A Fresh Look at Structures

With court closures during the pandemic combined with industry turnover, adjusters and carriers are dealing with high case inventories, and both sides want to close cases in the most efficient way possible. One way to accomplish that is to utilize structured settlement annuities, which have become even more valuable with the rise in interest rates. “Structures” can provide the same benefits for less money (or more benefits for the same money) and they offer claims and litigation professionals the chance to bridge settlement gaps, enhance negotiations, avoid trials, and offer safe and secure financial planning for injured claimants.

Savings, Settlements, and Skeptics

Savings on worker’s compensation claims, especially Medicare Set-Aside costs, have been approximately 34% over the past seven years. Take, for example, an MSA report with a total cost of $645,985. When annuitized, this MSA can be funded for a cost of $388,210. That’s a definitive savings of 40%. 

Savings on liability cases can be better defined with structured financing value (SFV). The SFV on a claim is the difference between the cost of the annuity and the guaranteed benefits it produces over time. Let’s say an offer includes a series of annuities for future medical and lost wages, college funds for children, and a retirement package. Those annuities have a present value cost of $751,325, but will generate $1.2 million in guaranteed tax-free payments.

Skeptics may say this approach doesn’t work, it’s not real money, and that plaintiff’s attorneys don’t like structures and will only negotiate in cash. But is that actually true?

First, it does work and offers significant advantages for both sides in the claim resolution process. According to the National Structured Settlement Trade Association (NSSTA), there were over $6B in structured settlement annuity sales in 2022. The industry has averaged $5.6B in annuity sales over the past 20 years, which is quite consistent.

Second, structures provide real money and benefits. You cannot tell a claimant that the monthly income for their medical bills, the college fund set up for their children, or the retirement fund starting at age 65 payable for life is not real. Regardless of market volatility, they will get exactly what it says in the policy. They don’t have to pay taxes on any of it, either. It can have a significant and life-changing impact on injured claimants and their families.

Lastly, it is a myth that plaintiff's counsels do not like structures. A recent MetLife survey of personal injury attorneys offered some interesting insights: 90% of respondents agree that advising clients to choose a structure is ethical and responsible; 65% back structures because they help ensure the award isn’t depleted too fast; 68% support structures because claimants can receive immediate cash and steady long-term income for the future; 63% believe structures can help prevent expensive and time-consuming trials by resolving the case beforehand.

Enhancing Value With Transparent Negotiations

The benefits and the costs of structures are readily transparent. For instance, a structure proposal discloses to the plaintiffs that this package costs $751,325 to generate $1.2m in future benefits. That’s it, simple math. However, don’t for a single minute think that the claimant is not looking at that package, its tax-free guarantees, how and when it pays out, and thinking about how it solves many of their issues. Will this settle the case and bridge the gap? Maybe, but there is little downside. In fact, a structure may make the impossible negotiation possible.  

In practice, things are often more complicated. Let’s say counsel estimated a $1.5m settlement. Telling their client that they only got them $751,000 instead of $1.5 million is a challenging conversation. It is a much better conversation to tell the client they negotiated a plan that provides $1.2 million in real and specific benefits.   

If a plaintiff’s counsel says that they are not interested in a structure, explain that this is the method used to present offers. Ask for their feedback on the proposal, then make changes and adapt, but continue to make structure offers. Plaintiffs’ counsel has an obligation to show their clients the offers in the form they are made. Counsel sees the costs; claimants see the benefits.

There is also probably not a plaintiff’s attorney on the planet who can’t tell you horror stories about clients who took all cash and blew the money within a few years. Several studies indicate that, on average, claimants who receive large, lump-sum settlements dissipate 80% of those funds within five years. Structuring some of the settlement protects all the parties from bad decisions, bad relatives, bad markets, and bad luck. Also remember that plaintiffs’ counsel often structure their fees to gain tax-deferral advantages.  More proof that plaintiffs’ attorneys do, in fact, like structures.

Time to Tailor and Clarify

I had a coach who was a fanatic about practice and preparation, saying, “If you’re not early, you’re late.” Early is far better if you want to incorporate structures into your claims process. It allows time for gathering information, assessing and pricing future damages, strategizing with carriers and defense counsel, informing mediators, and, ultimately, assisting with negotiations. It also allows the education process to occur, showing the benefits and advantages of structures, soliciting feedback on proposals, and asking about pressing current and future financial needs to address in proposals.

Discovery is the right moment. Like counsel, use this phase of the claim to gather and share information about the accident, claimants, and the injuries in order to evaluate liability, risks, and damages. The more you know about claimants, their families, injuries, and financial situations, the more relevant structure offers will be, thus making settlement offers more compelling. If a structure offer satisfies most items on a claimant’s needs list, they may think twice about raising the amount, extending negotiations, or risking a worse outcome at trial.  

During this phase, you also have the time to gather relevant reports on damages—such as MSAs, life care plans, economic loss reports, and medical cost projections—and have them analyzed to see what it would cost to fund those future numbers and how to mitigate the demands. It also gives you time to secure rated ages from annuity carriers, which can further reduce the cost of the annuity (or increase the benefits). Their conditions can also be co-morbid, unrelated to the injuries received in the accident (diabetes, obesity, heart conditions, etc.).

This is really a process of “demand deconstruction.” Let’s say that as part of their justification for a $4 million demand, the plaintiffs cite a $1.7 million life care plan. Have that report analyzed, pull out immediate cash items, and annuitize all the future expenses, then secure and apply a rated age for the pricing.

That analysis might show that you can fund the entire life care plan for $910,000. Will this cause counsel to lower their demand by $800,000? Probably not, at least initially, but it sure is an excellent discussion point. Taking this approach with all the future parts of the demand can significantly affect how that demand holds up over time in front of a mediator, judge, or, ultimately, a jury.

Process for Structures

Earning success with structures means having a programmatic approach. Structures work best if they are part of the claims-handling process and metrics. Anything worth doing is worth measuring. Training and roundtables on structure topics and strategies with your staff and counsel is a best-practices protocol of every successful claims operation.

Consider structures on cases where you feel the process will assist in evaluating or negotiating the case. This does not mean that only large cases create a significant impact. If you save $2.3 million on one large loss, that is significant. If you save $5,000 on 1,000 cases, that is significant, too.

Good files for analysis include those with an MSA (or an LMSA), or where you have a life care plan, an economic loss report, or some future medical cost projections that require analysis and pricing. Cases involving minors, death, dismemberment, traumatic brain injury, or other catastrophic injuries are perfect candidates for structured settlement analysis and negotiations.  

Any time you are preparing for or scheduling a mediation, structures can provide the needed analysis in advance. Alert the mediator to the process and strategize with the defense team as to what proposals might be offered in what amounts and at what point in the negotiations they should be introduced.

Structured settlement annuities have been around since the mid-1970s and have never been more relevant, informative, and effective in the claims-settlement process than they are today. If used proactively, consistently, and thoughtfully, structures can save money on claims payouts, reduce litigation times and costs, and provide a lifetime of safety and security to injured claimants and their families. In the end, those are outcomes that both sides can agree upon.