Historical Developments Structured Settlements: Market Foundation
This is the second article (Part II) in a four part series of articles that explore the timeline of historical developments that highlight key events for the structured settlement market.
- Period One – Industry Formation
- Period Two – Market Foundation
- Period Three – Conflict, Growth, Transition
- Period Four – Industry Reset and Rebuild
PERIOD TWO – MARKET FOUNDATION (1991-1999)
Structured settlements initially were utilized exclusively by defendants and their insurers as a claim management tool. Defendants and their insurers (as opposed to plaintiffs) also typically purchase structured settlement annuities which defines a critical role for them in the structured settlement process. The Weil lawsuit opened the market for plaintiff consultants to receive and/or share commissions. OBRA 1993 and the Childs case (1994) established new structured settlement markets for special needs trusts and deferred plaintiff attorney fees. Rev. Proc. 93-34, the introduction of off-shore non-qualified products (1997) and PLR 199942001 (1999) expanded the funded options and case options for structured settlements. The Small Business Jobs Protection Act of 1996 amended IRC 104(a)(2) by adding the word “physical.” And, with secondary market “factoring” an increasing problem, Illinois became the first state to pass a structured settlement protection act (1997). Industry annuity premium stayed level during this period ($4 billion per year), a foundation was set for future growth.
- 1992 – 1996: Weil v. Manufacturers – Unable to obtain life company appointments to sell structured settlement annuities, three plaintiff consultants initiated a class action lawsuit against several life insurers, certain structured settlement consultants and NSSTA. The case settled in May 1996. Although the terms of the settlement were confidential, the settlement coincided with a greater willingness on the part of structured settlement annuity insurers to license plaintiff-oriented consultants and to permit the sharing of commissions between defense and plaintiff consultants in concluded cases..
- 1993: OBRA 1993 – Until 1993, receipt of a personal injury award or settlement would almost automatically disqualify a recipient from receiving Medicaid. The Omnibus Reconciliation Act of 1993 (OBRA) created a “safe harbor“ consisting of three alternative types of ”special needs trusts” (self-settled; pooled; third party) to allow disabled individuals to receive assets without disqualifying them from Medicaid. More recent legislation has further impacted the use of special needs trusts: The Affordable Care Act (2010); The Achieving a Better Life Experience Act (ABLE Act) of 2014; The Special Needs Trust Fairness Act (2017); The Tax Cuts and Jobs Act (2017).
- 1993: Rev. Proc. 93-34 – The U.S. Treasurer published Rev. Proc. 93-34 which specifies requirements under which an IRC 468B qualified settlement fund will be considered “a party to a suit or agreement” under IRC 130 (c) (1) in order to determine whether a qualified assignment has occurred.
- 1994: Childs v. Commissioner – This groundbreaking case demonstrated that if a structured settlement annuity is properly established, an attorney subject to a contingent fee agreement will not be required to recognize income on deferred future periodic payments he or she receives as compensation until he or she actually receives the payments.
- 1996: Small Business Jobs Protection Act of 1996 – This legislation amended IRC 104(a)(2) by adding the word “physical.” Payments to which IRC 104(a)(2) applies received after August 20, 1996 that are on account of non-physical injury or non-physical sickness are included in a recipient’s federal gross taxable income.
- 1997: Non-qualified products – Liberty Life introduced off-shore “non-qualified” products into the U.S. structured settlement market to assist in settling various types of claims that do not qualify for income tax exclusion under IRC 104(a)(2) including employment disputes, emotional disputes and punitive damages.
- 1997: Protection Statutes – Starting with Illinois in 1997, 49 states have enacted some form of structured settlement protection act. Most are now based upon the Model State Structured Settlement Protection Act (“Model Act”) which incorporates language originally agreed to by the National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP) in 2000 and which has since been updated and supported by the National Conference of Insurance Legislators (NCOIL).
- 1999: Variable annuities – The IRS issued PLR 199942001 which concluded that variable annuity payments calculated pursuant to an objective investment formula were “fixed and determinable as to amount and time of payment” thereby meeting that requirement under IRC 130 (c)(2)(A).