At zero expense to the carrier, tax-free, and tailored to fit the needs of the claimant, structured settlements are a powerful tool claims personnel can use when resolving claims.
While the best candidates for structured settlements remain physical injury claims, the option has been applied to employment, personal injury, construction defect, directors & officers’ liability, and even copyright infringement claims. In addition, plaintiff attorneys can take their fees as structured settlements.
There are many different areas that can be successfully resolved using the structure concept, according to Dan Finn, president of the National Structured Settlements Trade Association (NSSTA).
“The reason this is such a perfect tool for a personal physical injury claim is because most plaintiffs are claiming damages for future medical needs, future loss of earnings and future loss of consortium. A number of issues commonly found in the claims process can be addressed better by matching future needs with future dollars,” Finn said.
According to the NSSTA, a structured settlement is a voluntary method for families to accept compensation in wrongful death and physical injury claims. The recipient receives periodic payments tailored to specific needs without having to worry about the responsibilities and risks of managing a lump sum settlement.
The most common question, according to Ismael Acevedo, vice president of structured settlements at Chartis, is, when are structured settlements appropriate?
“We flag claims for structures when they exceed $50,000 in exposure to our insured and involve bodily injury,” said Jim Martin, vice president commercial liability claims at CNA.
Besides being used to address high value bodily injury exposures, structured settlements can be used to push past issues that stall negotiations. “We use it within the claims context to bridge the negotiation gap,” Acevedo said. “We want to achieve a fair and reasonable settlement and a fair and reasonable outcome.”
Giving choices to the claimant allows for creativity in the resolution of a claim. “[Structured settlements] can provide options that are not available in the traditional settlement context,” said Acevedo. “In the structured settlement context we can provide offers that can match up to the needs of the claimants going forward, post-settlement.”
As an example, Martin described a situation involving a disagreement over the cost of a life care plan. “So, if the plaintiff believes it’s ‘x’ and the defense says no it is only going to cost ‘y’, that issue can be taken off the table for the plaintiff by investing the ‘y’ number which will pay out the ‘x’ number they claim they need for the remainder of their lives.”
Another example involves disputes over how much future wages a plaintiff may lose as a result of the incapacity. “They may say that they are unable to perform any kind of work, where the defense may claim that they are capable of some kind of work and therefore their future lost wages isn’t that much,” Martin said. “That gulf can be breached by the use of a structured settlement that says okay, if we pay this much into the settlement now, it will cover what you say you will lose in lost wages for the remainder of your life. And not only that, it will cover it in a way that is not taxed. So, if you are making $50,000 a year and you are being taxed at a federal, state and local rate, that net income is much less. With a structured settlement you are getting your full $50,000 as claimed, tax-free.”
Benefits to the Claimant and Insurer
Federal tax code regulates how structured settlements are established, according to the NSSTA. Payments under a structure are funded by life insurance company annuities. Under current law, structured settlement payments are free from federal and state income taxes, as well as taxes on interest, dividends and capital gains.
According to Martin, there are three things claimants seek in a settlement:
- Financial security
- Guaranteed income
- Instructions on how to take advantage of any tax benefits
Finn believes the insured gets more than tax-free and guaranteed periodic payments. “You’re offering the plaintiff options in a process that doesn’t typically allow for options,” Finn said. While a cash settlement offer may be viewed as a take it or leave it offer, the claimant may view the adjuster who offers a structured settlement as recognizing their entire life needs situation, as opposed to just the physical injury, according to Finn. “Positive public relations can flow from a structured settlement.”
Another benefit is that the resource doesn’t add to an insurer’s allocated loss adjustment expense (ALAE), Finn said. A free resource to claims departments, structured settlement consultants can attend mediations, create and present value options, and even prepare settlement documents.
Consultants provide a value-added benefit to insurers by having the financial and investment planning backgrounds to create future payout options. “They understand the tax code and how to generate the benefits in the settlement context relative to the tax code,” Acevedo said.
The use of structured settlements in hard-to-resolve claims can’t be ignored, according to Finn. “A structured settlement, I believe, helps carriers and claim reps resolve claims and bridge gaps more effectively than a lump sum,” he said.
Because their use allows options that can address specific future costs and issues, it’s important for carriers to review injury claims that may benefit from the use of a structured settlement. “All claim departments could benefit from revisiting the positives and all the reasons why they should always consider structured settlements on many physical injury cases,” Finn said.
Because of the benefits to both sides, Acevedo encourages their use. “We believe that everyone benefits in the process and that it gets us to settlements that maybe wouldn’t be easily reached otherwise. Because of that, we encourage it, we promote it and we make our claims professionals aware of the tool,” Acevedo said.
Most important may be the benefit to an insurer’s bottom line. “I think the use of structured settlements in the claims process is a great tool,” Martin said. “I think it can help drive the total claim outcome for claim operations.”
The National Structured Settlements Trade Association website is www.nssta.com
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