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Structuring a Settlement:
A How-to Guide
by Marjory Harris, Esq.
In a previous article, Managing
the Big Case: A How-To Guide, we provided some pointers on
how to do a structured settlement. This article expands on that and should
be read in conjunction with the previous article and the companion
article
by Steve Chapman and Gregg Chapman, Esq. in this issue.
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What is a
structured settlement, and what does it do better than a lump-sum
settlement?
In workers’ compensation cases, both the structured settlement
and the lump-sum settlement are concluded by a Compromise and Release
(C&R) approved by a WCJ. The structured version provides for
periodic payments but, unlike periodic payments paid under an Award,
the structured payments are by way of an annuity for the rest of
the injured worker’s life. The big advantages of the structured
C&R over the lump-sum C&R are financial security and more
for the money. The monthly money is tax-free and the total paid out
is often much higher than what would have been paid under a lump-sum
settlement. Here is an example showing how $500,000 was structured:
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“A structured settlement
is a financial or insurance arrangement, defined by Internal Revenue
Code as periodic payments.”
– Wikipedia
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Another benefit is that the money that remains in the Medicare
Set Aside account can be bequeathed, so for some workers, that
may be the only money they have to leave to loved ones or to pay
for a funeral. The cash up front can be negotiated with the client,
so it is enough to purchase some creature comforts, pay off some
debts, and the like, while not enough for the injured worker to
give into pressure of relatives and friends who want to “borrow” money
for some venture. Since studies show that most recipients of lump
sum settlements quickly squander the funds and are left with nothing
within a few years, we are doing a service and a kindness to our
clients to advocate the structured approach.
Another major value
to a big structured settlement is it gives the client relief from
having claims adjusters and their minions managing their medical
treatment. They don't have to wait anxiously at the pharmacy to
find out if their pain medicine prescription is being honored.
They don't have to worry that they will go into withdrawal while
their medications are under utilization review. They don't have
to wonder if they will get the physical therapy they need, or some
other treatment their doctor thinks is beneficial.
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Since studies show that most
recipients of lump sum settlements quickly squander the funds and
are left with nothing within a few years, we are doing a service
and a kindness to our clients to advocate the structured approach.
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Get the proverbial
elephant out of the room
Some applicant attorneys fear doing structured settlements or even
Medicare Set-Asides because they believe these types of settlement
increase their liability for professional negligence. Fear often
exists where there is a lack of knowledge. If done carefully, it
is not dangerous to do either a set aside or a structured settlement.
The benefits of a structured settlement are simply too great to put
aside because of unfounded fears.
There may also be a “fear of math” whereby the applicant
attorney’s eyes glaze over when confronted by numbers, formulae,
and the like. A good broker and also a service that provides present
value calculations should allay fears.
If you
take the following steps and document your efforts, you are doing
the "due diligence" and complying with the standard of
care. Remember, going to trial on a case that could have been successfully
settled to everyone's satisfaction is a lot riskier, as you have
little control over the outcome.
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| Going to trial on a case that
could have been successfully settled to everyone's satisfaction is
a lot riskier than structuring a settlement, as you have little control
over the outcome. |
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Getting your
client to understand the benefits of
a structured settlement
Before investing a lot of time and effort in the structured settlement
process, I want to make sure my client is on board. It is also a
good idea to reinforce the concepts as one goes through the steps,
ensuring the client’s understanding and approval. If you wait
until presenting the settlement documents to the client to explain
the essentials, you risk having the structure collapse and the time
invested wasted.
