Why Congress needs to reform structured settlements

President Trump’s tax reform announcement is likely to jumpstart Congress’ focus on reforming the federal tax code. Almost no industry is more vested in tax code changes than the structured settlement industry. Its existence as an option for tax-free income to accident victims depends on Sections 104 and 130 of the federal tax code. 

For 31 years, I have been involved with structured settlements, first as a consultant who represented accident victims and for the past 15 years as attorney.  I have seen firsthand how structured settlements help preserve financial security for vulnerable people.

{mosads}But no industry is perfect. Congress must recognize that the current system has drawbacks for the victim and these problems need fixing.

First, some perspective: Fifteen years ago, 22 U.S. life insurance companies issued $6.1 billion in structured settlement annuities to fund future payments. Last year, the industry’s nine remaining insurers issued only $5.8 billion in annuities. Adjusting for inflation, therefore the industry has declined significantly.

My hunch is that part of the decline is due to low interest rates and another part involves concern about unscrupulous “cash now” companies. But I suspect there is a larger problem.

Specifically, since Congress does not allow an accident victim to purchase or own the annuity, that person must go through a structured settlement broker, who acts as an intermediary. The life insurance company pays this broker a 4 percent commission, which ultimately lowers payments to the victim. Under pressure from the established broker distribution network, life insurers have made the 4 percent commission an immutable element of their pricing.

That’s often a problem, particularly if a financial settlement isn’t enough to meet a victim’s long-term needs.  Every settlement dollar that goes to a broker’s commission is one less dollar funding future payments.  Other financial products allow adjusted commissions, but not structured settlements.

This system probably seemed normal in 1982, when Congress changed Sections 104a and 130 to encourage structured settlements. But it is woefully outdated in 2017. An annuity with a represented cost of $1 million generates a $40,000 commission. Many structured settlement annuities in catastrophic cases cost multiple millions. Is it fair to an injury victim to require an automatic 4 percent fee to use a benefit Congress created to protect his or her financial future?

One option for Congress involves treating accident or injury settlements the same as qualified retirement plan rollovers. The victim might have, say, 90 days to buy and own an annuity or U.S. Treasury obligation that would provide tax-free income. This would certainly be victim-friendly.

If built-in commissions were removed from an annuity’s price and brokers were compensated on a separate, negotiable fee basis, paid by whichever side engaged their services, the payout to the injury victims could increase by 4.167 percent (1.00 divided by .96). 

Importantly for Congress, this could end or at least dramatically reduce the scurrilous problem of undisclosed commission payments from insurers. Instead, the injury victim could choose the insurer that issues the annuity and, more important, select the structured settlement consultant to represent him or her.

To be clear, a structure broker provides incredibly valuable assistance, especially when representing the plaintiff instead of the liability insurer. For decades, I have worked with plaintiff consultants who are exceptional professionals. In fact, I helped found their trade association, the Society of Settlement Planners.

Congress must accept that the current system causes legitimate confusion about whether structure brokers working for the defense represent accident victims or the defendant. Ethics rules label simultaneous representation of both sides a non-waivable conflict of interest. But my experience is that defense brokers often suggest falsely to injury victims that they are working for the injured party’s benefit.

Three years ago, Ringler Associates, the industry’s largest structured settlement company, was sued by an accident victim who lost tens of thousands of dollars in promised structured settlement payments because his insurer went into liquidation. Tragically, after the victim’s payments were slashed, his state’s insurance guaranty association refused to cover any part of the shortfall because the insurer that issued the annuity was never licensed in his state.

Congress, take note: That victim’s structured settlement annuity was procured by a defense broker who collected the full 4 percent commission.

Incredibly, Ringler Associates’ response to the lawsuit was to state that that, since its broker worked for the defense, that “precludes any finding that [Ringler] owed Plaintiffs a duty to exercise reasonable care.” Ouch!

Congress should know about other litigation involving insurance companies paying undisclosed fees to defendant structured settlement consultants. In 2010, Hartford Financial Services paid $72.5 million to resolve claims by 22,000+ structured settlement beneficiaries involving undisclosed fees.

Recently, AIG was hit with a class action suit, Ezell, et al. v. Lexington Ins. Co., et al, Case No. 1:17-cv-10007 (D. Mass.), alleging fraud, racketeering and unjust enrichment for failure to disclose commission payments on structured settlement transactions.  

Disclosure: I am associated with both cases as a plaintiff’s counsel.

Congress should help the industry clarify the role of the structured settlement broker, specifically whether this person’s first duty is to the accident victim or the insurer. At a minimum, claimants should always have the right to select their own structured settlement broker, and be required to make full disclosure of all commissions.

Members of the Ways & Means and Senate Finance Committees should help reform this process.  So should Sen. Elizabeth Warren (D-Mass.), who has been putting a spotlight on bad insurer practices. Reps. John Lewis (D-Ga.) and Jim Sensenbrenner (R-Wis.), co-chairs of the Congressional Structured Settlement Caucus, should also speak out about removing this burden on accident victims.

The structured settlement industry has been trying to expand through claims involving the Centers for Medicare & Medicaid Services and the Federal Employers Compensation Act. I agree that it’s time to expand the industry but Congress should do so in a way that empowers the victim. That way, everyone benefits.

Richard Risk, Esq., principal of the Risk Law Firm, P.A., was a structured settlement broker for 16 years before becoming an attorney in 2002.