Lawsuit Awards Spread Over Many Years : Business Booms for Brokers Who Arrange Structured Settlements

Philip Kane gave a lot of thought to becoming an instant millionaire--then decided against it.

The former maintenance man could have received almost $1 million in cash to settle his personal injury case after he fell 30 feet from a ladder while changing light bulbs atop a 55-story high rise in downtown Los Angeles.

Instead, Kane, 44, opted for a “structured settlement,” which will give him $2,200 a month for the rest of his life, a lump sum of $200,000 for him or his heirs at the end of 20 years and a $98,000 college fund for his two daughters, now 15 and 13.

“I’ve never had a whole bunch of money and if you’ve never had it, it’s kind of scary. I’d be afraid I’d blow it all,” explained Kane, who shattered both ankles and several vertebrae in the fall and no longer is able to work.

The structured settlement Kane accepted is something that is becoming more prevalent in cases where large sums of money are paid to injured parties.

Besides providing financial security to the injured party, these long-term payments, all arranged as out-of-court settlements that enable both sides to avoid the costs and uncertainties of a protracted trial, also take pressure off an overburdened court system. Additionally, advocates say, structured settlements prevent financially unsophisticated victims from squandering their money and turning to welfare.

Created an Industry

The growing use of structured payoffs--which can pare as much as 15% off the cost of a lump-sum award, saving the defendant and its casualty insurance company sizable sums--also has created a multibillion-dollar industry for firms that specialize in putting them together.

It also is generating harsh words from some personal injury attorneys, who claim that their clients are getting less than they deserve and that the system allows losing defendants in personal injury cases to get off easier than they should because they have lower actual costs with a structured settlement.

While industry-wide statistics are not available, interviews with structured settlement firms across the country show that business is booming, with new firms springing up regularly.

“The business has developed to the point where we have touched most of the available market--every major personal injury lawsuit on the court calendar.” said David Ringler, whose 10-year-old Newport beach-based firm, Ringler Associates, is one of the oldest and biggest structured settlement companies in the nation. “Wherever there is a settlement, there is an opportunity to use this technique,” Ringler said.

A spinoff of the insurance claims business, the settlement industry has grown from a handful of consultants or brokers to about 250 firms nationwide during the last decade. A combination of escalating verdicts, mounting lawsuits and favorable tax laws have helped this heretofore little-known industry to flourish. Industry officials estimate that structured settlements accounted for $2 billion in annuity premiums last year. Indeed, many firms individually point to a substantial increase in business in the last several years.

Cases Have Doubled

Ringler, for example, said his 32 consultants, in 26 offices throughout the nation, handled more than 4,000 cases last year, double the amount in 1983. He declined to say how much in sales that represented.

Roger Harbin, a financial services actuary with the Safeco Life Insurance Co. in Seattle, said his company issued $100 million in annuities in 1984, compared with $62 million in 1983 and $36 million in 1982.

Basically, a structured settlement spreads the injured person’s compensation over a long period or throughout his lifetime. Some cash is paid immediately to cover outstanding medical or legal expenses; the remainder is paid in installments through trust funds or annuity policies purchased from a life insurance company by the losing defendant in the personal injury suit.

It is the broker’s job to help negotiate the cheapest, safest annuity with the plaintiff’s attorney, tailor that annuity program to the injured party’s medical and financial needs and take care of any administrative details that might arise during the life of the annuity. The broker generally receives a fee of 4% of the cost of the annuity for his efforts.

A typical structured settlement might work like this: A man crippled in an airplane crash is offered $1 million by the airline. Instead of taking the money all at once, he decides to take a structured settlement of $50,000 a year for life.

Sets Up an Annuity

So the airline and its insurer hire a structured settlement broker to set up an annuity that will provide those payments. The settlement broker finds a life insurance company that offers to establish the annuity and make the payments for a one-time cost to the airline of $600,000. The airline then has satisfied the court award, doesn’t have to worry about the payments and has saved itself $400,000 because the victim chose not to take a $1-million cash award. The life insurance company assumes the job of making periodic payments to the accident victim. It pays the settlement broker’s commission up front and makes its profits from a share of the interest earnings on the $600,000 it invests to fund the annuity. In this particular case, the broker’s commission would amount to $24,000.

(Plaintiffs’ attorneys typically receive one-third of a settlement when it involves an adult and one-fourth in the case of a minor. In a structured settlement, the fees would be based on the current cash value of the payments.)

