by John Darer CLU ChFC MSSC CeFT RSP CLTC
What are the ramifications in a New York CPLR 50-A or 50-B judgment where the annuity issuer and/or insurer becomes insolvent?
I received such a question in September 2008 from an attorney for a former plaintiff receiving a substantial CPLR Article 50-B judgment from an AIG insured and funded with a structured judgment annuity from American International Life Assurance Company of New York (now United States Life Insurance Company in the City of New York) when AIG entities were A++ AM Best and AAA Standard & Poors.
First, please note that the situation described is both unprecedented and untested. The financial crisis of 2008-2009 however placed it on the radar screen.
Now consider this:
CPLR 5041(d) states in pertinent part "The court, as part of its judgment, shall direct that the defendants AND their insurance carriers shall be required to offer and to guarantee the purchase and payment of such an annuity contract".
Under a CPLR 50-B judgment, the structured judgment annuity is owned by the defendant and/or its insurer. The defendant and/or insurer, as owners of the annuity contract, are general creditors of the annuity issuing life insurance company.
What if the structured judgment annuity issuer and the defendant''s insurer are subsidiaries of the same holding company, such as described above?
If the annuity issuer goes "belly up" the Defendant appears to be responsible to make payment under CPLR 5041(d).
Now consider this:
§ 5044. Failure to make payment. If at any time following entry of judgment, a judgment debtor fails for any reason to make a payment in a timely fashion according to the terms of this article, the judgment creditor may petition the court which rendered the original judgment for an order requiring payment by the judgment debtor of the outstanding payments in a lump sum. In calculating the amount of the lump sum judgment, the court shall total the remaining periodic payments due and owing to the judgment creditor, as calculated pursuant to subdivision (e) of section five thousand forty-one of this article, and shall not convert these amounts to their present value. The court may also require the payment of interest on the outstanding judgment.
The implications of such a scenario are logarithmic! A defendant that is not aware of, and has not reserved for the contingent liabilty has significant potential exposure. The acceleration clause in CPLR 5044 could be lethal to a defendant if all the wrong stars are aligned. It is therefore wise for defense lawyers and insurers whose insureds take a large sustainable verdict and elect to pay a judgment in New York subject to CPLR 50-B, to discuss this possibility with their insureds in advance and document a complete understanding of the ramifications, however remote the occurrence may seem at the time,
A CPLR 50-B judgment has the potential to be a financially disasterous outcome for a plaintiff with serious medical impairments who wishes to leave an estate to his/her family. The typically large elements of damages (pain & suffering and medicals) are life contingent. For such plaintiffs a CPLR 50-B structured judgment offers little to no protection for their heirs unless the plaintiff is medically qualified to be insured for life insurance which can offset the exposure.
Lawyers on both sides of New York cases clearly have an incentive to work towards a settlement that will protect their principals.
A settlement gives plaintiffs more flexibility, a more tailored and diverse array of options and a greater ability to put a comprehensive plan in place for the litigation recovery.
Note that this post was updated on January 8, 2013.