Considerations regarding “In House” Programs and Factoring Transactions for the Casualty Insurer

Acknowledging these economics as well as the availability of relevant affiliated resources, many casualty insurers, and some self-insureds, have organized “in house” programs to capture and direct structured settlement claim dollars.  These internal structured settlement programs frequently include partnerships with affiliated and/or external brokers and product providers.  Internal structured settlement programs increasingly view claimants and their families as potential customers for financial and insurance products and services.  The Financial Services Modernization Act has accelerated the development of internal structured settlement programs among casualty insurers.  Few, if any, program specific or case specific performance metrics currently exist for structured settlements.

Regardless of their strategic and operational perspective, defendants and casualty insurers should now reconsider how factoring transactions impact their structured settlement programs and case management strategies.  Should they promote structured settlements?  Should they facilitate structured settlement factoring transactions?  Should they encourage and promote alternative structured settlement products?  How should they respond to claimant demands for expanded structured settlement payment rights?  Should they participate with claimants in seeking tax guidance on individual cases?

Cost/Time Savings, Complexity and Risk for the Casualty Insurer in dealing with the Structured Settlement Industry

The traditional justifications for casualty insurers to promote structured settlements have included saving claim costs and claim time.  These traditional justifications are counter intuitive and unsubstantiated.  The structured settlement industry, even with the Tax Relief Act of 2001 still struggles with meaningful and articulated standards, metrics and best practices over all.

1. Cost Savings – Structured settlements typically are negotiated on a cash basis.  Few plaintiff attorneys permit their clients to accept a structured settlement costing less than the cash alternative.  Plaintiff attorneys increasingly are assisted by their own structured settlement consultants who have access to annuity rates.  Annuity costs are discussed openly in most structured settlement negotiations.  Justifications for cost savings frequently point to settlement costs that are less than preliminary reserve estimates.  It is questionable whether such “savings” are attributable to the structured settlement or to good claim practices.
2. Time Savings – Many structured settlement participants don’t track their time.  Structured settlements involve additional information, documentation and work processes not required in a lump sum settlement.  The time inefficient process of completing structured settlement closing documentation creates a bottleneck for the entire claim management process.
3. Balanced with these “benefits”, are the complexity and risks of structured settlements that do not occur with lump sum settlements.  Unanticipated liabilities and inefficient work processes result when defendants and casualty insurers fail to understand and properly manage the complexities and risks of their structured settlements.
4. Defendants, including casualty insurers, purchase 100 percent of all structured settlement funding products.  They incur extra costs for structured settlements that increase general claim costs.  When issues occur following settlement, including factoring transactions or insolvencies, they are at risk for additional costs.  Beyond their concern for claimants’ welfare what favor or advantage granted in return do defendants and casualty insurers receive for promoting and agreeing to structured settlements?

Considerations for the Casualty Insurer in Dealing with Structured Settlements

Recent trends in property/casualty insurance reflects catastrophic insurance losses from earthquakes, hurricanes, and other natural and unnatural disasters reaching unparalleled levels.  Property/casualty insurers are anticipating even larger losses in the future.  It’s not only the frequency of these natural and unnatural disasters that is debilitating,  it is also the population growth.  For example, the population in the Atlantic and Gulf regions of Florida and in California have experienced a population growth three or four times the national average for the last three decades.

Faced with this increased exposure and seeking an alternative to traditional methods of managing their risk load, property/casualty insurance companies have turned to capital markets.

The structured settlement market has enjoyed major improvements since the Victims of Terrorism Tax Relief Act of 2001.  For casualty insurers, there is now tax clarification:  defendants (including casualty insurers) who are periodic payment obligors on specific structured settlements, or otherwise qualify as “parties to a settlement” under IRC 5891 (d), have received tax clarification in the event of a factoring transaction.  Provided the applicable requirements of IRC sections 72, 104(a)(1) and (2), 130 and 461 (h) were satisfied when the structured settlement was consummated, these Internal Revenue Code sections remain applicable.  In the event of a structured settlement factoring transaction, payers of the periodic payments are not required to withhold tax.

As obligors in specific structured settlements, defendants and casualty insurers also qualify as “interested parties” under the Model State Structured Settlement Protection Act.  As such, they are entitled to receive notice to applications and to participate in Court proceedings seeking qualified orders for structured settlement factoring transactions.

