Summit Structured Settlements
755 S.E. Frontier Suite 101
Waukee, Iowa 50263
Voice: 515.987.6888
Fax: 515.987.6999
Toll Free: 866.267.1177
info@summitsettlements.com
Disclaimer
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Why Does this Mentality Exist?
How did we ever get to this mentality in conducting settlement negotiations? Why
are offers made by some defendants or their insurers presented without divulging
the cost or the annuity company's name, and without disclosing the assumptions
used, such as impaired life expectancy? And, whey do attorneys representing
their injury victim clients allow the adversary to handle the biggest financial
transaction of their clients' life? It doesn't make sense.
It started sometime before 1983, when the Tax Code was amended by adding section
130, allowing for future payment obligations of the defendant or its insurer to
be assigned to a third party with favorable tax consequences for all. Before
section 130 came into being and periodic payment liabilities could be assigned,
the self-insured defendant or liability insurer purchased and owned the annuity.
The defense strategy was to focus on tax-free benefits to the claimant instead
of how much the annuity would cost. The defendant or insurer retained all risk
to make the future payments, giving them the argument that they could purchase
from whichever company they chose and for whatever price they could find. Some
liability carriers that had life insurance affiliates began purchasing annuities
from the affiliate, amounting to a transfer of cash from one side of the house
to the other.
Periodic payments were a product of the time value of money. A modest annuity
premium paid at the time of settlement could result in huge dollar payouts in
the future, depending on compounding interest rates and the length of time until
the payment was made. When used on an unsophisticated injury victim, this
negotiating strategy of not disclosing the cost of the annuity worked.
To respond to questions from the claimant as to the annuity's cost, the defense
created the myth that knowledge by the payee of the annuity premium amount was
constructive receipt, which would cause all internal growth of the annuity to
become taxable income. This was never true, but this strategy worked also for
the defense. The IRS has issued at least two private rulings that knowledge does
not cause constructive receipt, but we still hear that myth being exploited on
occasion.
Annuity Quotes Aid in Deceit
The structured settlement brokers, who worked almost exclusively for the defense
in those days, asked the life insurance companies to include in their annuity
quoting software programs a "plaintiff version" that would omit the cost of the
benefits and often the name of the life insurance company. The reasoning was so
that the focus would be on benefits, not cost.
If you check the insurance code in your jurisdiction, you might find that
annuity quotes are considered advertisements of life insurance products, and
that advertisements must bear the name of the company being quoted and the
premium amount.
Going beyond the original purpose of the "plaintiff version" annuity quote,
allowing the defense to focus on benefits during negotiations, rather than cost,
the annuity issuers began to authorize the substitution of phrases like "paid in
full" or "valuable consideration" in the blank on the annuity application form
asking for the premium amount. This ensures that the claimant never has access
to the actual cost of the annuity, even when a copy of the policy containing the
application form is provided to the claimant. And, because the payee is
considered only the "measuring life" with no ownership rights in the annuity,
the annuity issuer typically will not disclose the cost if the payee inquires.
Over the years, the defense brokers have entered into agreements with the
liability insurers for exclusive rights to handle structured settlements
involving those particular insurers. Often this amounts to an undisclosed rebate
to the insurer of part of the commission, because this concept of having
"national accounts" has become so competitive among defense brokers. Even if
there is no commission sharing, the quid pro quo is the broker's expertise in
helping the insurer save money. Additionally, the defense broker might be
obligated to steer the annuity business to the liability insurer's affiliated
life insurance company.
This article was written by Richard B. Risk, JD |
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