by Structured Settlement Watchdog
The market for structured settlement payment rights and other cash flows and receivables, like lotteries) became available toindividual investors as the result of the 2008-2009 financial crisis and grabbed the attention of individual investors (including plaintiff attorneys!) and their financial advisers, as alternatives for their IRAs and Pension Plans.
The Suitability of Factored Structured Settlement Receivables Has Been Called Into Question
Some settlement planners began offering them to tort victims, including minors, one even swearing in an affidavit to a California court that there was "no change in funding asset". Another has used it in an Arizona case, a state that does not protect investments in other people's structured settlements in the event of insolvency, since Arizona adopted the Life & Health Guaranty Association Model Act (#520). The question is "are they suitable investments for tort victims"?
Are Structured Settlement Receivables an Attractive Nuisance?
Not every lawsuit plaintiff is unsophisticated. But, in the words of Elvis Costello "accidents do happen". When they do, the victims are the poor and the rich, young and old, the unsophisticated and sophisticated, the financially adept and the financially inept, as well as the risk averse and those with some appetite for risk. And there are those who have no business being in such investments. Would the investment pass a suitability test? Does such an investment meet a fiduciary standard of best interest?
What are Risks of Investing in Structured Settlement Payment Rights?
- Health of Insurer The security of the structured settlement investment is related to the financial health of the life insurance company that issued the underlying annuity and the insurer's ability to pay on its contracts and the terms of the court order that is a prerequisite to each structured settlement factoring transaction. The purchaser of the structured settlement derivative is buying the payment rights, or a subset of the payment rights being transferred.
- Not Deposits Structured settlement payment rights are not deposits and thus not insured by the FDIC.
- Not Annuities The National Association of Insurance Commissioners has expressly stated in its Statutory Issue Paper No. 160 (finalized April 6, 2019), that acquired structured settlement payment rights are not annuities or an insurance product. Furthermore, acquired structured settlement payment rights (factored structured settlement payments) are not annuities as defined under the insurance law of many states. Nevertheless you may be solicited by lawyers, settlement planners, accountants and even licensed insurance agents and financial advisers calling them annuities. Don't be fooled!
- Not a Qualified Funding Asset for use with legitimate structured settlements. If you're a plaintiff attorney or guardian ad litem, keep an eye out for this sort of conjuration from settlement planners or finanical.
MetLife Doesn't Sell Structured Settlement Annuities to Other Assignment Companies
This author has had the opportunity to review an excerpt of a " Qualified Assignment and Release prepared by a settlement planning firm or one of its related entities. The Assignor was a qualfied settlement fund (QSF), believed to be administered by a related company to a settlement planning firm that heavily promotes QSFs. The Assignee was an assignment company, related to the settlement planner. The Qualified Assignment and Release lists the " Qualfied Funding Asset" as " Annuity" and the "Issuer of Qualfied Funding Asset" as Metropolitan Life Insurance Company. Paragraph 12 of the QAR states " In exchange for "legal paymnet rights" pursuant to 5891 of the IRC, to the Periodic payments specified in Paragraph 15, Claimant hereby forever discharges the defendants and.or Respondents with regard to the Periodic Payments, and agrees to only look to (settlement planning firm's related assignment company) for satisfaction of the obligation to pay periodic payments. Paragraph 13 of the QAR prepared by the settlement planner's related firm states " In the event of notice of an application to any court for the transfer of structured settlement payment rights established under this agreement, (settlement planner's related assignment company) reserves the right to transfer the ownership of the "Qualified Funding Asset(s)". Upon the transfer of ownership to Claimant and/or Payee this contract shall terminate". This author has confirmed with MetLife that it does not sell structured settlement annuities to anyone other than a self-insured defendant, an insurer that wants to buy-and-hold, or it's own qualified assignment company.
5. May not be any coverage under statutory insolvency schemes Structured settlement payments rights are not covered under the statutory insolvency streams in a majority of the United State, whereas they might apply to legitimate insurance products. As of July 2023 (updated), 40 states had an express prohibition, and the NAIC is pushing to have all 50 states fall in line to adopt the 2017 Revisions to the Life & Health Guaranty Associations Model Act (#520) which introduced the exclusion.
The scary thing for any investor, (and an essential piece of knowledge for any fiduciary providing advice under the "best interest" standard) of an investment in structured settlement payment rights is that the 2017 Revisions to the Life & Health Guaranty Associations Model Act (#520), adopted by 40 states so far, has to be the retroactive application, so you're not safe if the investment was purchased before the eventual effective date of the adoption of the 2017 Revisions (#520) in your state.
Most states have a prohibition on advertising the existence of said funds in sales presentations. However, some of the actors soliciting investors in structured settlement payments are not licensed to sell annuties and operate in no-man's land, promoting the investments as annuities, which they are not, while "violating" a law that would apply to them if they were licensed to sell legitimate annuities, which many are not.
6. Exposure to interest rate risk. If market interest rates rise, the rate of return on the structured settlement derivative is locked-in. Longer term purchases are more sensitive, similar to long bonds or traditional structured settlement annuities. This can be mitigated somewhat by hedging through an "structured settlement derivative ladder" by making several purchases over an extended period of time.
7. Transactional Risk There is originator risk (think Access Funding, Barry Cooper among those whose payments were scheduled to begin and never did. They were suspended due to competing claims), forgery (happened in 200 cases in New York and Florida, forgery by a law firm paralegal in New York and by a lawyer in Florida) and imposters (Wall case-retirees lost $152,000). In 2018, a whole slew of investors in "secondary market annuities" were noticed as creditors in the Woodbridge Structured Funding/Woodbridge Wealth bankruptcy (2018). The Barber case in Allegheny County PA, involved a raid on a minor's structured settlement and forum shopping by the originator. One of the investors was a California settlement planner with retirement funds who found himself competing with an 18 year old for the payments when they came due. Very unfortunate and it could have been any retiree. The deal in which the California settlement planner invested was originated by a company controlled by the current President of the National Association of Settlement Purchasers.
8. Fraud e.g. Dan Cevallos and Advance Funding
9. Currency Rate Risk (To Foreign Investors) Payments are made in US dollars.
10. Liquidity Structured settlement derivative investments may need to be held to term and are not liquid. Complex litigation between a structured settlement factoring company, investors and an intermediary pending since 2020 in Maricopa County Arizona and branching out into other states provides an illustration of what can happen. Genex Capital is litigating against multiple investors who it alleged breached its Receivables Purchase Agreement(RPA) when they sold their receivables and did not obtain Genex's consent or go through Genex. According to a Motion filed by Genex in Castro County Texas
" When Genex discovered that the Leonard IRA had wrongfully attempted to reassign payments to NEAA it issued a default notice, which went unresponded. It is uncontroverted that Genex confiscated the payments and reassigned them to other investors as it was expressly permitted under the Leonard IRA RPA" In Re: Juan Oltivero In the District Court of Castro County Texas Cause No. B9545-1211 Genex's Motion to Strike, Motion in Limine...Filed May 23, 2022 441pm
Some of the above risks are similar to the purchase of most fixed income annuities. However, most purchases of fixed annuities do not require a court order to be concluded, have such an exposure to transactional risk.
So is an investment in structured settlement payment rights appropriate for tort victims?
In very rare circumstances, and then only after very careful deliberation.
Last updated July 17, 2023