What is a Structured Settlement?

Annual Compensation Payments

A structured settlement is a court-ordered set of periodic payments which stem from a lawsuit for damages or a legal agreement to settle damages in a tort case. The structured settlement calls for compensation payments for damages or workers’ compensation and is subject to the Internal Revenue Code Section 104.

Structured settlements have only been around for a generation or two, as the first structured payment plan occurred in a British court case in the 1970s. This type of payment replaced lump sum payment plans, which were the rule in damage claims before that time. The innovation came about because of the increasing amount of money changing hands in tort cases in the Seventies.

Since the Seventies, structured settlements have become the norm in the United States, Canada, United Kingdom, and Australia. These payments are often funded through the purchase of annuities, which acts as a guarantee of future payments. Structured settlements are considered asset-backed securities, and can result from either settlement out of court or due to a legal obligation incurred through a lost court case.

What Is Tort?

“Tort” is money compensation for injuries caused or wrong done by one party to another. Tort law has been evolving since before the 1970s, because of the increasing amount of damage claims in cases since that time. You’ve probably heard people talk about “tort reform” and tort cases all the time, but it’s a term that many people don’t immediately understand, since tort law isn’t taught in public schools.

What Is Tort Reform?

Tort reform is the name given to law which hope to limit the amount of compensation in tort cases. Supporters of tort reform claim that out-of-control damages clog up the civil court system, encourage ambulance chaser lawyers, and increase insurance costs for everyone else, as companies have to compensate for large damage settlements.

Opponents of tort reform claim that companies must face high penalties for cases where they cause irreparable damage to employees and private citizens, because they will view lesser settlements as the “price of doing business” and therefore have no motivation to limit danger to workers or individuals affected by cost-cutting decisions.

Therefore, tort reform becomes a matter of viewing individual welfare against public costs. Questions of whether to support tort reform often revolve around the question of whether private corporations will police themselves or need the threat of legal jeopardy to do the right thing in setting up their business practices.

You could say that tort reform is about whether “slimy” lawyers prey on private interests, whether crusading lawyers serve a public purpose in keeping those very same private interests honest. Whether you support tort reform tends to boil down to where you stand on that issue.

Proponents in tort reform have won a valuable public relations battle simply in having the issue termed “tort reform”, because opponents would say reforming the tort system is no sort of reform at all, but opening the door for corruption. In my personal view, the murky politics of personal injury law leaves room to blame both sides, though I suppose having a “curse on both your houses” attitude hardly solves any problems. Each case is different, so I tend to dislike laws that limit judgments.

Structured Settlement and Tort Reform

Structured settlements therefore have become a way for businesses and companies often targeted by personal injury claims to defer some of the costs of tort cases against them, but limiting the amount of up-front payments and forestall damages that would put them out of business.

You could say lawyers and corporations alike have found a third way, which avoids a lump sum damage claim that would close doors, while avoiding the kind of tort reform laws that would close the doors on the law practices of so-called ambulance chasers. The business paying structured settlements retain capital they can invest in their business, hoping either to collect interest or make profits that offset the costs of the annuities they’ll have to pay.

The corporation forestalls costs and pays out over many years, the lawyers still collect fees for years to come, and those harmed are paid out over the years, hopefully as its own kind of pension. It should be noted that Medicare and Medicaid sometimes affect the amount of money paid in a structured settlement.

Selling Structured Settlements

Believe it or not, there are companies that buy structured settlements from the people who’ve been awarded them or who bargained for them out of court. Imagine you have a structured settlement plan, but you need money up-front and fast. There are companies who’ll pay you a lump sum amount (at a lesser total cost), and who then have the right to collect the damages (making a long-term profit).

These companies do the same with life insurance policies, annuities, and lottery awards. You have to imagine that the amount paid to those selling their future payments is going to be at a significantly reduced amount, so they can eventually turn a profit on this transaction.

For the most part, I would urge people not to sell their structured settlement to one of these companies, but people mortgage their futures for quick cash today all the time, so I know that advice is going to fall on deaf ears in many cases. Understand that you’re selling a dime for $0.05 today, or more likely, you’re selling a quarter for five cents. If you can avoid selling out your annual payments, don’t sell.