With over 85% of personal injury and wrongful death cases ending in settlement, and the case management costs rising exponentially, the objective for all parties should be to reach a fair settlement at the earliest possible time. A second objective should be protecting the value of the settlement to ensure coverage of future needs.

In a number of cases, plaintiffs have taken a cash settlement. They then invested it through advisors, assuming that market growth would increase the value of the settlement, and provide them with after-tax income that exceeded the tax-free returns on annuities. In many cases, the fall in the market has taken away half or more of the value invested.

In other cases, qualified periodic payment annuities that did not target a claimant’s needs were accepted in full or partial settlement of claims. Subsequent sale of the guaranteed portion of the structure produced a reduction in the settlement value of 50 to 75%.

Clients are now looking to their attorneys and others claiming that they were owed a duty of due diligence, and that they never gave informed consent to the terms of the settlement. In those jurisdictions where such theories are gaining acceptance, the only defense seems to be evidence that due diligence was performed and that informed consent was gained.

Due diligence is an ever evolving concept which at a minimum should include some independent valuation of any structured settlement. Eventually, it could include gaining best value for the settlement dollar. In other words, opening the process to competitive bidding.

Informed consent is a bit more difficult to deal with. It includes advising the client of due diligence efforts and the results, but it can also entail gaining a client’s consent to a future distribution scheme, after that client understands its ramifications and limitations. The best way to achieve that is through client participation in design of the future distribution scheme (structuring process). Under the present passive approach, participation is often reduced to agreeing with a particular proposed structured settlement, without independent valuation or the benefit of alternate proposals. As blind bid processes are extended to larger cases, informed consent will become even more complicated. Plaintiff’s counsel will likely be attempting to find values at which settlement can take place and not how future client needs can be met.

In major cases where the value in structuring a settlement is the greatest and the need to preserve future funds flows are the highest, mere presentation of a range of values, with or without some pro-forma translation into future payments, might not be sufficient to gain informed consent. Minimal requirements should entail working forward from a future payments plan to arrive at a range of values that can be employed to respond to an offer to settle or to generate a demand.

Fortunately, there are a number of people who will help in developing future payment plans based on the plaintiffs’ needs and/or an expected settlement range. Many have no association with the liability carrier or defendant and can preserve the confidentiality of the planning process. Given the right tools, counsel could internalize the process.

Once a plan has been developed, the remaining tasks would be

1. Gaining the clients’ input about and agreement to the future payments plan. (If the client participates in initial plan development, much of informed consent may be satisfied.) As input is generated, the plan can be modified to change amounts and timing of payments, and to reallocate funds among beneficiaries. This both ensures the clients’ informed consent and improves the probability that structured settlement will not be sold at some subsequent point.
2. Gaining the clients’ agreement to plan adjustments that will yield a range of values that can be employed in making a demand for settlement.

Finally, the settlement and the future payments should represent a best value for the client. It seems reasonably well settled that knowing a settlement amount does not constitute "constructive receipt" or violate any provisions of Section 130 of the Internal Revenue Code, nor should selecting from alternate methods of deploying the funds prior to final settlement. Given a plan, plaintiffs’ counsel can competitively bid it among various providers to obtain a best value for the client.

If the defendant or liability carrier, as the assignor, insists upon structuring some portion of the settlement and selecting an approved annuity provider, that can accommodated in the competitive bid process by granting any approved provider with right to match the best competitive bid. In that way, Plaintiffs’ Attorney can ensure best value while assignor can satisfy any contingent liability issues.

The determination of best value contains three factors. They are

1. Risk. The various rating agencies address the issue of risk by some measurement of financial strength, or the ability to meet ongoing obligations. They then rate annuity providers on some alpha or alphanumeric scale. Those scales are proxies for relative risk.

Plaintiffs in different financial circumstances may have different levels of tolerance for risk. And a prudent selector can gain a significant increase in return for a small increase in relative risk.

