Do Maryland revisions on structured settlement cash flow sales raise issues of suitability?

"Structured settlements" have recently gotten back in the news through a series of articles by Terrence McCoy in the Washington Post. The stories covered the lead paint cases arising in Baltimore, Maryland. The tragic death of Freddie Gray has also brought the lead paint litigation issue and the widespread use of structured settlements to resolve personal injury litigation to the forefront, as it turned out that Gray was a lead paint victim. The stories discussed problems which arose long after his settlement and structured settlement were put in place and involved the purchase of his future structured settlement payments at a discount of their present value for cash. 

The issue that brought structured settlements into the news was the purchase of structured settlements by companies that engage in the business of factoring, or purchasing future cash flows at a discount in return for a lump sum. Many of these purchases discussed in the Post story were made of victims of the Baltimore lead paint cases. Children who ingested the paint had filed claims against landlords and building owners who had failed to re-mediate the properties that had lead paint in them. Many of the lead paint victims had severe cognitive problems as a result, something that is common in almost all lead paint injuries, leading to the wide spread use of structured settlements at the time of settlement to pay out their damages over a period of years. This fact and the contention that “A lot of them can barely read.” is the topic of interest I cover in this video commentary for The Legal Broadcast Network. 

The articles in the Washington Post prompted the Maryland Court of Appeals to adopt some new rules regarding the purchase and sale of structured settlements. Which, like 47 other states, has in place a structured settlement protection law which requires the involvement of an independent professional advisor and court approval in the sale of the settlement benefits for cash. However, what came to light in the investigation appeared to be the rubber stamping of proposed structured settlement sales through essentially the same professional advisor on almost all of the cases, with what the courts in retrospect feel was less than rigorous analysis whether the sale would be in the best interests of the structured settlement payee. However, it is still to be determined if the parties involved in those sales were doing anything less than what the law required in order to obtain court approval. 

While this apparently lax approval of process in selling benefits in the courts, as well as aggressive sales tactics used by representatives of factoring companies, has been the primary focus of the articles and the primary structured settlement industry. Yet for me the troubling issue not being discussed in these cases is that many, if not all, of these child or young adult plaintiffs apparently had mental or cognitive disabilities at the time of settlement. These plaintiffs clearly had the same mental problems when the structured settlements were put in place at settlement. 

Look, the job of trial lawyers is to get the largest possible settlement for their clients based upon the facts of the case and the economic recovery possible given insurance overages and the assets of the defendants. From all reports that was clearly done by the attorneys in these cases. However, once the settlement distribution process was locked into the use of structured settlements due to the impaired mental and cognitive capacity of these clients a decision had to be made as to whether an irrevocable fixed payment program was going to adequately address the future needs of the victim. If, as is contended, these plaintiffs were not so impaired as to require a Guardianship or incompetency hearing, should not at least a suitability assessment as to the use of a structured settlement annuity program have been done to determine if they might not be better served by a managed settlement preservation trust account? If you sell an annuity to a senior citizen in most states in the US you are required to do a full suitability assessment, as the presumption of potential Elder Abuse by recommending long term, low liquidity investments is high on regulators radars. There are civil and criminal penalties if those annuities turn out to be unsuitable for seniors, but in the settlement profession we are under no similar guidelines when it comes to the use of structured settlement annuities.

Under the new standards adopted by the Maryland Courts just the other week, Independent advisors on the sale of the cash flows now must appear before the court, explain their business relationship with the purchaser and also be willing to address the cognitive, educational and comprehensive ability of the person selling their payments. This is clearly a higher standard, one that makes sense, however my concern is if this standard is now going to be used on the liquidation of cash flows, plus we have state laws on annuity sales suitability, how much longer is it going to be before structured settlements experts on the front end of the process are swept under these exact same standards. I believe that most independent advisors are incapable of making decisions and assessments on competency and cognitive ability of a client and would be foolish professionally to even attempt that analysis. So who is going to make that decision going forward and what is that process going to look like? Only time will tell. 

In conclusion,  if structured settlement payees were being taken advantage of in these court-approved sales of their future cash flows, the solution to the correct solution to that problem is better oversight by the courts involved, which appears to be how this is going to resolve. However, before the primary structured settlement tears a rotator cuff patting itself on the back we might want to prepare ourselves for what I feel is going to be  heightened oversight and analysis of the cognitive abilities of these and many other structured settlement clients on the front end. I have no doubt that once the dust settles that factoring companies will start pushing to apply the same oversight at the beginning of the process, when structured settlements are being considered and put into place. Structured settlement companies are not presently required to do a suitability assessment for the sale of the annuities that make up structured settlements, I fear that won't be the case for too much longer and experts are going to need to prepare and upgrade their standards.

Factoring and structured settlements.

A few weeks back Earl Nesbitt, the general counsel for NASP, the National Association of Settlement Purchasers joined Mark Wahlstrom at the LB Network studios while in Phoenix for a judicial education conference.

