by John Darer CLU ChFC MSSC RSP CLTC
The United States Court of Federal Claims has decided in yet another case that The United States DOES NOT have to make up a shortfall to an annuitant of Executive Life Insurance Company of New York more than 32 years after personal injury litigation was settled against the United States Department of the Army. In this case the short fall with two of annuities in the case was 62.4%.
Like its decision in Trevor Langkamp v The United States No. 15-764C filed March 20, 2017, the Court of Federal Claims, in its March 31, 2017 decision in Karen L. Shaw et al v The United States (no. 14-783C), the Court concluded, that the plain language of the Settlement Agreement demonstrates that the government did not unequivocally guarantee that it would make annuity payments in the event of a default by the annuity company.
The underlying Shaw case commenced in 1982 arose out of a child birthing injury July 4, 1979 at the Madison Army Medical Center in Tacoma Washington for which there was alleged medical malpractice. Plaintiffs obtained an $11.7M judgment that was reversed on appeal, subsequent to which the parties settled January 24, 1985. The settlement included several annuities and a reversionary medical trust funded by one of the annuities.
No specific annuity carrier was selected. The Settlement Agreement said that "The United States represents to [Plaintiffs] that the insurance company it selects for the purchase of the annuities will be one which is generally regarded as very sound in the insurance industry and to be among the class or group of insurance companies which are rated Excellent or better by Best’s Guide to Life Insurance Companies, 1982 Edition, published by A.M. Best Company, Oldwick, New Jersey 07830".
The Irony of "The Thundering Herd"
It's notable that the annuity agent on the Shaw case was Merrill Lynch Settlement Services, Inc. which appears to have utilized the cheapest annuity, ignoring some unavoidable facts, apparently including Merrill Lynch internal guidelines. To wit... as reported in the New York Times November 3, 1983:
"In a memorandum sent to its account executives, Merrill Lynch Life Agency, a Merrill Lynch subsidiary that sells annuities and receives commissions from the issuing companies, said that after Dec. 1 (1983), it would no longer handle annuities issued by Charter Security Life, a subsidiary of the Charter Company, the Capital Life Insurance Company, Old Republic Life of New York, the John Alden Life Insurance Company and Executive Life."
An A.M. Best rating of A is an excellent rating, not the top tier rating at A.M. Best, which at the time was an A+ (Superior). At the time the Shaw case was concluded ELNY had an A+ rating from A.M. Best, despite the two well publicized recent failures of Baldwin United and Charter (which it is indisputable Merrill Lynch sold a lot of**), a raft of negative information that appeared about Executive Life in the New York Times, Wall Street Journal and other publications for several years preceding the placement. Executive Life Insurance Company of New York was a subsidiary of First Executive, which the Journal reported in early 1984 had 40% of its assets in junk bonds.
**In January 1984 (one year before the Shaw annuity purchases), for the first time ever, Merrill Lynch & Company reported a quarterly deficit, the result of an $88 million write-off in the fourth quarter to cover losses to investors who bought Baldwin annuities through Merrill.
Important Lesson for Plaintiff Lawyers
Given that several of the annuities did not begin for 25 years, it certainly is appropriate to question why the plaintiff's lawyer left the table without nailing down an agreed annuity provider or providers. Does agreeing to an A.M. Best rating constitute adequate due diligence in a time frame when there were two well publicized failures?
A January 29, 1984 New York Times article ANNUITIES: A NEW LIFE AFTER BALDWIN-UNITED'S FALL, published one year prior to the conclusion of the Shaw case, provides this very important and significant contemporaneous account:
"The reputation of annuities, it seems, should have been ruined forever after the downfall last year of the Baldwin-United Corporation left thousands of annuity holders unable to redeem their policies, or to collect on them, at least temporarily"..."Investors have turned away not only from Baldwin, but from other big sellers of single-premium policies, including the Charter Company and the First Executive Corporation. Instead, the new growth in the annuity business has benefited the old- line conservative companies, such as the Aetna Life and Casualty Company, the Equitable Life Assurance Society of the United States, the Travelers Corporation and the Prudential Insurance Company of America"
Settlements Are the Result of Negotiations
And the devil is in the details.