STRUCTURED SETTLEMENTS 101: HOW STRUCTURED SETTLEMENTS ASSIST THE SETTLING OF MEDICAL MALPRACTICE CLAIMS

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Rosalyn Perkins
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1 STRUCTURED SETTLEMENTS 101: HOW STRUCTURED SETTLEMENTS ASSIST THE SETTLING OF MEDICAL MALPRACTICE CLAIMS 1

2 WHAT IS A STRUCTURED SETTLEMENT? A structured or periodic payment settlement is defined as: "Any series of payments made other than a single cash lump sum amount." It is a financial package designed for the plaintiff, and is agreed to be paid by the defendant or its insurer. It is limited only by the ingenuity of those involved. In its most fundamental form, a defendant or its insurer agrees to make future periodic payments to the plaintiff. Once this has been accomplished, in most instances, the defendant then funds his obligation by the purchase of an annuity. 2

3 WHEN SHOULD STRUCTURES BE CONSIDERED? Many settlements are put together in the $5,000 to $50,000 range. However, almost any time the $50,000 threshold is reached a structured settlement should be considered. In particular, those cases over $100,000, because of the tax-free status of income, yield a leverage which makes the whole system desirable. 3

4 CIRCUMSTANCES OF THE INJURED PARTY Those without means, or capabilities or basic financial management skills are good candidates. Also effective when the injured party has long term needs. Typically, these are cases involving permanent injuries which require continuing medical attention. We can also supplement the injured party s diminished earnings or earning capacity. These are all helpful method of resolving the case. 4

5 ADDITIONAL CONSIDERATIONS Guardianship Cases Death Cases Deferred Payments Severe Injury Attorney Fees 5

6 WHY DO STRUCTURES WORK? Because the approach is one which benefits everyone involved. Let me explain. 6

7 THE DEFENDANT/INSURER Substantial savings in claim dollars are possible. In addition, it helps to settles cases and clear claim calendars. 7

8 THE DEFENSE ATTORNEY Obviously, what is good for the defendant / insurer (the Client) is good for the defense attorney. In addition, it provides the defense attorney with another approach in negotiating a settlement. 8

9 THE PLAINTIFF ATTORNEY By using this approach, he/she can assure that their client will receive a guaranteed, taxfree income for life. The income will be in a form that his client is competent to manage. The payments are not vulnerable to those who might put the funds in the hands of unscrupulous outsiders, or who might squander the funds in a well-meaning attempt to assist the injured plaintiff. 9

10 THE BENCH Judges almost universally support this approach. It is especially appealing in guardianship cases because the judge has the responsibility of approving the settlement. It is clear to the courts that all too often the injured parties dissipate their awards (statistics show that some 25-30% of all accident victims completely dissipate their judgements or settlements within two months of recovery; and 90% of them spend it all within 5 years pursuant to the California Practice Guide - Personal Injury and without other means of support, become wards of the state. It also prevents the necessity of guardians applying to the courts periodically for qualified withdrawals and for annual accounting of funds deposited. 10

11 THE PLAINTIFF This is the party who probably benefits most. When the program is properly designed, a structured settlement focuses on the needs of the plaintiff. This individual tailoring results in a program that protects the plaintiff through the provision of a guaranteed income for life. An annuity settlement program reduces the potential of mismanagement of funds. Since many of the plaintiffs have little prospect of returning to work, guaranteed financial security is particularly important. Best of all is, all of this income is tax free. 11

12 ADVANTAGES The plaintiff can use a structured settlement to exclude from federal income taxation the total amount of future payments received. A structured settlement provides an alternative to just offering cash and can be designed to meet the specific needs of the plaintiff: College funds, Medical care and lost income, Retirement fund, or Mortgage payments. 12

13 ADVANTAGES They can be used to insure that the settlement is protected from the squandering of a naive or inexperienced plaintiff, or claims by friends and relatives. The defendant can employ a structured settlement to resolve a dispute for less, in terms of present value dollars, than it would cost to settle for a lump sum. They help to renew settlement negotiations when both sides reach an impasse. They can provide a lifetime of security and material well-being to the injured plaintiff without the problems and anxieties of investment, money management, and financial decisions. 13

