Brain Injury > Structured Settlements
TYPICAL STRUCTURED SETTLEMENTS
Kleinick Law, New York Lawyers specializing in structured settlements involving brain damage. Representing plaintiffs in
New York City (NYC), Brooklyn, Bronx, Manhattan, and surrounding
While structured settlements can take several forms. Below is a brief description of what I would consider to be a typical structured settlement transaction.
1. An individual (the "Plaintiff") is involved in, for example, an automobile accident with another individual or company (the "Defendant").
2. The Plaintiff may file a lawsuit against the Defendant or simply file a claim with his own automobile insurance company or against the casualty insurance carrier for the Defendant. (It is important to note that all structured settlements do not necessarily arise from a lawsuit. Often, claims against property and casualty insurance carriers that have not resulted in a lawsuit are resolved by way of a structured settlement. Nevertheless, for purposes of our example, let's assume that the Plaintiff has retained a lawyer and filed a lawsuit against the Defendant.)
3. The Defendant's property and casualty carrier will retain an attorney to provide a defense for the Defendant.
4. As is the case with almost all litigation, the parties agree to settle; in this case let's say they agree to settle by way of a structured settlement.
5. Under a structured settlement agreement, the Defendant will contractually agree to pay the Plaintiff (i) an up front cash payment (which almost always goes to pay the Plaintiff's attorneys fees, court costs, medical expenses, etc.) and (ii) future periodic payments. The future periodic payments may be monthly payments, annual payments, every five years, or any combination of these and more. The available payment options are limited only by the creativity and negotiating skills of the parties. The parties execute a settlement agreement, whereby the Defendant and/or the Defendant's property and casualty insurance company agree to make the future periodic payments to the Plaintiff in return for a release by the Plaintiff of all claims and causes of action against the Defendant and the Defendant's insurer.
6. Often, the Defendant and/or the Defendant's insurer will execute a Qualified Assignment, whereby the Defendant and/or the Defendant's insurer will assign to a third party (the "Assignment Company") the obligation to make the payments due under the settlement agreement. The Assignment Company is typically, but not always, an affiliate or subsidiary of a large insurance company.
7. Typically, the Qualified Assignment arrangement is contemplated and described in the Settlement Agreement and the Plaintiff contractually agrees to permit the Defendant and/or the Defendant's insurer to assign their obligation to make the future periodic payments due under the Settlement Agreement to the Assignment Company. Often, the Plaintiff actually signs the Qualified Assignment and the Defendant and/or the Defendant's insurer is released from any obligation to make the periodic payments called for by the Settlement Agreement.
8. The Assignment Company will then purchase an annuity from a life insurance company ("Life Insurance Company") to fund its obligations to make the payments due under the Settlement Agreement and/or Qualified Assignment. Often, the Assignment Company purchases the annuity from an affiliated life insurance company. For example, Safeco Assigned Benefits Service Company, an Assignment Company, will often purchase an annuity from Safeco Life Insurance Company to fund its obligations to make structured settlement payments.
9. The Assignment Company is the "owner" of the annuity, Life Insurance Company is the "issuer," and the Plaintiff is identified as the "payee," "annuitant" and/or "primary beneficiary." The Settlement Agreement often, but not always, will provide that the Assignment Company may, at its option, purchase an annuity from Life Insurance Company to fund the Assignment Company's obligation to make the periodic payments.
10. Life Insurance Company will then make the annuity payments directly to the Plaintiff, as payee, annuitant and/or beneficiary under the annuity, at the direction of the Assignment Company, as owner of the annuity.
11. NASP members come into the equation by providing the Plaintiff (i.e. the (annuitant/payee/beneficiary under the Annuity) liquidity, in the form of assignments or loans secured by the Plaintiff's right to receive all or a portion of the payments due under the Settlement Agreement and annuity. For example, a NASP member may accept an assignment of the Plaintiff's right to receive certain payments due in connection with the structured settlement arrangement or may loan the Plaintiff money, in return for a pledge of the Plaintiff's right to receive the payments due under the settlement agreement and/or annuity.
This is not the exclusive method by which structured settlements arise, but certainly the most common. For example, there is no requirement that a structured settlement involve an Assignment Company or an annuity. As discussed in more detail below, the Assignment Companies, Life Insurance Companies and structured settlement brokers enjoy tremendous economic benefits from structuring these transactions in the above manner, which helps explain why this structure is so valuable.
Nevertheless, defendants in litigation and their property and casualty insurance companies may simply agree with plaintiffs and claimants to settle a case which calls for a payout of the settlement amount over time. That would be considered a structured settlement, but would not involve a Qualified Assignment company and would not fall under Section 130 of the Internal Revenue Code (see below).
The defendant or property and casualty carrier may bypass the Assignment Company and simply purchase an annuity directly to fund its obligation under the settlement agreement or simply make the future periodic payments directly to the plaintiff/claimant out of its own funds. Structured settlements that predated 1986 (and the enactment of certain tax provisions) typically did not involve Qualified Assignments.