by John Darer CLU ChFC MSSC RSP CLTC
Investors in structured settlement derivatives can now avail themselves of an insurance product placed through certain underwriters at Lloyds of London, that provides some protection against the transaction risk of overturning approved structured settlement transfer orders. The insurance cover became available May 1, 2017, according to Jeff Coluccio, whose firm was involved in placing the coverage.
For investors, the policy is first taken out by the structured settlement factoring company and then the investor is added, at an extra cost at the point of sale on a pay as you go basis.
So an intermediary company like SMA Hub can buy this policy and it can be sold as an option to each of its investors by deal basis. Investors must be added as an additional insured on deal by deal basis for an additional cost of 0.99% of the amount invested. So if the investment is $150,000 we understand that there is a one time premium of $1,485 to be paid by the investor.
When is a claim triggered?
When at a later date a court of competent jurisdiction vacates a previously approved structured settlement transfer order involving a insured claimant.
Is there an aggregate?
The policy has a $1,000,000 aggregate, which represents total annual losses for each insured factoring company. Using SMA Hub again as an example, this means that if there are any claims it is "first come first served" on the aggregate and once the aggregate is exhausted nobody else gets paid. The limit replenishes on renewal as long as the underwriter continues to offer the program and insured renews the coverage. Hence the caveat "some protection". Don't get me wrong, the availability of the coverage is an important development.
Are defense costs covered?
No, defense costs ARE NOT covered.
Settlement planners who operate as fiduciaries and recommend structured settlement derivatives have an affirmative obligation to disclose
Settlement planners who put their clients into structured settlement derivatives and hold themselves out as fiduciaries now seem to have an affirmative obligation to (1) only do transactions via intermediaries that have the insurance cover (2) ensure that the injury victim clients they are putting into structured settlement derivatives are aware of the availability of coverage (3) disclose the cost of the coverage and (4) include the cost of the coverage in any comparisons to alternative income integrating sources
Are there exclusions?
As I understand the coverage, it will be possible to buy cover on existing deals provided they have not been subject to litigation. Thus many of the Access Funding deals assigned to investors will not qualify.
The exclusions under the policy are for fraud or forgery perpetrated by the insured.
Prompted by the Wall case in which Altium and one of its investors were burned for almost $153,000, Altium Group did a very good thing and pursued this coverage with Lloyds. As good as it is however, it's important to remember that there is an aggregate and it's low when you consider all that has been written. Time will tell once there is claims history whether limits can be increased.