GRAY MARKET COULD HURT STRUCTURED SETTLEMENTS

CHICAGO-Structured settlements can offer significant benefits to defendant companies and claimants in many situations, but an emerging "gray market" might cause Congress to rethink the settlements' favorable tax treatment.

"There are a growing number of companies that started out their lives buying lottery earnings," Randy Dyer, executive vp of the Washington-based National Structured Settlement Trade Assn. said last month in Chicago during REBEX '97, the annual Risk & Employee Benefits Exposition sponsored by the Chicago, Northeastern Illinois and Wisconsin chapters of the Risk & Insurance Management Society Inc.

"These same companies have now discovered the wonderful world of structured settlements, and these companies are now advertising and attempting to buy structured settlements from people," Mr. Dyer said.

Mr. Dyer noted that the federal tax code clearly recognizes periodic payments as a tax-excluded means of making settlements because Congress recognized the social value of structured settlements.

But current tax law also specifies that structured settlements can't be encumbered or accelerated, he noted, adding that legislation stemming from companies' efforts to buy the settlements already has emerged on the state level.

An Illinois law enacted last year prohibits anyone from selling a stream of payments from a structured settlement without the approval of the judge who originally approved the settlement, Mr. Dyer said.

Structured settlements enjoy support from attorneys for plaintiffs and defendants, Mr. Dyer noted. "They're the one place where there's a truce in the tort wars because both sides generally agree on this," he said.

Detailing just how structured settlements could be used, Joseph E. Gargan, a senior vp with Settlement Planning Associates in Washington, explained that a structured settlement is a voluntary agreement between the parties under which the injured victim receives damages in the form of a stream of periodic payments vs. a single lump sum.

"Really, what a structured settlement is, is anything but a lump-sum cash payment," he said.

Among the advantages are that payments can be scheduled for any length of time-even for a claimant's lifetime, and can be paid in a variety of ways, such as monthly, quarterly or on a joint-life basis.

Payments are structured to meet the future financial needs of the claimant, such as lost wages, medical needs, college funds or mortgage payments. "They can be matched to future financial needs," Mr. Gargan said.

The reasons a company should establish a comprehensive structured settlement program are that it helps to negotiate better settlements, it reduces legal and financial liabilities, and a structured settlement professional can provide a wide range of services and expertise, Mr. Gargan said.

But, "most defendants don't establish a structured settlement program," he noted. "They allow claim reps to select a structured settlement broker that they're going to use."

Mr. Gargan noted that what can distinguish structured settlement brokers is the level of service and added value they can provide.

Among other things, they can help establish a structured settlement policy with the client company's senior management, conduct file reviews, train claims people on how to use structured settlements, provide life care plans, economic cost analysis and wage-loss analysis, he said.

A structured settlement broker also will attend defense meetings and settlement conferences, provide administrative and legal support and report on the status and success of structured settlements they've helped arrange.

The last element is critical, Mr. Gargan suggested. "If you're putting together a program, you want to know how that program's working," he said. "You want to know where you stand, if you are saving money."

The actual cost savings a defendant company can gain through the use of structured settlements comes "through the process," Mr. Gargan said.

A defendant company needs to initiate discussions early, he suggested. It also should divide the larger demand into its smaller components, addressing each separately and focus on net income rather than gross.

It also should address the claimant's actual needs rather than perceived wants. "If somebody says they want to go to Disney World every year, well, they wouldn't have gone to Disney World every year prior to getting hit by the bus," Mr. Gargan said. The defendant company should continuously make good-faith structured offers that reflect those identified needs.

Done early in the process, structured settlements can reduce legal costs in several ways, generating savings "on both sides of the fence," Mr. Gargan said, reducing the number of hours billed by the defense counsel and the legal expenses the plaintiff will seek to recover.

And, because legal expenses escalate dramatically as trial nears, additional money is saved by initiating serious discussions early in the process.

Structured settlement programs need broad corporate support, Mr. Gargan said, with senior management defining the program and setting goals, selecting the funding vehicle, providing financial due diligence and continuously monitoring the program's results.

Structured settlements can make sense to both sides in the process. The most notable advantage that structured settlements offer claimants is that periodic payments are received free of federal income taxes. They also reduce the claimant's chances of squandering or mismanaging the money or falling victim to unscrupulous or unqualified investment advisers.

Among the cases for which structured settlements are ideally suited are temporary or permanent disabilities, guardianship cases, wrongful death cases or severe injury cases, especially those with long-term needs for medical care, living expenses and support of a family.

Structured settlements also could be used in some property loss cases, particularly to satisfy cases involving groups of homeowners seeking reimbursement for construction defects, Mr. Gargan said, as well as in environmental and pollution liability cases.

"Whenever there's a future need for payments, usually a structured settlement will work," he said.

Federal law does provide that the defendant may transfer the cost of future damage payments to a third party by means of a "qualified assignment" to a financially secure institution. Such an assignment provides the claimant with security that future payments will be made.

To qualify, the assignment must meet certain provisions, including that the payments are fixed and determinable and cannot be accelerated, deferred, increased, decreased or otherwise changed after agreement is reached.