AVOID THE PROBLEMS OF ALL-CASH NEGOTIATIONS
EFFECTIVE NEGOTIATION THROUGH STRUCTURED SETTLEMENTS (Cont'd.)
by James J. Yukevich and Alexander Calfo

DECEMBER, 2005
FOR THE DEFENSE

Preparing the Offer Actual case:

Two granddaughters were providing all the financial and health support for their 80-year-old grandmother following her accident. The generation between granddaughters and grandmother was deceased. The granddaughters wanted guaranteed income for their grandmother's care without the concern over dissipating a lump sum settlement. They wanted security that there would always be money for her care, so they were demanding a huge settlement which likely would have subjected them to estate taxes after the grandmother's passing.

The solution: A lifetime structured settlement for the grandmother with a long (30 year) guarantee that virtually ensures she will not outlive the guarantee period. The payment stream addressed the granddaughters' concerns about meeting their grandmother's continuing expenses. Upon the grandmother's passing, the unused payments from the guarantee period converted into equal lump sums, which bypassed probate and went directly to the granddaughters. The granddaughters agreed to settle for an amount acceptable to the defendant that also did not subject them to estate taxes.

This section will discuss specific ways for defense counsel to use structured settlements to facilitate settling cases within the client's target range. As you begin preparing for negotiation, one of your first tasks likely will be to analyze economic reports from the plaintiff and the carrier. We have often found it helpful to have your side's structure broker analyze both reports for respective strengths and weaknesses. A good broker will have experience in this and may be able to make useful suggestions. (As noted, since brokers work on commission, this will not create an additional expense for you or your client.)

Many injury cases involve the claimant putting forward a detailed plan for medical, rehabilitation or life care. This goes beyond the economic reports and is your guide to damages that the plaintiff might "blackboard" at trial. In effect, it presents a cap on the amount that plaintiff might demand for future medical care costs.

It may be helpful to price out this plan with a structured annuity. Doing so can give you insight into the plaintiff's potential recovery and also how that recovery is impacted by interest rates and mortality expectations. You can also determine areas of the plan covered by government benefits or private resources. Using this knowledge, you will be in a better position to direct your client's settlement resources to other aspects of the settlement. (A structure broker who understands the impact of government and private resources can design an annuity payment stream incorporating these benefits. He or she may also be of help with your negotiation strategy.)

A creative use of structured settlements, such as outlined in the cases above, may be able to provide many of the requirements of the life care plan at a cost that is within your client's settlement range.

Any case involving a lifetime payment plan or serious injury should raise the issue of the claimant's rated age, which is an insurance company's projection of the claimant's likely life expectancy. Companies use this to calculate the annuity cost of funding a pay-out stream. Therefore, you will want to secure the best possible age rating for the claimant. For example, a 40-year-old with traumatic brain injury might be given a rated age of 60, meaning his life expectancy matches that of a typical 60-year-old.

To obtain an age rating, your structure broker submits medical information about the claimant to life insurance underwriters. This generally includes a hospital summary or an independent medical exam. Very important: Your age rating request should include any information that may reduce the claimant's life expectancy, even if it is unrelated to the accident. This could include such issues as the claimant being diabetic, a smoker, or having a family history of cancer.

The life company analyzes this material and assigns the age rating. As the following table shows, age ratings can be critical to settling your case because the higher the rating, the greater benefit payments for the same settlement amount. This table shows the monthly payments you can guarantee to a 40-year-old claimant who suffered traumatic brain injury based on a hypothetical $1.5 million settlement available. Note that even a relatively small rating change from 70 to 75 significantly affects the payment stream.

If your case involves workers' compensation, you may find it helpful to incorporate structured funding with your Medicare set-aside allocations (MSAs). An MSA is created when settling a workers' compensation or similar liability case. It is funded with a portion of the settlement designed to compensate the claimant for future medical expenses stemming from the accident that otherwise would be paid by Medicare.

By funding the claimant's MSA with a structure, you can establish a regular payment stream for medical care that cannot be prematurely dissipated. That may be particularly attractive to an injured worker. Moreover, since the Administrator is responsible for filing annual reports with Medicare to account for every dollar spent, Medicare looks favorably on structure funding. For workers with injuries requiring long-term care, you should be able to leverage a tax-exempt structured annuity to fund these expenses for a competitive amount. This may allow you to add additional funding to another part of the settlement while still staying within your client's targeted settlement range.

Finally, there has long been discussion within the defense bar about whether to reveal to the claimant the cost of a structured annuity. U.S. Treasury regulations are clear that divulging such information will not compromise a claimant's right to place the funds in a tax-free structured annuity ("[I]ncome is not constructively received if the taxpayer's control is subject to substantial limitations."). Moreover, with such cost information readily available to the plaintiff, a refusal to reveal the cost is simply likely to raise unnecessary suspicions.

That said, as is noted in the excellent book Structured Settlements & Periodic Payment Judgments, "A legitimate concern exists if the plaintiff settles on cost first and then directs the type of annuity which is to be purchased. In such cases there is, arguably, control, hence a question of constructive receipt."

Post-Verdict Negotiation

The nightmare happens. A case that should have settled out of court for, say, $500,000 goes to trial and the jury returns a verdict of $2.5 million. With the threat to appeal, the defense has not lost all its negotiating power, but the negotiation dynamics have changed.

Since a lopsided verdict typically exceeds the defendant's primary limits, one of the first results is often involvement of the excess insurance carrier, who will press for a new legal strategy in the hope of mediating a new solution.

If you are on the defense team, it may be helpful to incorporate a structured annuity settlement into your strategy, particularly if it was not discussed during pre-trial negotiations. By offering a structured settlement, you can confer a benefit to the plaintiff (tax-free income over time) that he cannot obtain on his own. Remember that in most instances, the plaintiff will be keen to settle the case. The thrill at a massive verdict will be quickly tempered by angst about a reduction or overturn on appeal and a lower net after expenses and contingency fees.

Finally, if you do use a post-verdict structure, then prior to settlement it is important to file notice of appeal or motion for a new trial. Another option is a "compromise and release" agreement that vacates the judgment. The case can then be settled as a disputed claim to ensure that the plaintiff is not deemed by the IRS to have taken "constructive receipt" of the settlement.

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