December 2010, Forum Magazine featured an article written by Stephen Knight on behalf of Strategic Capital. The article discusses how the changes in the California statute protect structured settlement holders who need to sell their payments by highlighting two cases, where annuitants needed to sell their payments and pays special attention to how the changes in the California statute was beneficial for their current and future needs.
Rigorous oversight of structured settlements is nothing new in California. But this year saw the arrival of new state codes meant to further bolster the rules to ensure structured settlement recipients act in their own best interest. If they don’t, the court will do it for them. Changes to the state Insurance Code are meant to make certain that annuitants better understand how selling their payment rights will affect them in both the short and long term.
On average, $4 billion to $6 billion in new structured settlements are hammered out every year by insurance companies to settle tort claims. For some recipients, selling their structured settlement payments before they are due to be paid has allowed them to survive a dismal economy and an unemployment rate exceeding 12% in California. But too many annuitants – pressed by hard times and lacking financial expertise – have run afoul of their own bad decision making. And it has landed some in a thicket of regrets.
California in 2009 enacted legislative amendments, sponsored by the Consumer Attorneys of California, to sections 10134 to 10139.5 of the Insurance Code, adding more oversight to the settlement sales process and providing enhanced guidance to judges in determining what is in the best interests of payees. These consumer protections, which took effect at the start of 2010, will affect not just payees, but all the players in the system – judges, lawyers, factoring firms, structured settlement brokers and insurance companies, as well as governments and taxpayers.
“The new laws will protect holders of structured settlements from making rash decisions that are not in their long -term best interests,” said CAOC President Chris Dolan, who helped 2009 CAOC President Christine Spagnoli get the legislation passed.
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Dolan said the law helps by providing clear guidance to the courts on factors to be considered, including the future medical needs of the beneficiary, any obligations to dependants, the beneficiary’s financial sophistication, the degree of hard-ship that prompts the sale of the annuity and whether the beneficiary has previously sold any payments.
David Meyerowitz, president and CEO of Strategic Capital, a factoring company that has purchased more than $1.5 billion in future payments since its establishment in 1994, noted that some clients may be advised by an attorney or broker to not sell, but that can potentially backfire. The need for money due to economic hardship can drive the client to a company that charges a lofty discount rate as high as 23 percent. In effect, he said, “the consumer has been sent into the jungle without help or guidance.”
“Investment advisors are there to help people invest their money in the best way. Mortgage brokers are there to help consumers get the best mortgage,” he says. “Why not help a structured settlement annuitant find the best option? That may include selling their payments, selling only some of their payments or helping them not to sell their payments at all.”
While structured settlements provide a guaranteed income, the downside for annuitants is that these financial mechanisms are inflexible. In accordance with the Internal Revenue Code, structured settlements are fixed and determinable, and cannot be accelerated, deferred, increased or decreased by the recipient. Payment streams cannot be used as collateral for loans from banks or other traditional lenders. This raises issues for recipients when they need cash, especially if the structured payment stream is their only asset.
Factoring companies act as middlemen between annuitants and purchasers, who can be high-net-worth individuals or institutional investors. “The value of what any future payment stream is worth essentially becomes a function of what a willing seller and a willing purchaser can agree to as a ‘fair’ purchase price, which then must be approved by a court,” said Southern California attorney Eugene Ahtirski, who has handled more than 5,000 structured settlement sales. As these settlements are often set in place to provide long-term security to severely injured plaintiffs who may have future medical needs or lack the capacity to make sound financial decisions, the role of the court is to require a thorough examination of a decision to sell. The courts have to weigh not only the interests of the person selling future payments, but also the state’s interests. For example, if an annuitant who is paralyzed for life is receiving structured payments designed to cover future medical costs, and then sells those payments for less than their full future value, that person may have an increased risk of becoming a burden to the state.
Dolan believes annuitants should first consider traditional financing. “The majority of factoring companies are seeking to get the best deal for them and not the annuitant,” he says. “If an annuitant, after careful consideration and receiving sound financial and legal advice, determines that they will proceed forward, they need to watch the discount rate and carefully select a provider.” Because selling “today” means giving up your future payments at a discount, payees should carefully consider decisions, be aware of the discount rate and ensure that the reason for selling is a valid Consumer Attorneys of California one. There is a big difference in using the money today to save your house from foreclosure in order to maintain the stability of your family life, versus selling payments and using the proceeds to buy an expensive car or take an exotic holiday CAOC has helped by vetting structured settlement firms to weed out the bad apples from the most ethical firms. Strategic Capital’s Meyerowitz, for instance, said his firm makes a practice of demonstrating to clients how they can avoid selling their payments. “We are in business to make a profit,” he said. “But we do it by helping people, not by taking advantage of them.”
The changes to the California statute have beefed up the oversight of settlement sales in at least three identifiable ways. First, the statute lists a set of factors the courts must consider regarding all elements of a payee’s decision to sell payments. Second, the judge must be provided with information on any previous transfers or attempted transfers of the settlement. And third, notice must be provided to the payee’s attorney at the time the structured settlement was agreed to if the original settlement occurred within the previous five years. This provides an opportunity for that attorney, aware of the original motivation for the settlement, to contact the client and make an appearance at the hearing.
These changes, sponsored by CAOC, place California squarely at the vanguard of consumer protection efforts in the secondary market for structured settlement payments, as no other state has as detailed a set of requirements. According to Ahtirski, judges are scrutinizing transfers more closely now, in accordance with the guidelines detailed in the revised statute. In particular, judges are paying more attention to the annuitant’s future income needs for essential living expenses and for medical care, whether the annuitant has sold payments in the past and, if so, what happened to that money, and whether the annuitant has received independent legal advice. Two case studies help illustrate the conditions under which payees might consider transferring settlements to a factoring company in exchange for immediate cash.
“Andrea” was pinned by a city bus. Her pelvis was broken and she had to go through a number of surgeries on her left thigh. She was awarded a structured settlement to be paid out over ten years. Then Andrea’s partner, the sole bread-winner of the family, lost his job. She was unable to make ends meet and needed money to pay the rent and put food on the table. She also needed money for medical care for a sick child, because as her partner was no longer employed, the family did not have health insurance. Andrea felt she had no choice but to sell her structured settlements for a lump sum in order to meet her financial obligations.
“Tyler” was in an accident when he was a young boy and was hospitalized for a few months as a result. He was awarded a structured settlement. As an adult Tyler lost his job and was unable to find another job for months. Meanwhile, his debts were piling up, he missed several rent payments, and he had a variety of ticket violations that, if not paid, put him at risk of going to jail. He decided to sell his structured settlement for a lump sum in order to stay out of jail.
The changes to the California Insurance Code involve a delicate balancing act between government deciding what is in someone’s best interest and the free flow of commerce, without inadvertently throwing unsophisticated settlement recipients to the wolves. The new laws should benefit both annuitants and ethical factoring companies. “As much as possible, it is best left to the individual to make decisions concerning their assets,” said Strategic Capital’s Meyerowitz. “Having said that, the changes in the legislation are designed to ensure people make informed choices” based not only on their current situation, “but also their future needs.”
Judges certainly have more leeway now to intervene if they think an annuitant’s transfer request is not in his or her best interests. Annuitants have been given the tools and now must do their homework and seek independent professional advice. If they don’t, they may end up denying themselves access to a timely lump sum of money.
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Stephen Knight is a freelance writer and editor.
