by John Darer CLU ChFC MSSC CeFT RSP CLTC
Ken Paradis of Chronovo recently remarked that “Our industry has fiduciary responsibility for over $6 billion in premium annually. Trust is our duty as well as
our collective currency. We must all do everything possible to protect client, claimant and carrier funds", to push its financial prophylactic "Direct Pay". It's a bit of selective exploitation of a recent event and marketing overkill in the same vein as settlement planners pushing "Grillo waivers" for the last 25 years to induce the sale of more structured settlements. "Direct Pay" is certainly not "everything possible".
What Is The Standard Practice for Structured Settlement Premium Submissions?
The standard practice applicable and effective for the vast majority of cases, is for structured settlement premiums to be issued (1) in the form of a check from the defendant, TPA or insurer payable to the annuity issuer or the qualified assignment company, or (2) in the form of a wire or ACH payment directly to the annuity issuer or qualified assignee's lock box, pursuant to wire instructions provided.
Does the standard business practice work?
A Layer of Marketing Hype That Would Not Have Solved the Gargan case
The direct pay process promoted by Paradis and Chronovo adds an extra layer of processing and marketing hype from what it appears, but it clearly WOULD NOT have solved the problem involving a self insured using a sinking fund out of its annual operating account.
On June 17, 2020 I thoughtfully addressed the issue of Safe Guarding Funds in an Escrow Trust right after the Gargan case broke:
"There are several options available to ensure the safeguarding of funds in an escrow trust. First is utilizing an institutional trustee versus an individual acting as a trustee. An institutional trustee will have supervision, segregation of duties, financial controls, and insurance that an individual trustee will not have.
State trust law generally provides that a "Trust Protector" can be appointed to act as an independent third-party to supervising the institutional trustee of the escrow or trust. Additionally, a Trust Protector can be empowered to review and approve all trust distributions and other types of transactions.
There can be varying levels of duties and powers assigned to a Trust Protector to reflect the specific needs of the arrangement and level of supervision required. Additionally, the title may be modified to reflect better the particular circumstances (trust advisor, distribution protector, etc.)
It is common for an entity that has a pending liability to create an escrow trust as an informal sinking fund. However, caution should be exercised such that the escrow trust remains the asset of the funding entity to avoid potential economic benefit and constructive receipt doctrine complications for the ultimate beneficiary arising from a "formally funded" trust.
A formally funded account could create a “vested legal right” to funds and trigger the economic benefit and constructive receipt doctrines and thereby prevent the ability to obtain a qualified structured settlement. Ensuring that the escrow trust remains "informally funded" is generally easily accomplished by ensuring that the escrow trust assets remain subject to the claims of creditors of the funding entity while preventing the funding entity from utilizing the funds for other purposes.
Alternative to Escrow Trust
At least one major life insurance company will accept structured settlement annuity premium payments in installments".
Maybe I should have issued a press release?