I keep my explanation simple: they would get cash up front which
would help pay off accumulated bills, provide for some things that
would make them more comfortable (an adjustable bed, a widescreen
television, or something similar that would bring daily comfort are
good examples). They would get money to pay for medical bills and
would no longer have to rely on waiting for approval after utilization
review; when they go to the pharmacy they would no longer have to
worry whether their pain medication would be approved; they could
get gym memberships or acupuncture or anything else they think may
help them without delays and denials. This last point is one of the
best features of the structured settlement. I also point out that
any money that is not spent from the set aside can go to heirs. This
may be the only money that my client would be able to leave for his
or her children, since in this type of case, any savings have long
since been spent just to get by. I point out that they are assured
of receiving monthly payments as long as they live. The payments
go directly into their bank account by electronic funds transfer,
so they do not have to worry about whether the check was mailed when
scheduled, whether the check will come by a certain date, whether
the check will get lost or stolen, etc. By the time we are getting
ready to settle a big case, my client has usually had enough miserable
experiences involving delay or denial of care or periodic payments,
that freedom from these miseries is very desirable.
I discuss with my client the benefits of settlement as opposed to
going to trial, and the benefits of a structured settlement over
the lump-sum settlement. I usually start by explaining that, if they
are on Medicare or otherwise eligible under the CMS rules, any settlement
by Compromise and Release will involve a Medicare Set Aside account.
I then go on to explain why the structured annuity for the other
benefits is preferable to the lump-sum, allowing both cash up front
and an assured lifetime monthly amount that cannot be “borrowed” by
relatives and friends who think the worker’s settlement is
their own gravy train.
In most cases, my clients are already on Social Security Disability
and Medicare. I discuss the potential offset issue and the need to
have money coming regularly for future medical treatment not covered
by the MSA. The annuity payments come by electronic transfer along
with Social Security payments for the rest of the client's life,
whereas a permanent disability award, unless it is for 100%, ends
at a certain point. The life pension is often paltry. They can count
on the annuity money and make plans accordingly. I also point out
that the money available for settlement goes much further if invested
in annuities then if paid out in full up front, that there is “more
bang for the buck.” I will later show them my case analysis,
what they are likely to get at trial, and a proposed structure which
can be tweaked so there is more or less cash up front, or more monthly
annuity, or guaranteed payments.
I try to explain everything in terms
my client is likely to understand (e.g., “You get more in the
long run”). I make sure they get answers to their questions,
sometimes having my structure broker explain the concept and process,
to augment my explanation.
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| By the time we are getting ready
to settle a big case, my client has usually had enough miserable
experiences involving delay or denial of care or periodic payments,
that freedom from these miseries is very desirable. |
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Assuming my client authorizes me to
proceed, I contact my broker. The first structured settlement I did,
I made the mistake of agreeing to the defendant’s structure
broker. Neither my client nor I felt that we had an open channel
of communication and often felt left in the dark. From then on, I
always hired my own broker, who specializes in representing applicants
and ceaselessly travels the state attending settlement conferences,
mediations, and meetings.
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| The first structured settlement
I did, I made the mistake of agreeing to the defendant’s structure
broker. Neither my client nor I felt that we had an open channel
of communication and often felt left in the dark. |
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A recent case
illustrates the process
In a recent case, upon learning that defendant was interested in
a structured settlement, I took two important first steps: one, I
discussed with my client the benefits of the structured settlement
approach, which I had done at an earlier date when talking to her
in general about settlement. I again explained the key elements.
She liked the idea of having money coming every month for the rest
of her life and being able to manage her own care. We discussed what
she would do with cash up front and how much she needed. As she had
not run up credit card debt while disabled and lived modestly all
her life, there were no unpaid bills to settle. She said she would
like to get a computer as her old one had died. The second thing
I did was send an e-mail to my broker alerting him to the fact that
there was a potential structured settlement. I gave him my impression
of the settlement value of the case and forwarded documents that
would help him come up with a sum that could be structured in a satisfactory
way. The documents included the relevant forensic reports (in this
case an AME report and a QME psychiatric report), the reports of
vocational experts, the ledger of benefits paid and the proposed
Medicare Set-Aside.
The parties had agreed to start with mediation rather than
a Mandatory Settlement Conference, so both sides prepared mediation
briefs. I spoke several times with my broker and also sent
him the briefs. He had prepared a structure proposal which
I served on the mediator and the defense attorney. On the day
of the mediation, my broker was present, as was defendant’s.
