Structured Settlement Planning Errors and Omissions Insurance

by John Darer CLU ChFC CSSC RSP

Structured settlement brokers are the obstetricians and gynecologists of the insurance field, when it comes to errors and omissions insurance coverage. Despite the fact that many structured settlement transactions require the review of multiple attorneys, and often a judge, the insurance prices are trending at a high multiple by comparison, to coverage offered to insurance agents (whose business requires less real-time transactional scrutiny).

Today structured settlement brokers do more than simply place structured settlement annuities. They are involved in planning issues that may or may not involve the placement of a structured settlement annuity. They may place life insurance, long term care insurance, disability insurance, SPIAs, indexed annuities, mutual funds and variable annuities (if they have securities license) and other financial products. Most policy forms specify that ancillary planning services are related to a covered product.

Given the aforementioned, and the recognition that most E&O coverage offered on the market for structured settlements limits coverage to placement of structured settlements and related services, an improved solution is needed. The last reasonably priced solution was an annuity issuer sponsored plan that offered comprehensive coverage but is no longer available due to Aviva's withdrawal from the structured settlement market.

Individual members of the settlement industry, who are also members of the Society of Financial Service Professionals ("SFSP") can purchase a comprehensive group E&O plan for annual premiums advertised as low as $530 (more if add mutual funds and securities), with defense costs OUTSIDE the policy limits. The FSP Risk Purchasing Group plan also offers entity coverage at reasonable prices. The SFSP program is administered by Calsurance.

Of note to those in the settlement profession Section P of the exclusions states:

"Based upon, arising out of or in anyway involving the offering, sale or servicing of any structured settlement, provided, however, this exclusion shall not apply to a Claim solely based upon or arising out of selling or servicing a Covered Product utilized to fund a structured settlement.

According to the Enrollment Packet

Covered Products under Tier I included Fixed Annuities

Covered Products under Tier II include Variable Products

Inasmuch as the preponderance of structured settlements are funded with fixed annuities, this author will attempt to clarify the obvious when business resumes after the holiday weekend.

 IRC 5891 (c)(1) defines "structured settlement" as

 "an arrangement—

(A) which is established by—

(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104 (a)(2), or

(ii) agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104 (a)(1), and (of significance to the issue at hand)

(B) under which the periodic payments are—

(i) of the character described in subparagraphs (A) and (B) of section 130 (c)(2), and

(ii) payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.

IRC 130 (d) provides for only two types of qualified funding assets

1. Any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or

2. Any obligation of the United States

Irrespective to what needs to be clarified, those concerned should consider the following:

While many of the members of the profession operate as independent contractors with their own entities affiliated with a larger producer group the indications seem to be that traditional structured settlement E&O coverage does not extend to the entities of the brokers-only to the brokers themselves. Try asking your entity to be listed a s named insured under your firms E&O policy. If the affiliation contract between the agency and the broker's or planner's entity and that entity is what is being held out to the public, what happens if that entity is sued?  Does the extension of coverage to the individual and not entity increase exposure and give a potential litigants a lever for veil piercing? What exposure does the entity have?

The Society of Financial Service Professionals is an 80 year old national network of credentialed professionals working in diverse financial disciplines and has nearly 17,000 members nationwide , including this author.

Regular Membership is open to financial service professionals holding any of the following credentials in good standing:

1. 1. CASL®
   2. CEBS®
   3. CFA®
   4. CFP®
   5. ChFC®
   6. CLF®
   7. CLU®
   8. CPA
   9. CPC
   10. CTFA
   11. Enrolled Actuary
   12. JD
   13. MSFS
   14. MSM
   15. REBC®
   16. RHU®
2. Associate membership is available to those students who have successfully completed one course towards the above credentials.
3. Members must meet the CE requirements of their credential, comply with the Society's Code of Professional Responsibility and pay their dues on time.