“We assist in setting up socially desirable programs for people who have suffered horrible, terrible injuries,” said Ringler, whose firm has negotiated settlements with attorneys for victims of the MGM Grand Hotel fire in Las Vegas and the Hyatt Regency skywalk collapse in Kansas City. “We assist in their financial planning instead of dumping a large sum of money on them.”

Can Create Security

Dennis English, president of English & Associates Inc., the 4-year-old Mission Viejo firm that negotiated Kane’s settlement, added, “If we can show an injured person a way to take the money and put it in a secure place, we can create security and income for the person without (him taking) the risk of investing in someone’s chicken franchise.”

The English & Associates broker who designed Kane’s annuity, David Snyder, said that if Kane lives until he is 72, his life expectancy at the time the settlement package was designed, he will receive a total of $1.9 million in payments, or about twice what he would have received from a lump-sum award. The annuity cost $749,000.

But not all attorneys--nor their clients--are enamored of the structured settlement approach.

Ned Good, a Pasadena-based personal injury and wrongful death attorney said he has opted for such settlements only a handful of times in 33 years of practice.

“An insurance company offering a structured settlement does not do so because it is really and generally concerned for the victim, but because they recognize an opportunity to make less look like more and thereby escape from their obligation to pay their full debt by only making a partial payment . . . “ Good said, referring to the fact that the annuity costs an insurance company less than a lump sum award.

‘Getting Fake Gems’

“What the insurance companies usually do . . . is offer $500 when they really owe $1,000 and wrap the package so that it looks like the plaintiff is getting the same amount of money,” he added. “Because the plaintiff and his counsel may lack the financial expertise to analyze the transaction, they do not recognize the fact that they are getting fake gems which are claimed to be genuine.”

Good said an additional problem he has with structured settlements is that in order for the insurance company to make a profit on the money it invests in an annuity, the company may be investing in high-risk investments that can go sour and lose the injured party’s money.

“Therefore,” says Good, “the concept that a bird in the hand is worth two in the bush means that a victim is generally better off getting the cash in one lump sum rather than trusting the money to the insurance company which has no genuine interest to protect the victim.”

Berry Frazier, a 40-year-old former trucker from Mississippi, is one accident victim who took a lump sum rather than a structured payment. After an accident in 1978 left him a paraplegic, Frazier received $1.4 million in cash, rejecting several structured settlement offers. He said he was not impressed with the structured approach and felt insulted by the amount of money offered and by the method of doling it out in small portions.

Frazier was paralyzed from the waist down when an equipment malfunction caused the rear wheels of the truck he was driving to fall off. He was thrown 85 feet in the crash and broke his back. He has been confined to a wheelchair ever since.

Turned Down Packages

“All the money they had wouldn’t pay for what happened to me,” said Frazier. He said he turned down four different structured settlement packages because “I felt more justice would be had this way . . . they all embarrassed me, really.”

Frazier, who is married and has an 11-year-old son, said he has more money now than when he first received the lump-sum payment because he invested it in a variety of ways, including municipal bonds.

“I studied it (the structured settlement) for quite a while,” Frazier added. “If you are smart enough to invest your money, you can come up three-fold on it. They said you’re not smart enough, the common man. I said they were wrong, and I think I’ve proved it.”

Still, proponents believe believe periodic payments over a set amount of time protect financially unsophisticated people from wasting the large sums of money that would be needed for medical care and also shields them from relatives or friends who may want to take advantage of their new-found wealth.

Another key attraction, say settlement brokers, is that both the principal and interest from settlement annuities are tax-free to the victim as a result of an Internal Revenue Service ruling and the Periodic Payment Settlement Act passed by Congress in 1982. Lump-sum payments in personal injury cases also are non-taxable, but any interest received from investments of that money is taxable.

Kathleen M. Brown, senior vice president at Martens, Renter & Brown, a new structured settlement firm in Newport Beach, summed her work up this way: “At all times we are trying to save claims dollars for insurance companies and meet everybody’s economic needs. . . . You hear what the plaintiff is looking for, what the defense has to spend and you, as the middle man, try to bring it all together. What’s rewarding is being able to see a settlement that is fair and equitable for everyone.”

“It’s a very sad business to be in,” added Brown. “I’ve worked on cases with quadriplegics who can only move their eyes and tongue. Certainly giving them money doesn’t give back what they have lost. But the thing we can do is secure that they will be taken care of in the future.”