impact the primary structured settlement market, new products featuring re-cycled structured settlement payment rights have begun to proliferate as funding alternatives for personal injury periodic payment settlements. Release 54 features a new section with detailed diagrams and charts (designed by Timothy Morbach) to explain the several variations of these products. In addition, this new section compares the features of these products with traditional structured settlements and summarizes recent investor warnings about these products issued by the SEC and FINRA.

Securitization of Structured Settlement Payment Rights - S2P2J already includes a detailed Chapter 16 titled "Transfers of Structured Settlement Payment Rights" which provides comprehensive coverage of most structured settlement secondary market issues. This coverage includes: the history of the secondary market; summary and analysis of IRC section 5891 and the state structured settlement protection acts; and how judges review (or should review) transfer applications. Release 54 adds a new section, with detailed diagrams and charts (designed by Timothy Morbach), explaining how securitization of structured settlement payment rights works.

Australia Structured Settlement Update - S2P2J continues to track structured settlement developments in countries outside the United States including Canada, the United Kingdom, Continental Europe, Australia and New Zealand. Release 54 highlights a recent legislative development in Australia called “The Lifetime Care and Support Scheme” which provides treatment, rehabilitation and attendant care services to people severely injured in automobile accidents. At least one Australian structured settlement expert believes this legislative development could prevent an annuity-funded structured settlement market from developing in Australia anytime soon.

"Structured Settlements and Periodic Payment Judgments" is a complete reference work for attorneys, settlement planners, structured settlement consultants, risk managers, liability insurers, annuity providers and secondary market participants. It is available in both hardcopy and online versions which are updated semi-annually. For highlights from previous S2P2J updates, see the structured settlement wiki.