Regular readers of this column will recall that I strongly support structured settlement annuities for accident victims. But as you will see, while extremely rare, at times it is not all smooth sailing.
If the term “structured settlement” is new for you, let me explain why I believe most plaintiff’s attorneys in the country like this method of settling personal injury and workers compensation cases.
Recognized and encouraged by the Federal tax code since 1983, structured settlements are financially appealing for anyone settling a physical injury or wrongful death insurance claim. The Federal tax code gives you the choice to have some or all of your settlement funds used to purchase an annuity with a highly-rated life insurance company that will provide safe, tax-free income on a schedule you determine.
A structured settlement is like having your own pit bull who bares its teeth and growls when “family and friends” pressure an accident victim for a large loan. The annuity pays a specific amount on a certain time table, and this prevents the accident victim from becoming his own worst financial nightmare, because the amount of payments can’t be changed.
With Federal and State tax rates likely increasing, the prospect of long-term tax-free income is incredibly appealing. That’s why I have counseled accident clients for years to look at structured settlements’ benefits.
Every industry has its rotten apples
On Wednesday, Sept. 23, financial broker Joe Gargan, who pled guilty in June to embezzling nearly $8 million meant for child victims of medical malpractice injuries, will learn his fate. Gargan was CEO of one of the country’s largest structured settlement companies, and according to his guilty plea, he used that position to siphon $6.9 million intended to purchase structured settlement annuities to benefit injured minors.
Gargan also admitted to embezzling more than $1 million from a hospital settlement that was supposed to purchase an annuity for a child’s benefit.
The Gargan scandal is the second time in 3 years that a structured settlement broker has been sentenced to prison for crimes involving insurance settlements. In July 2017, Michael Woodyard, a broker with structured settlement company Ringler Associates, pled guilty to a $4.6 million insurance fraud and was sentenced to 87 months in prison.
But as the Gargan and Woodyard felonies show, the structured settlement industry unfortunately has its share of unethical players. So if you’re settling an injury or wrongful death claim, here are a few ways to protect yourself.
Rule 1: Settlement money that funds a structured annuity must be sent directly to the life insurance company. The critical mistake defendants in the Gargan cases made was to send settlement money to his firm, not to the insurers that were to issue the annuities. This allowed Gargan, according to his guilty plea, to embezzle millions while concealing his activity through false documents showing that he had purchased the annuities.
Rule 2: Insist that your lawyer use a plaintiff broker to represent your interests. It’s not certain from Gargan’s guilty plea whether he represented the plaintiff or defense, though an industry insider tells me that he worked for the defense.
I’m also told that none of the cases had a broker representing the plaintiff. If they could have but did not, then attorneys for the accident victims made a huge mistake and could face being sued for malpractice.
As Peter Arnold, a respected structured settlement consultant, correctly notes, “For all but the smallest injuries, plaintiffs and their attorneys should insist on using their own structured settlement consultant in negotiations.”
Bottom line: Do NOT rely on the defense’s structured settlement broker any more than you would rely on the defense’s attorneys!
The insurance company issuing a structured annuity pays a commission (typically 4% of the annuity cost) to broker(s) involved. Your structured settlement broker will receive a portion (often half) of the commission so there’s no out-of-pocket cost to the plaintiff.
Rule 3: Deception between an insurer and the defense’s structured settlement broker could cost you. Sometimes plaintiff counsel might only rely on the details provided by the defendant’s structured settlement consultant.
You’ve got to make sure your attorney insists that all annuity pricing quotations, including injury details–which can be used to calculate the amount of the annuity–be submitted to you in writing. Your attorney should also insist that the insurer confirm in writing all information supplied by the defense broker. If the defense objects, find a plaintiff broker!
Rule 4: Be on the look-out for unethical conduct. While I’m a strong supporter of structured settlements, I’m appalled when industry players use obviously unethical practices.
Here’s a nice example of an arguable conflict of interest. For years, Pacific Life Insurance has been running junkets for favored structured settlement brokers at 5-star hotels in places like Bora Bora, Dubai, and the Maldives. Evidence appears to show that brokers have responded by channeling hundreds of millions in annuity sales to the company.
The losers are the accident victims, who might have been better off with an annuity from a competing insurer, as rates offered by annuity companies vary. Senators Elizabeth Warren and Richard Blumenthal, if you’re reading this and would like more detail, please call my office.
Brokers who go on life insurance junkets are clearly violating the industry’s code of ethics, in my opinion. So, what should your attorney do? Have any broker state in writing whether he or she has been on an insurer junket or received freebies. Name the insurer. If the broker tries to convince you to use that insurer’s annuity, demand competing estimates from different companies.
Rule 5: Understand how your private data is protected and obtain this in writing. Some unethical structured settlement brokers pocket huge sums by selling client information to companies which then contact those clients and promise “quick cash” for selling future payment rights. This can completely destroy one of the main benefits of a structured settlement: preventing the injured person from squandering the money!
The money to be made from selling your information is jaw-dropping. John Darer is another respected structured settlement consultant who writes the industry’s all-important “Watchdog” blog. He recently reported on structured settlement brokers “trafficking hundreds or even thousands of names of annuitants, details of their annuities, annuity issuer, payment streams and contact information in exchange for hundreds of thousands or even millions of dollars.”
Before agreeing to work with a structured settlement broker, have them detail in writing how their firm protects your information. If someone at the firm misappropriates your information and you can show it, you can take the firm and the broker to court.
Structured settlements are an excellent way to ensure long-term financial stability. But there are bad apples in every industry. Accident victims and their attorneys must protect themselves.
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.