by John Darer CLU ChFC CSSC RSP
Pat Hindert enters the debate about Product Suitability standards in the settlement industry with the first in what promises to be an exhaustive blog series on the subject. Although there is no collaboration agreement between us it appears that this is a subject in which we have mutual concerns.
A structured settlement IS an appropriate solution for many litigation scenarios, not just personal injury or workers compensation. But like a good medication, it needs to be dispensed in an appropriate dosage. Since 2007, the term "over structured" has been used publicly by a number of folks in the primary and secondary market as one possible impetus for factoring of structured settlement payment rights. In my opinion it weakens the plaintiff's "immune system" to a degree that it becomes susceptible to the amusing midnight "Sirens" of "unemployment TV" seductively wailing "cash now" and they steer their financial ship onto the rocks.
The theory is that by not providing for enough up front cash to account for immediate cash and short term cash needs and anticipated future expenses in the solution, people resort to factoring. That's great business for the factoring company or factoring broker providing the liquidity, but a potential financial disaster for the structured settlement annuitant. A structured settlement that is factored within a month or two of its creation could result in a loss to the recently former plaintiff of a significant part of the cost that went into the portion of the structured settlement payments they are selling.
Basic fact finding should be able to uncover the plaintiff's needs and wants. Once again it is of critical importance is to get an understanding of of the plaintiff's immediate cash and short term cash needs. A good illustrative case is one we've previously reported on, which involved a Connecticut resident who executed a Settlement Agreement and Release on August 21, 2008. The terms of the release included a large structured settlement. On October 21, 2008, 60 days later, a transfer petition was filed in the Connecticut Superior Court in Milford to initiate the sale of 16% of the plaintiff's recently created monthly structured settlement payments to raise $150,000 in cash. According to the structured settlement transfer petition obtained by this author, the annuitant stated that the need for cash was related to needed modifications to the plaintiff's home. Because logic holds that discussions of the transfer must have ensued in advance of the October 21, 2008 transfer submission to Milford Superior Court it means that the shortfall in cash needs was uncovered within 4-6 weeks following the execution of the release. Wouldn't it have been cheaper to simply have $150,000 more up front cash?
In the Connecticut case the product itself WAS suitable however, the dosage proved not to be correct, in very short order. Was the amount structured suitable for the plaintiff in the case? Is there anything that the plaintiff's structured settlement consultant or plaintiff attorney could have done differently when the case was settled to have prevented the loss of the plaintiff's capital? Was there another solution? On a broader scale, where do you draw the line on over structuring? How do you define over structuring?