As anyone who does any work in the structured settlement market knows, the impact of factoring companies such as J.G. Wentworth, Peachtree Funding and others in advertising to annuity holders to "get cash now"has been a major concern of NSSTA and others. We have entire blogs and private initiatives that attempt to address the key word purchase price inflation these companies cause for topics such as structured settlements, settlement planning and structured annuity. A quick scan of Google shows that those terms alone are among the most valuable on the internet, largely because of the huge margins a factoring company can make on the purchase of someone's future payments. I, as much as anyone, am aware of the fact that these terms have been usurped by factoring firms through this saturation of advertising to the point where many legislative and judicial leaders consider the factoring firms "the structured settlement industry" and not NSSTA and it's supporters.

However, as my readers and viewers know i'm actually quite neutral on the issue of factoring, particularly in light of the fact that it is legal, has a clearly defined process that is required to get it done and in a large number of cases is a result of lazy or careless planning by the annuity broker who sold it to the client with little thought toward their cash needs.

This two part interview with Earl Nesbitt goes into a lot of those issues, particularly advertising, the idea of judicial education on factoring process and cooperation between the primary and secondary markets. If you are curious as to what N.A.S.P is up to, what the factoring industry has planned given the recent turmoil in credit markets and the future of factoring issues, you might want to check out this video series.

I will be addressing in some length later this week the topic of NSSTA and it's minuscule investment in advertising, marketing and education, particularly in contrast to the aggressive approach taken by the secondary market. Unless the leaders of our profession had failed to notice, J.G. Wentworth, Peachtree and others are essentially crippled at the moment by the collapse of their banking, hedge fund and secondary market sales options. NOW is the time for NSSTA and it's members to commence judicial education on structured settlements, the value of annuity products, the safety of what we offer and why responsible factoring has a role in our industry. Now is the time to build bridges, move past our battles of the last five years and grow our business and part of that is going to be getting off the factoring company bashing routine that has been the primary focus of our profession for many years now.

Lets get proactive and start selling our product and it's virtues, reclaim the brand now that the factoring companies have fewer dollars to advertise, lobby and influence buyers and get out of the fox hole and build our profession.

Structured settlements, the right choice

In an earlier blog post I tossed out the concept of The Golden Age of structured settlements, and how I believe we are about to enter a period of incredible growth in the settlement profession. I got such an exceptional response to that blog post that I took the time to create a two part video presentation on the topic of the future of the structured settlement profession, settlement planning and the need for structured settlement annuity contracts for injured plaintiffs.

This two part edition of "Speaking of Settlements" goes into that post and the theory of a coming boom in structured settlements in greater detail. Obviously I'd like you to view the videos, but if you want the short hand argument as to why I think we are about to see a surge, the five points are as follows:

1. Tax rates are about to rise given the government deficit and Democratic control of the House, Senate and White house. High tax rates make tax free annuity payments such as offered under structured settlements more attractive and as such we will see a relative advantage to using tax free annuity payments over alternative investments that don't enjoy the same tax status.

2. Interest rates are going to rise substantially over the next 3 years as the massive government debt leads to inevitable declines in the value of the dollar and relative increases in interest rates on debt obligations. Again, when compared to alternative investments such as bonds and bank CD's, the high rate of return on structured settlement annuities will compare favorably with other choices that lawyers and plaintiffs have before them, making the structured annuity a favored choice for many.

3. Life insurance companies are going to come out of this financial crisis as one of the few entities that didn't fail and in fact stood strong during the turmoil. The performance of structured settlements in this crisis is going to contrast very favorably with money market funds, banks, stock brokerage and mutual funds, not to mention real estate. People will begin to realize the superior safety of life insurance companies which is going to make our selling job easier when we discuss safety, stability, etc. All one needs to do is look at the 100% gain in the price of Hartford Life's stock last week in a single day once it became clear the insurance industry is still making money, is not going to vanish and that the major life markets such as Met Life, John Hancock, Genworth, Prudential, Hartford and others are not going away, but in fact are going to get stronger. Even AIG looks to be a candidate for a successful work out at this point.

4. Tort reform is dead as a political issue on both the national and state level, which will ultimately lead to a stronger settlement market. The distraction of tort reform, the heavy handed claims and litigation tactics and other clubs used to push people into smaller settlements, poison jurys and reduce the number of cases filed will slowly begin to receed. Nothing huge at first but the pendulum that swung so far to the right over the last 10 years will begin to swing back to the middle as the political climate shifts to a more pro-plaintiff market.

5. The Structured Settlement industry cartel is in it's last days as the information age sweeps over our business and creates greater awareness of pricing, negotiation and access to markets by consumers looking to decide how to settle their claims. The last 25 years has seen complete dominance by defense interests and a few powerful brokers that limited information, access and entry to the structured settlement business. I can't think of any other major financial market that is so totally insulated and sheltered from outside competition, however, with the information age, the intrusion of other financial professionals and increased sophistication of consumers is going to continue to force greater transparency and cooperation on our business.

Take a look at both segments of Structured settlements, the coming Golden Age and watch for some other big news this week related to new marketing opportunities about to be made available to structured settlement professionals nationwide.