My client I and I met before the mediation with our broker,
so that he could explain anything that she needed to know to
better understand the process.
Despite the professed desire of both sides to reach a settlement
agreement, the mediator’s efforts to narrow the gap,
revisions to demands and offers produced on the spot by both
brokers, who had computers and printers with them, the parties
were not able to reach agreement. There was a gap of almost
$200,000 between defendant’s final offer and applicant’s
demand.
In the following days, I several times sought calculations
from my broker for lesser sums than our last demand, to see
if they would work. I compared annuity amounts to what my client
would likely get at trial, after the fee was taken out and
non-Medicare-covered items deducted (since the monthly annuity
is intended to replace indemnity and some of the medical expenses).
I came to the view that unless defendant offered a certain
dollar amount, I simply could not recommend this settlement.
In the meantime, after the collapse of good faith settlement
negotiations, I had filed a penalty petition for failure to
make adequate permanent disability advances and a Declaration
of Readiness. We were quickly set for a Mandatory Settlement
Conference. At the MSC there was no further attempt to settle,
and the case was set for a one-day trial within a few months.
Fortunately the defendant decided to change law firms, and
the new attorney reviewed everything and came to the same view
as I had of the value of the case -- $130,000 more than their
previous “final offer” plus a few other items of
value. When the amount they offered was structured, it provided
my client with a monthly payment that would approximate the
best she could do if she went to trial. It also allowed her
cash up front in the amount that she felt would be good for
her to buy some much-needed creature comfort items. We a negotiated
an MSA guarantee so we did not need to wait for CMS to approve
the settlement or risk collapse of the agreement if CMS came
back with a higher amount, a “hold harmless” on
the liens, and a lifetime custodial Medicare Set-Aside account
at defendant’s expense, so my client would be relieved
of any uncertainty and paperwork associated with medical expenses.
Besides finding the best priced annuities for this case, my
broker’s staff communicated with my client about how
to set up the right type of bank accounts and obtained the
documentation needed (e.g., birth certificate or other proof
of age and identity).
After the attorneys dickered over the language of the settlement
documents and the proposed Order, and after the client had
a chance to review the documents and the Informed Consent,
the parties met at the WCAB for signing and a walk-through
several weeks before the trial was set to begin.
I assured my client that after the judge approved the Compromise
and Release, I and my broker and his staff would be there to
answer questions that may arise concerning the annuities, the
plan documents, etc. Because I know from years of experience
that my client is getting the necessary attention and service,
the burden on me seems lighter. But just to make sure that
I am not putting myself in the line of fire, I did an individualized,
detailed Informed Consent similar
to the sample.
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| A recent case stumbled through
a mediation and an MSC but settled some weeks before trial. |
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Preparing a
written case analysis
As part of preparing my client for settlement, I do a written case
analysis showing the client the very most that can be obtained if
we go to trial and win everything we are claiming. This is a sobering
starting point for all concerned. I warn about the difficulties of
proving the non-statutory 100% case. The case may be tried piecemeal
over a long period of time. If there are different opinions from
each side's vocational expert, the judge may decide to rely solely
on medical evidence; either side may appeal and delay the process.
Changes in the law during the ensuing months may shrink the value
of the case. I point out that after trial, they will receive payments
every two weeks (assuming the check is mailed and delivered timely)
and hassles over receiving medical treatment are bound to continue
if not get worse.
I also point out to my client that any award under 100% will be paid
out at some point and a smaller weekly life pension will then begin.
If the injury occurred in 2003 or later, and they are rated at 70%
or more, I discuss the still-unresolved COLA issue. An annuity is
more attractive, because one knows exactly what one will be receiving.
If the annuity provides for a COLA, there is some protection against
inflation.
