Future Looms on Southern Horizon

Defendant insurance companies and self-insurers should be alert to litigation trends in the United States arising from the negotiation of claims involving structured settlements. The best protection for your company is to make sure your claimants have access to the advice of an independent structured settlement broker/expert during the settlement negotiations and during the placement of the structured settlement annuities.

BACKGROUND: STRUCTURED SETTLEMENTS

Structured settlements developed first in the United States. “Structures” are arrangements to provide a claimant with a tax-free pattern of future payments to meet their needs. These arrangements require less cash than a “lump-sum” settlement that generates taxable growth. They provide significantly more security than a claimant-directed investment.

Canada followed the United States by about a decade in the acceptance and the use of structures. Canadians have also followed the United States in adopting structured settlement variations and developments. “Assignments,” “reversions” and “split plans” to enhance return and security are some examples of developments in the United States that followed sometime later in Canada.

United States negotiation and practice methods have shifted in recent years in response to stresses, problems, and litigation that ensued after (structured) settlements had been completed.

Structure brokers are involved prior to settlement in assisting their client or solicitor to identify and “cost” the various needs and obligations. They develop proposals that address future increases and decreases in those needs. Also, they attend the settlement forum to evaluate the other party’s proposals and offer alternatives to unreasonable suggestions.

The structure broker is often the professional that assists the claimant during preparation and in the final hours to understand that they can settle for a compromised amount and still be certain that their future will not be one of destitution. Structure brokers are paid by commission on the funds they place with the life insurance company that issues the annuity.

U.S. TRENDS DEFENDANT INSURERS AND STRUCTURE BROKERS

There was a trend in the United States towards defendant insurers demanding that their chosen structure broker exclusively place the annuity and receive the commissions.

Motivations for doing this vary according to the different insurance companies. Some simply found they were comfortable with the methods and personnel at one brokerage. Some felt they would receive “free” advice and assistance from their broker on other cases in return for the exclusive right to be paid all the commission on the cases that did result in a structure. Some actually entered into arrangements with their brokers to receive a significant portion of the brokers’ commissions in return for exclusivity.

This trend means claimant solicitors would have to pay for independent expert advice from their own or their clients’ funds. This is a difficult proposition, especially given that the commissions paid to the defendant’s broker already come out of the claimant’s settlement amount (in the form of a commission that reduces the actual amount invested). Many claimant solicitors simply accepted the advice of the defendant’s expert or ignored the structure potential altogether.

Claimant solicitors in the United States and Canada do not blindly accept the opinion of the defendant’s lawyer, the defendant’s doctor, the defendant’s actuary, the defendant’s rehabilitation consultant or the defendant’s investigator; nevertheless, they found the difficulty in paying an independent structure broker was overwhelming. Many claimant solicitors in the United States also became resigned to relying upon the advice and expertise of the defendant’s structure expert to protect their claimant’s best interest at the same time.

Several cases with one common thread have produced some unanticipated results across the United States. The common thread is the absence of an independent structure broker working for the claimant. The unanticipated result has been judicial findings against the defendant insurers.

FINDINGS AGAINST DEFENDANT INSURERS

A medical malpractice case in New York state was resolved with a structured settlement. The defendant’s broker represented the settlement to cost US$675,000 and produce US$3,000 per month. The claimant did not have a structure expert involved, but he was satisfied with the amount and he settled. He paid his lawyer a contingency fee based upon the $675,000. The defendant’s broker subsequently applied an “increased mortality factor” based upon the claimant’s injuries and purchased the annuity for US$410,000. The claimant sued, and recovered US$210,000 from the defendant insurer. [Source: Cause No. 730 N.Y.S.2d 345(2001)]

In Connecticut, the solicitor and guardians of a minor claimant did not have a structured settlement expert working for them. They discovered post-settlement that the casualty insurer had received a large portion of the defendant structure broker’s commission (the casualty insurer had thus misrepresented the amount the settlement had cost them). Upon further investigation, the claimants also alleged that the casualty insurer had frequently spent less on its purchase of annuities than agreed at settlement.