As far as future structured settlements go, defendants should reconsider their use of structured settlements as well as their products, protocols and documentation.  What is the strategic and operational justification for using structured settlements?  Why, and under what conditions, should casualty insurers promote or agree to structured settlements?

Entering into contract with a Factoring Company to sell some or all of your future payments from your structured settlement could be one of the biggest mistakes you make in your lifetime without a skilled attorney in this arena of law.  The fine print alone could obligate you into doing business with a scam.

 As with any industry, there are good and bad Factoring companies.  The good ones abide by the law, and have your best interest at heart.  The bad ones have no problem breaking the law and ripping you off.   Maybe you have hired a lawyer, but how do you know the lawyer didn’t come from the Insurance Company that funds the factoring company?  Take for instance this situation:

You’re working with what you believe to be a reputable Factoring company.  They walk you through a detailed contract and they point out how they are protecting you and how they are abiding by California State Law; but are they showing you everything?  Do you really understand the legal terminology?  ”Obligor, payee, protected party, third party beneficiary, tort claim, contravene…” are you ready to do business with a company that you don’t even know is providing the correct and legal information in the contract?  Just because they say they are with coffee and smiles and nice chairs and an overall feeling of warmth and care, doesn’t mean you’re protected.

They are drafting the contract.  Not you.  There is a contract template provided by the state of California that they are supposed to follow, but are they including the correct wording?  The contract looks legal… If your selling an unqualified funding asset, you have even more to be concerned about.  They could throw in wording in the contract — in the midst of what is legal and sound — a statement like, “Buyer’s first right of refusal”.  You skim over it, saw it, but put it in the category of, “Well, not sure what that means, but they’d explain it to me if it was important, just like with everything else…they like me, they wouldn’t hurt me.”  That kind of thinking will get you in hot water, they’ve got to support their Rolls Royce and the three vacation homes in the Caribbean some how.

Those 5 little words obligate you to do business with the same company if you wanted to sell more of your future payments down the road — whether or not they’re offering fair market value.  It means you can’t shop around to get the best deal.  It means if you had $100,000 left to sell, you might end up with only $25,000 and there’s nothing you can do about it.  Do you really have the time and money to do battle with an arsenal of lawyers from the Company?  Even if you did have a lawyer, how do you know he/she could handle the barrage of paperwork and legal briefs from the opposing large money making machine of a company?

Don’t be scared to be creative with your future payments.  Finding a trustworthy lawyer to protect you and to participate in the drafting of the contract on your behalf should be your first move.

Interested in selling your future payments from your structured settlements? Be careful. Even though this secondary market is regulated, unethical companies (factoring companies) have just gotten more sneaky and more creative on how to rip sellers off. Just yesterday I was researching companies that advertise to buy your future payments. One really spoke to me. I began to admire their website and their mission, and I thought, “What a trustworthy company…” I researched the president and the vice – president. It turned out the vice – president of the company was in prison as of 2010 for 4 years for over a hundred felony counts that include identity theft, forgery, grand theft and conspiracy. All the money he ripped off from over 300 victims supported his lavish lifestyle. And he was posing as a professional that you could trust. The phonies, the scams are out there. Our government has created laws that make selling your future payments safe and legal, and there still is evidence of scam artists, prolific thieves that dress well, look the part, say the right things and seduce you with “cash now”. A lot of times, a company devoted to buying your structured settlement payments will want sensitive information from you, just for a “free quote”. Some of the requested documents would be: • completed application (name, address, birth date, social security number) • your annuity policy • the Extended Release / Settlement Agreement • A copy of your most recent Annuity Check or Check Stub (If direct deposit, attach copy of bank statement showing deposit) • A copy of front page of most recent Tax Return • Copies of two forms of ID • A copy of Marriage License • A copy of Divorce Decree(s)/and property settlements(s) • A copy of Will and Probate Papers if you are receiving payments as the result of a probated estate • A copy of the Court Judgment • Copies of Assignments, Revisions, or other important papers related to the Annuity or Settlement Agreement, and Bankruptcy discharge papers Are you really going to blindly submit all of this sensitive information to a company you know nothing about, except that you liked their website? You are the unwary consumer they hope will visit their website. You are their prey. Only a legal professional with a strong moral compass can protect and represent you. Do your research, hire a lawyer and get the best possible deal.

Welcome to WordPress. This is your first post. Edit or delete it, then start blogging!