14 SUBSTANDARD RATINGS / RATED AGES One aspect of service in the annuity settlement field is searching for the "substandard advantage." Finding a way to adjust the annuitant's age upward reduces the cost of a periodic payment settlement, or increases the benefit available given the same cost factor. The substandard advantage may appear in one of four ways: 14

15 The actual injury suffered in this claim action may have an adverse impact upon the long-range survival expectation. Complications from the original injury may create a risk to survival, even if the original primary injury did not. The risk which caused the injury persists, increasing the probability of future injury. Alcohol abuse is related to many injuries and evidence of persisting alcohol problems poses a significant risk, even if the injury in question is innocent. Risks may be present which are coincidental to injury. High blood pressure, diabetes, significant obesity, even cigarette smoking may permit an age adjustment. It is in the best interests of all concerned parties to explore the possibility of a substandard rating. 15

16 COMPONENTS OF A STRUCTURE While structured components may vary with each case, most of the "pieces" will be considered over and over again. They are: Cash Up Front 16

17 MONTHLY INCOME Level income, Compounded annually - generally speaking, 3% to 5%, Step rate increases - i.e., $20,000 the first 5 years, $25,000 the next 5 years, $30,000 the next five years, etc., Joint and survivorship - the surviving spouse receives income up to 100%, and Guarantee period - 5, 10, 20, 30 year guarantees. 17

18 COLLEGE FUNDS Typically, annual payments at ages 18, 19, 20, and 21 18

19 DEFERRED CASH PAYMENTS Periodic - every "X" years, Retirement lump sums, Estate funds, and Inflation hedge. 19

20 ILLUSTRATION A Minimum Premium Options PROPOSAL 1 GUARANTEED PROJECTED PAYOUT PAYOUT COST CASH AT SETTLEMENT 2,500 2,500 2,500 BENEFITS: At age 18 7,500 At age 21 10,000 17,500 7,500 TOTAL SETTLEMENT 20,000 20,000 10,000 PROPOSAL 2 GUARANTEED PROJECTED PAYOUT PAYOUT COST CASH AT SETTLEMENT 2,500 2,500 2,500 BENEFITS: At age 18 5,000 At age 21 10,000 At age 25 12,500 27,500 7,500 TOTAL SETTLEMENT 30,000 30,000 10,000 20

21 ILLUSTRATION B College Fund PROPOSAL 1 GUARANTEED PROJECTED PAYOUT PAYOUT COST CASH AT SETTLEMENT 2,500 2,500 2,500 BENEFITS: College Fund Commencing at age 18 $5,000 per year for 4 years only 20,000 20,000 7,500 Lump Sums At age 25 5,000 At age 30 10,000 15,000 3,500 TOTAL SETTLEMENT 37,500 37,500 13,500 21

22 ILLUSTRATION C Birthday Payments PROPOSAL 1 GUARANTEED PROJECTED PAYOUT PAYOUT COST CASH AT SETTLEMENT 27,500 27,500 27,500 FUTURE MEDICAL (age 16) 7,500 7,500 7,500 BENEFITS: At age 18 7,500 At age 21 10,000 At age 25 12,500 At age 30 17,500 47,500 15,500 TOTAL SETTLEMENT 82,500 82,500 50,500 22

23 ILLUSTRATION D-1 Rated Age PROPOSAL 1 GUARANTEED PROJECTED PAYOUT PAYOUT COST CASH AT SETTLEMENT 100, , ,000 BENEFITS: $3,000 per month for life 20 years guaranteed 3% annual compounding 967,333 3,205,744 Estate Fund At age ,000 At age , ,000 Total Structure 1,567,333 3,805, ,029 TOTAL SETTLEMENT 1,667,333 3,905, ,029 23

