Avoid the Problems of All-Cash Negotiations
Benefits of Using Structured Settlements in Claims Negotiations
Whether and when structured settlements are used during the course of the claim settlement process (i.e., for evaluative or illustrative purposes) depends, to a large degree, on the philosophy embraced and the type of claim under consideration (i.e., tort or first party).
However, as stated in the last chapter, the use of structured settlements has increasingly become a regular practice in the course of settling both tort and Accident Benefits claims.
Tort Claims
Recall that structured settlements, relative to lump-sum settlements, can make “winners” of both claimants and casualty insurers. The most obvious reason for this is that the income generated through a structured settlement is received by the claimant tax free. This tax savings makes it possible to generate, again relative to a lump-sum investment, more income on the basis of a smaller principal or loss payment. Consequently, both claimant and casualty insurer “win.”
How then, specifically, might structured settlements be used to arrive at a “win-win” outcome? What constitutes a “win-win” outcome; that is, how much more income should the claimant reasonably expect to receive by virtue of a structured settlement, and how much savings can the casualty insurer reasonably expect in terms of a reduced loss payment?
The following stepwise procedure is reflective of what takes place in most successful negotiations involving structured settlements in the context of a tort claim.
1-Claim and/or Claimant Type Identification
The first step is the identification of appropriate claim/claimant types or heads of damages
2-Structured Settlement Consultant Contact
The next step is to contact a structured settlement consultant. Whether for evaluative or illustrative purposes, early contact allows the consultant to take the necessary preparatory measures; for example, the submission of medical documentation for life impairment ratings.
3-Lump-Sum Parameter
The third step in the process is usually the determination of a point of comparison; namely, the lump sum claim potential. This usually means calculating, mathematically, the present value of the future heads of damages being claimed.
4-Offer/Counter-offer
The fourth step is the preparation and exchange of offers. Offers involving structured settlement costs are usually arrived at in one of two ways: “top-down” or “ground-up.”
A “top-down” offer begins with the present value of the claimant’s full lump-sum loss. This amount is then broken down in terms of what is to be paid “up-front” and what is to be invested in the structured settlement. The amount to be invested in the structured settlement is discounted in recognition of the fact that the casualty insurer has no obligation to agree to a structure and, therefore, should share in the tax benefit that it produces for the claimant.2 The discount employed, conventionally, has been in the range of 10% to 15%.
A “ground-up” offer is based on the claimant’s loss assessed on a periodic basis, rather than by reference to a lump sum. The principal amount to be invested in a structured settlement is calculated in reference to what would be necessary to replace the claimant’s periodic loss; for example, the amount invested in a structure needed to produce the claimant’s net annual future lost income. If this amount is not increased by some percentage factor, the claimant gets merely what he has lost, on a net basis, and the casualty insurer enjoys the full benefit of the tax savings through a significantly lower (relative to a present value calculation) loss payment. There is no convention associated with the percentage increase that may be applied to this “ground-up” figure; that is, this is a matter of negotiation.
5-Legal Fees
The fifth step in the process is legal fees. Legal fees are usually covered by the “up-front” payment. While always negotiable, the amount paid usually approximates what would have been paid had the loss been settled by a lump sum.
6-Settlement Documentation
The final step is the settlement documentation. The documentation associated with structured settlements is usually some combination of the following:
A-Minutes of Settlement
B-Release/Consent Judgment
C-Partial Satisfaction Piece
D-Certified Copy of the Annuity Contract(s)
The Minutes of Settlement may embody the Settlement Agreement and the Release. Alternatively, the Release may be a stand-alone document, particularly in cases where no action has been commenced. In the event that the structured settlement is negotiated in the context of a lawsuit, there may be a need to obtain a Consent Judgment (which would incorporate the Minutes of Settlement) and file a Partial Satisfaction Piece in relation to any initial “up-front” lump-sum payment.
The manner in which this documentation is worded is important to ensuring the tax-free status of the structured settlement. A structured settlement consultant should be able to assist with closing documentation. This would, at minimum, include the provision of precedent wording and an ability to determine and formally “sign off” on whether the closing documentation complies with CRA’s guidelines for structured settlements.
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Benefits of Using Structured Settlements