by John Darer CLU ChFC CSSC RSP
Today I'm going to discuss some common issues related to structured settlement quotes and funding which should be of importance to plaintiff attorneys, plaintiffs, insurance adjusters, defense attorneys and other interested parties or stakeholders in the structured settlement process.
Let's say you are looking at a quote, how long is it good for? The answer depends on the type of quote. A book rate may be good for 5-7 days while a daily rate may be good for 24 hours or less. If you are making or accepting on offer based on a quote that has been given to you be sure to check for an expiration date. Some brokers place a disclaimer on the quote stating that "rates are subject to change unless the case is locked-in with a commitment to accept". If the quote is based on a rated age, the rated age must be valid. Generally rated ages are good for 6-12 months (depending on the annuity issuer). If a case has been pending for sometime, the rated age request must be renewed or the quote may not be valid. A request for renewal or reconsideration of the rated age determination is a good business practice. Occasionally a rated age has been based on aged medical information. New information can be helpful in improving the rated age if there has been a change in the plaintiff's medical condition.
The timing of structured settlement funding may vary by (1) who is funding the structured settlement ("the payor"); (2) the statutory requirements of the jurisdiction as to timing of payment (e.g in New York, a defendant usually has 21 days to pay from the time he/she/it has been delivered the release of liability;(3) the nature and business practice of the payor (some stretch it out to the last possible day, others pay very quickly, or will even pre-fund the structured settlement prior to receiving a release); (4) whether Court approval of the settlement, or approval of the plan of distribution of the settlement proceeds, is required before releases can be executed; (5) whether the payor is a government entity that has special funding consideration as to timing of payments; (6) whether the payor is a state insurance guaranty or liquidation fund or insolvency scheme of arrangement; (7) anything that may be stipulated by and between the parties;
A key factor in the pricing of any structured settlement quote is the purchase date. This is the date that the annuity issuer expects the structured settlement funding. If the structured settlement funding arrives later than the purchase date it can affect the cost of the annuity. Why does it affect the cost of the annuity? As an example, consider an obligation to pay $150,000 in 10 years. If this has been priced based on a purchase date of August 1, 2008 with the payment date on August 1, 2018 it will have a particular price. If the structured settlement funding is not received on time and is instead received one month later on September 1, 2008 it is 9 years and 11 months until the payment date. Thus it makes sense that the cost could be higher. Of course if interest rates were to rise in the interim then the price could be the same or better.
There is always speculation that interest rates will increase in the near future*. Some say "how low can they go"? Playing interest rate trends with your or your client's money is a dangerous game. If you are taking such calculated risks, you need to continuously evaluate whether those risks are working for or against you. Fortunately the the broker that creates structured settlements (i.e not the factoring company representatives masquerading as structured settlement brokers) have lock-in privileges with the annuity issuers. In exchange for the agreement to fund on a certain purchase date in the future the annuity issuers will generally agree to lock-in the interest rate associated with that quote. This is particular useful when Court approval is a required for the settlement.
It's important to note that agreeing to a lock-in is a commitment. The annuity issuer actually goes out and secures investments to balance the liability created by the periodic payment obligation (as is required under the insurance laws of most states). If interest rates rise in the interim and the plaintiff attorney, who previously agreed to the lock-in commitment, goes somewhere else to get a better rate the annuity issuer agreeing to the lock-in is left screwed. Occasionally an insurance company may be willing to extend the lock-in provided the annuity payment dates are moved a number of days commensurate to the days delay in funding. However the message is that you should exercise care in agreeing to a lock-in commitment. Use it for the valuable tool that it is in the right situation. If you or your structured settlement broker abuses the privilege the annuity issuer may not grant lock-ins in the future.
* Postscript January 13, 2013. in the 5 years since the original publication of this post interest rates have actually decreased. A structured settlement established in 2008 would have outperformed many alternatives.
Check out John Darer's videos on Structured Settlement Quotes