I review my file and assess the pros and cons that will affect trial
outcome: is the client a convincing witness? Are the injuries significant
enough to get beyond the rating on a LeBoeuf or similar theory requiring
vocational evidence? Are there dueling vocational or medical experts
whose opinions will cancel each other out? Will the WCJ or WCAB decide
that a report is not substantial evidence, or that additional medical
evidence is needed?
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| A sobering starting point is
a written case analysis showing the client the very most that can
be obtained if you win at trial on all issues and are sustained on
appeal. |
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Communicating
with the structure broker by providing a precis of the case with
a value range
I send an email or letter to the broker with the major medical reports, the MSA
if available, my assessment of the case’s worth, my comments on defendant’s
stance, etc., and ask the broker to draw up a proposed demand for a structured
settlement.
Here is an analysis read to the client
at the start of a meeting in my office where the broker was present. I gave my
client a copy before I read it out loud. A
more formal analysis was mailed to a client and his guardian ad litem,
before a Mandatory Settlement Conference at which the brokers for both sides
were to be present. In that case the client had been uncooperative and unavailable
for an office or even telephonic conference.
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| I ask the broker to draw up a
proposed demand for a structured settlement. |
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Negotiating
a Structured Settlement
As I noted in Managing
the Big Case, “In
big cases, I am often negotiating directly with the adjuster, at
their request. Many people in the business world regard attorneys
as deal killers, because we tend to focus on minutiae and let our
egos get in the way of sound business judgments. The adjuster is
hell-bent on getting rid of the case, while their attorney may see
the open case as an endless billing opportunity. The adjuster may
want the defense attorney’s involvement to be limited to dealing
with the documents after agreement is reached. Of course, make sure
that your opponent knows that the adjuster is dealing directly with
you, to avoid ruffled feathers or worse, complaints to the State
Bar. If, on the other hand, you find the defense attorney much easier
to deal with than the adjuster, you may decline the invitation to
deal directly with the adjuster.
Sometimes it helps to have the structure brokers deal with each other,
while you stay in the background. Like realtors, they have an incentive
to preserve and close the deal. If you're having problems with opposing
counsel or the adjuster, the broker may be able to intercede at a
higher level in the corporate structure.
In some cases, I have arranged a meeting between myself, the structure
broker, and my client. I may suggest that a responsible relative
attend the meeting, if my client has difficulty understanding and
making decisions, or if the relative may undermine the settlement
if they don't understand what's going on. Structure brokers are usually
very good at explaining the benefits of a structured settlement,
since it is something they do on a daily basis. Before the meeting
begins, I go over my written settlement analysis with my client,
so they know the best that they can do if they go to trial. If you
skip this necessary step, your client will be measuring the structure
offer against things they heard on daytime television in personal
injury attorneys’ ads. They must have a realistic view of the
value of their case before they can compare it to what is being offered
in a structured settlement. Also, the structure broker usually has
several breakdowns of the money available and will offer to rearrange
the money to meet the client’s needs.
In some cases, the defendant’s attorney would request a meeting
with their structure broker. I would want mine present. At such a
meeting, I would not have my client present since there is not yet
any agreement on what is on the table.
In summary, negotiating the structured settlement has different permutations,
although generally there are only a few variations. It is important
to be available for meetings, phone calls, e-mail correspondence
and the like during the run-up to the final deal.“
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| Negotiating the structured settlement
has different permutations. |
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If talks bog
down, suggest mediation
There are many reasons to avoid trial. It is standard settlement
language that “the parties wish to avoid the risks and hazards
of litigation and to buy their peace.” When talks are unsuccessful,
mediation may make both sides more realistic about the value of the
case. See Is
Trial Always Your Best Option? When to Consider Mediation.
In the case I discussed above, while the parties failed to reach
an agreement at or immediately after the mediation, the production
of briefs allowed both sides to understand the other’s arguments,
forced everyone to digest the evidence early on, rather than on the
eve of the MSC or trial, and ultimately influenced the new defense
attorney’s assessment of the settlement value of the case.