24 ILLUSTRATION D-2 Yield Illustration Monthly Monthly Year Amount TotalYear Amount Total , , , , , , , ,278 1,91, ,069 1,712, , , , , , , , , , , ,195 2,176, , , , , , , , , , , ,501 2,714, , , , , , , , ,693 3,205, , , , , , , ,098 1,312,534 24

25 ILLUSTRATION E Rated Age - Not Accident Related While reviewing this file, the claims handler noticed that the Claimant had openheart surgery three years prior to the accident. Therefore, submitting medical records which resulted in a savings of $56,518. $1,125 per month for life 20 years guaranteed 3% annual compounding Cost With a rated age of 52 $245,421 Without a rated age $301,939 Savings $56,518 25

26 Pre-Mediation Analysis Counsel Provide structured settlement specialist with the following information. Demand Letter Life Care Plans Economist Reports Medical Records Pre-mediation memorandum 26

27 PRIOR TO THE MEDIATION Structured Settlement Consultant Analyze both positions (plaintiff & defense) Review medical records for underwriting purposes Select the life insurance market to be used (this may change as the proposal payment streams change) Determine the present value (cost) of life care plans and/or economist reports Provide analysis for discussion purposes 27

28 Work with the Plaintiff Allow the structured settlement specialist to be involved in the offers to ensure that the injured party fully understands the proposals Take into consideration the counter offer as it applies to the structure (this is a needs analysis) Reshape the offers to include the identified needs DO NOT wait until late in the negoiations to offer a structure Advise as to how the settlement documents will be prepared and inform the plaintiff regarding the annuity contract and continued service that will be provided 28

29 Representing the interests of both parties In certain situations: The structured settlement specialist should be utilized by both parties to provide meaningful proposals to the injured parties within the settlement authority. If this is done early in the process it will determine the cost of the needs and free up funds for cash at settlement. 29

30 Life Care Plans The structured settlement specialist can analyze the plan and fund it at a cost that is significantly less than the projected cost outlined by the life care planner. Again, this will allow the need of the injured to be meet at the lowest cost possible freeing up claims dollars for cash at settlement needs. If substandard ratings are obtained the cost will decrease as the rated age increases. Here is how it works: 30

31 Annual Cost Summary Current annual costs per category are as follows: Age 4-6 Age 7-13 Age Age Age 55-Life Professional Health Care Mobility/ADL Equipment $21,996 $13,236 $15,270 $13,360 $19,360 $2,569 $2,569 $2,276 $2,270 $2,270 Personal Care $2,800 $2,800 $2,800 $98,900 $98,900 Transportation $2,080 $2,080 $2,080 $0 $0 Annualized Totals $29,445 $20,685 $22,426 $114,530 $120,530 Period Totals $88,335 $144,795 $269,112 $3,206,840 $3,013,250 Total Costs: $6,722,332 31

32 Structured Settlement Illustration Four Year Old Male With a Rated Age of 32 Description Expected Annuity Benefits Cost Age 4-6 $29,445 per year for 3 years only 3% annual compounding 91,011 89,350 Age 7-13 $20,685 per year for 7 years only 3% annual compounding 158, ,300 Age $22,426 per year for 12 years only 3% annual compounding 318, ,900 Age $114,530 per year for 28 years only 3% annual compounding 4,916, ,315 Age 55-Life $120,530 per year for life only 3% annual compounding 4,394,435 30,720 Totals $9,879,092 $1,124,585 Cost without rated age (1,252,130) Savings $127,545 32

33 WIN/WIN APPROACH The Utilization of a Structured Settlement can meet the needs of both the Plaintiff and the Defense and Assist the Mediator in the Settlement of the case 33

Working For You. Arcadia Settlements Group

Working For You. Arcadia Settlements Group Working For You Arcadia Settlements Group A MORE SECURE FUTURE: ONE WOMAN S STORY A 45-year-old woman is injured in a multi-vehicle accident. She is still able to work, but is concerned about future medical