The times they are a-changing. Former clients in personal injury cases are suing their Attorneys not because the Attorneys lost the case, but because the settlement was inadequate. The former clients are alleging that the Attorneys never properly informed them of the value of a structured settlement, or did not get their permission to settle the case for the value of that settlement.

In a day when buyer’s regret occurs every time the client sells a structured settlement to a factor, and often for amounts of less than 25% of the original value, it is not surprising that the client would look to be made whole. It doesn’t matter whether the Attorney did a first class job in gaining the settlement or that the former client squandered the proceeds. All that matters is that a settlement that was supposed to last for years is gone, and the Attorney may not be able to show that permission to settle was obtained, that the structured settlement was properly valued or that it was adequately explained to the clients. The only surprise may be how few cases have been filed to date, and how long it has taken former client’s to file against their Attorneys.

The solution may be easy, and may also increase the benefits for the client.

First, always know what you are dealing with.

The value of a structured settlement is determined by the amount of the payments, when they occur and the discount rate applied to them. If there were no discount rate, the value of the structured settlement would be the sum of the payments. The discount rate is introduced to account for the time value of money. If you deposit a dollar in the bank and it earns 5% simple interest, it will be worth $1.05 in a year. If the bank promised to give you $1.00 in a year, you would value that at something slightly more than $.95 today (discounted at 5%). The discount rate is merely the net earnings rate that is applied to the annuity account. Sometimes, it is referred to as the Internal Rate of Return (or the discount rate at which the future payments equal the current value.). For a simple rule of thumb, the higher the value of a given stream of payments, the lower the discount rate, and, conversely, the lower the value of a given stream of payments, the higher the discount rate.

The cost of a stream of payments from a company that earns more on its portfolio and applies more to annuity accounts will be lower than the cost from a company that earns less or applies less.

The process becomes complex

• When continuous compounding or discounting is introduced,
• When the annuity company uses different discount rates for different periods,
• When the duration of future payments is dependent on the beneficiary’s survival, and
• When the different discount rates are applied one way for guaranteed payments and another for life contingent payments.

When was the last time that all of that information was provided, or the fee rate which is also included in the value?

The question is whether Plaintiffs' Attorney is certifying the reasonableness of the valuation of the structured settlement offer, and, if so, how counsel can do that without knowing these complexities and their impact, or without using a truly independent evaluation that yields a reasonable approximation of the quoted values. Fortunately, there are a number of programs and services available that will provide independent valuations.

At a minimum, this should determine whether you have received the best and final offer from the defense brokers. They have a fee that is dependent upon the settlement being structured, and, at least in part, on their providing the structure. If not previously mentioned, there is the practice of co-brokering where the defense-side brokers receive a part of the structuring fee even when someone else provides the structure. 

Caution should be used if the defense brokers offer alternate structured settlements that merely change the payments and not the value. Again, access to independent evaluation can identify that.

Third, shop the structure.

Different structured settlement providers have different net earnings rates and the same stream of payments can cost widely different amounts. Present the offers to your client, and have the client note acceptance. In that way, you will have a record of independent evaluation, competitive bidding of the structured settlement and client selection. If the company offering the best structure has a lower rating, review that with your client before selecting the provider.

This three-step approach will provide evidence of Due Diligence in selecting the structured settlement and an effort to maximize value to the client.