2. Cost. In the abstract, interest rates vary with relative risk. Yet, different annuity providers with the same risk ratings will quote different prices for the same structure, or, in effect, offer different discount rates. Small differences in rate can produce substantial differences in cost. Each increase in discount rate of ¼% produces a reduction in cost of 3 to 5% over the normal range of a structure. If those savings were captured for the plaintiff, they could increase front-end cash payments or enhance the payout from the structure.

Added to that is the broker’s rate. A reduction in a broker’s rate of 1% reduces the cost by something more than 1% (broker fees are applied to gross value including the fee). Broker fees normally run from 4 to 6%.

If 30-year period certain monthly payment structure were established that paid $1,000 per month with a discount rate and broker fee of 6%, the cost would be $178,800. At a discount rate of 6.5% with a 4% fee, the cost would be $166,300 or $12,500 less. If the net settlement were $250,000, and the savings were recovered for the plaintiff, the front-end payment would be increased from $71,200 to $83,700 or more than 17%. While such a dramatic result is not always achievable, it does highlight a range of savings that can be achieved through competitive bidding.

3. Service. Best value may not be the lowest cost, or the lowest relative risk. It may include the level of service provided by the broker or other structured settlement provider, and the level of security that a relationship generates. People who provide support in developing future payment plans most often look to placing the structure as a way of generating a return for their effort.

Whatever the combination of factors in any case, it is inevitable that with largely undifferentiated product, price competition will be the major factor.

The greatest difficulties in putting a competitive bidding system in place seem to have been

• Lack of open access to an integrated system for creating, importing and/or modifying future payment plans, for developing and submitting proposals, and for soliciting and responding to bids.

• Inability to provide structured settlement proposals in evaluative, reusable format.

• Reluctance to provide structured settlement rate and component information.

We have recently completed development on an online competitive bidding system for structured settlements. It deals with all of these questions except the predisposition of some carriers to use specific annuity providers.

The system is composed of two independent modules, one for plaintiffs’ attorneys and their advisors, and the other for brokers or other structured settlement providers. The system can generate the simplest or most complex future payment plans for from 1 to 10 claimants or beneficiaries. It can accommodate up to three plans for each case. Plans or proposals can be developed by planning professionals and electronically submitted in data form for evaluation, analysis, revaluation and/or modification. A user can select a plan for bid solicitation, and generate a file and document confirmation for transmission to participating brokers. Brokers can respond to submitted bids setting out a price and the period for which the response is valid, or offer an electronically transmitted alternate proposal. Finally, a user can generate a comparison of bid responses and proposals to the plan and to each other, select a best value, and electronically confirm acceptance.

There is a special module in which a user can vary plan elements, rates and assumptions to produce a range of values that can be used in any blind bid process. In this way, the submitted values are tied back to a plan.

Each section generates reports that can be used to analyze, adjust and balance a projected settlement. They include

• Worksheet. The report package displays the buildup or allocation of a settlement, the distribution of value and front-end payments among beneficiaries, and detailing each future payment element together with total contingent and guaranteed payments as appropriate, and their values.

• Proposals, Bids and Bid Responses. The report package displays the schedule and detail of future payments and amounts by beneficiary, by element in either a tabular or descriptive format. These are similar to the prevailing formats for submitted proposals.

• Value Range. The report displays the plan distribution of front-end payments and future payment value by beneficiary, together with adjustments from changed rates, fees and element variables to yield a valuation range for use in blind bidding. When combined with the proposal, the plaintiff should gain a full understanding of the plan and possible adjustments that would be the basis for informed consent.

• Bid Response Worksheet. The report displays the build up of a response from receipt of a bid solicitation (valued or unvalued) through broker’s valuation, including discount and fee rate alternatives, dollar pricing of individual elements and/or inclusion of substituted elements.

The modules generate internally distinguishable files that can be opened only by the proper command after entry of a file IDENTIFIER. The files are processed on a user’s computer, and no data is passed to the internet. In this way, the confidentiality of the work product can be maintained throughout the development process, and until plans, proposals, bids and bid responses are submitted. These submissions are all plain text files that can really be understood only when processed by one of the modules.

For more information, visit our site at www.NeedsPlan.com.