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| When talks are unsuccessful,
mediation may make both sides more realistic about the value of the
case. |
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Avoiding liability
with necessary writings
In order to avoid malpractice liability, and to provide the best
possible service, I do a detailed and individualized informed
consent. I provide detailed information on
how to manage the MSA (unless there is a custodial arrangement),
and I give the client information on how to get medical insurance
in those cases where the client does not have Medicare or other medical
coverage. Your structure broker should be able to help you with this
or put you in touch with a mentoring attorney who can help you.
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| A detailed and individualized
Informed Consent limits liability. |
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The Compromise and Release in a structured
settlement is longer than the ordinary one as it includes addenda
relating to the annuities, assignment of rights, language required
by the Internal Revue Code to protect the tax-free nature of the
annuities, etc. The annuity company will generally refuse to allow
any changes to their language, which implies that once the assignment
occurs, the assignor (insurer) is relieved of all obligations to
make payments. While this language is necessary for tax reasons,
it can create liability for the applicant attorney if the annuity
company fails and no recourse is provided for in the agreement.
Thus, it is essential to include recourse language. No matter how
much the defendant may balk, I insist that the following sentence
be included in the settlement documents, preferably in the Compromise
and Release itself: “Notwithstanding any other provision in
any addendum, in the unlikely event of failure of funding of any
of the provisions herein, Defendant [Insurer] is responsible for
payment. If a dispute arises pursuant to this paragraph, the issue
shall be submitted to the WCAB for decision and jurisdiction is therefore
reserved on this issue." In addition, try to get the defendant
to spell out what procedure is required in this unlikely event (such
as how and to whom the injured worker is to give notice, who will
resolve the dispute, etc.). At the minimum, keep this at the WCAB.
You don’t want to have to bring a federal suit later.
I also want to attach a "Characterization of Settlement Proceeds" necessary
to protect the client’s Social Security rights, if they are
receiving Social Security Disability. My structure broker prepares
this as part of the many services he provides.
I also prepare a proposed Order with this language: “I have
considered and find that Addendum “[Hartman Formula Addendum]” is
a reasonable characterization of the settlement amount. FINDING:
The life expectancy estimates and proration of indemnity benefits
over the Applicant’s lifetime as well as the allocation of
benefits contained in Addendum [Insert appropriate letter or number]
are noted and approved.”
Not all WCJs will approve this, but try to get at least the first
sentence in the order. The informed consent provides some protection
in that the client acknowledges that no particular language is binding
on the Social Security Administration.
Also include this in the order: “WCAB
jurisdiction is reserved in the unlikely event of annuity default.”
While it is important to be flexible and not let a good deal fall
apart over a small detail, I also do not want to be in the line of
fire later should anything go wrong. A big case could mean big liability
and big headaches if the client becomes disgruntled.
It may appear at times that everything is falling through the cracks,
that nothing is moving towards completion. It is especially frustrating
when there is no Medicare guarantee (that the carrier will pay any
difference if Medicare/CMS demands more than the proposed set aside),
and you have no idea if/when CMS will approve the settlement. Defendants
claim they do not do guarantees, but I have gotten them at times,
usually when a trial is looming and I refuse to agree to a continuance.
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| It is essential to include recourse
language, no matter how much the defendant may balk. |
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Aftermath:
Be available to help
I don't consider the case over when I get paid. Rather, it is over
when the client no longer calls with questions relating to their
life after workers’ comp. Your structure broker is also available
for post-approval help.
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| The structured settlement process
is over when the client no longer calls with questions relating to
their life after workers’ comp. |
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Marjory Harris, Esq. began practicing
law in 1974 as a defense attorney and later became an applicant's
attorney and a certified specialist. She continues to represent injured
workers in the San Francisco Bay Area and Inland Empire, and mentors
attorneys on big cases.
Reach Marjory Harris at (888) 858-9882 or
email to MHarrisLaw@verizon.net
www.workerscompensationcalifornia.com |
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