In light of the above revelations, the guardians initiated a new lawsuit that included 10 specific causes of action:

* breach of the implied duty of good faith and fair dealing;

* breach of fiduciary duty;

* breach of contract;

* violation of State Unfair Trade Practices Act;

* violation of State Unfair Insurance Practices Act;

* fraud;

* negligent misrepresentation;

* civil conspiracy;

* conversion; and

* unjust enrichment.

The Supreme Court of Connecticut allowed the claimants to proceed with six of these causes of action against the casualty insurer. Although the amounts in this case were small, it alerted former claimants of this casualty insurer and other companies to examine their own settlements. [Source: Cause No. 620 Connecticut (2002)]

Due to cases such as these – in addition to the increased vigilance of U.S. regulators – an evolution in the structure business has taken place. Defendants have learned that any small compensation they might receive from an exclusive brokerage arrangement is not sufficient when compared to the potential post-settlement disputes. Plaintiff and defendant structure brokers in the United States now regularly share the commissions generated by the annuity, thus ensuring claimants have access to an independent expert without increasing the defendant insurers’ settlement costs.

In the United States, life insurance companies have helped this process by accepting direction on their application forms to divide brokers commissions “at source.”

Canadian laws vary from laws in different U.S. states in some ways, but there are enough similarities to cause concern. Changes in the Ontario Statutory Accident Benefits (SABs) make this system more adversarial than its predecessors. There is also increased regulatory attention across Canada.

To my knowledge, there is only one independently written textbook on structured settlements in Canada. The author of the book Structured Settlements, John P. Weir, is a member of the Ontario Bar, a member of the University of Windsor’s Faculty of Law, and is a former superintendent of insurance for the province of Ontario.

In a section of the book entitled “Negotiation and Conduct,” Weir makes the following observation:

“All too often in structured settlement situations, claimant’s counsel, and sometimes even defense counsel, lose sight of the adversarial nature of the Anglo-American civil procedural syste m. The entire structured settlement process must at all times be conducted in an atmosphere which fully recognizes that the setting is an adversarial proceeding…

“Conflict of interest arises in those frequent instances where the casualty insurer introduces a structured settlement consultant who purports or is held out by the casualty insurer to be acting objectively and in the best interests of both parties simultaneously. Such a proposition is untenable in an adversarial system…

“The Ontario Supreme Court decision of Pelkey & Fortas found the casualty insurer and their legal counsel liable to the plaintiff notwithstanding that the plaintiffs had retained independent legal counsel…The analogy and application of the reasoning in this case … may visit liability upon the claimant’s counsel for professional malpractice, upon the consultant for breach of fiduciary duty, and vicariously upon the casualty insurer or life insurance company (contracted with) the consultant.”

MADE IN CANADA

There are about eight qualified, full-time structured settlement brokers in Canada. Most do structured settlement work for defendants and do other cases for plaintiffs. Experience has shown that when independent structure brokers are working for each party, the calculations of the structure brokers in support of each party during negotiations are inevitably different in some way. The largest divergence in our experience was Cdn$600,000. A number of others have exceeded $100,000. This pattern holds true in various provincial jurisdictions.

Without a broker on each side, one of the parties is typically resigned to accepting the calculations of the opposing expert. These diverging opinions should be addressed and resolved during settlement negotiations, not years later in new litigation.

All of the life insurance companies providing structured settlement annuities in the Canadian market accept written direction on their Annuity Application Forms to divide the commissions and bonuses between two qualified structured settlement brokers.

As a manager, executive, or corporate governance officer of a casualty insurance company or self-insurer, you should consider a policy that accommodates the request of a claimant who wishes to involve a qualified, independent structured settlement broker of his or her own choice. This dramatically reduces future risks to your company.

If you need to have your own structure broker involved, you can require that whichever broker places the annuity must designate on the Annuity Application Form that the other broker will receive 50% of the commissions and bonuses. As developed in the United States, this practice will protect your company without incurring any additional cost.