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Structuring a Settlement:
A How-to Guide


by Marjory Harris, Esq.

In a previous article, Managing the Big Case: A How-To Guide, we provided some pointers on how to do a structured settlement. This article expands on that and should be read in conjunction with the previous article and the companion article by Steve Chapman and Gregg Chapman, Esq. in this issue.

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What is a structured settlement, and what does it do better than a lump-sum settlement?

In workers’ compensation cases, both the structured settlement and the lump-sum settlement are concluded by a Compromise and Release (C&R) approved by a WCJ. The structured version provides for periodic payments but, unlike periodic payments paid under an Award, the structured payments are by way of an annuity for the rest of the injured worker’s life. The big advantages of the structured C&R over the lump-sum C&R are financial security and more for the money. The monthly money is tax-free and the total paid out is often much higher than what would have been paid under a lump-sum settlement. Here is an example showing how $500,000 was structured:


 
“A structured settlement is a financial or insurance arrangement, defined by Internal Revenue Code as periodic payments.”
– Wikipedia

Another benefit is that the money that remains in the Medicare Set Aside account can be bequeathed, so for some workers, that may be the only money they have to leave to loved ones or to pay for a funeral. The cash up front can be negotiated with the client, so it is enough to purchase some creature comforts, pay off some debts, and the like, while not enough for the injured worker to give into pressure of relatives and friends who want to “borrow” money for some venture. Since studies show that most recipients of lump sum settlements quickly squander the funds and are left with nothing within a few years, we are doing a service and a kindness to our clients to advocate the structured approach.

Another major value to a big structured settlement is it gives the client relief from having claims adjusters and their minions managing their medical treatment. They don't have to wait anxiously at the pharmacy to find out if their pain medicine prescription is being honored. They don't have to worry that they will go into withdrawal while their medications are under utilization review. They don't have to wonder if they will get the physical therapy they need, or some other treatment their doctor thinks is beneficial.

 
Since studies show that most recipients of lump sum settlements quickly squander the funds and are left with nothing within a few years, we are doing a service and a kindness to our clients to advocate the structured approach.
   

Get the proverbial elephant out of the room

Some applicant attorneys fear doing structured settlements or even Medicare Set-Asides because they believe these types of settlement increase their liability for professional negligence. Fear often exists where there is a lack of knowledge. If done carefully, it is not dangerous to do either a set aside or a structured settlement. The benefits of a structured settlement are simply too great to put aside because of unfounded fears.

There may also be a “fear of math” whereby the applicant attorney’s eyes glaze over when confronted by numbers, formulae, and the like. A good broker and also a service that provides present value calculations should allay fears.

If you take the following steps and document your efforts, you are doing the "due diligence" and complying with the standard of care. Remember, going to trial on a case that could have been successfully settled to everyone's satisfaction is a lot riskier, as you have little control over the outcome.
 
Going to trial on a case that could have been successfully settled to everyone's satisfaction is a lot riskier than structuring a settlement, as you have little control over the outcome.
 
 
Getting your client to understand the benefits of
a structured settlement


Before investing a lot of time and effort in the structured settlement process, I want to make sure my client is on board. It is also a good idea to reinforce the concepts as one goes through the steps, ensuring the client’s understanding and approval. If you wait until presenting the settlement documents to the client to explain the essentials, you risk having the structure collapse and the time invested wasted.

I keep my explanation simple: they would get cash up front which would help pay off accumulated bills, provide for some things that would make them more comfortable (an adjustable bed, a widescreen television, or something similar that would bring daily comfort are good examples). They would get money to pay for medical bills and would no longer have to rely on waiting for approval after utilization review; when they go to the pharmacy they would no longer have to worry whether their pain medication would be approved; they could get gym memberships or acupuncture or anything else they think may help them without delays and denials. This last point is one of the best features of the structured settlement. I also point out that any money that is not spent from the set aside can go to heirs. This may be the only money that my client would be able to leave for his or her children, since in this type of case, any savings have long since been spent just to get by. I point out that they are assured of receiving monthly payments as long as they live. The payments go directly into their bank account by electronic funds transfer, so they do not have to worry about whether the check was mailed when scheduled, whether the check will come by a certain date, whether the check will get lost or stolen, etc. By the time we are getting ready to settle a big case, my client has usually had enough miserable experiences involving delay or denial of care or periodic payments, that freedom from these miseries is very desirable.

I discuss with my client the benefits of settlement as opposed to going to trial, and the benefits of a structured settlement over the lump-sum settlement. I usually start by explaining that, if they are on Medicare or otherwise eligible under the CMS rules, any settlement by Compromise and Release will involve a Medicare Set Aside account. I then go on to explain why the structured annuity for the other benefits is preferable to the lump-sum, allowing both cash up front and an assured lifetime monthly amount that cannot be “borrowed” by relatives and friends who think the worker’s settlement is their own gravy train.

In most cases, my clients are already on Social Security Disability and Medicare. I discuss the potential offset issue and the need to have money coming regularly for future medical treatment not covered by the MSA. The annuity payments come by electronic transfer along with Social Security payments for the rest of the client's life, whereas a permanent disability award, unless it is for 100%, ends at a certain point. The life pension is often paltry. They can count on the annuity money and make plans accordingly. I also point out that the money available for settlement goes much further if invested in annuities then if paid out in full up front, that there is “more bang for the buck.” I will later show them my case analysis, what they are likely to get at trial, and a proposed structure which can be tweaked so there is more or less cash up front, or more monthly annuity, or guaranteed payments.

I try to explain everything in terms my client is likely to understand (e.g., “You get more in the long run”). I make sure they get answers to their questions, sometimes having my structure broker explain the concept and process, to augment my explanation.

 
By the time we are getting ready to settle a big case, my client has usually had enough miserable experiences involving delay or denial of care or periodic payments, that freedom from these miseries is very desirable.
 
Assuming my client authorizes me to proceed, I contact my broker. The first structured settlement I did, I made the mistake of agreeing to the defendant’s structure broker. Neither my client nor I felt that we had an open channel of communication and often felt left in the dark. From then on, I always hired my own broker, who specializes in representing applicants and ceaselessly travels the state attending settlement conferences, mediations, and meetings.
 
The first structured settlement I did, I made the mistake of agreeing to the defendant’s structure broker. Neither my client nor I felt that we had an open channel of communication and often felt left in the dark.
   
 
A recent case illustrates the process

In a recent case, upon learning that defendant was interested in a structured settlement, I took two important first steps: one, I discussed with my client the benefits of the structured settlement approach, which I had done at an earlier date when talking to her in general about settlement. I again explained the key elements. She liked the idea of having money coming every month for the rest of her life and being able to manage her own care. We discussed what she would do with cash up front and how much she needed. As she had not run up credit card debt while disabled and lived modestly all her life, there were no unpaid bills to settle. She said she would like to get a computer as her old one had died. The second thing I did was send an e-mail to my broker alerting him to the fact that there was a potential structured settlement. I gave him my impression of the settlement value of the case and forwarded documents that would help him come up with a sum that could be structured in a satisfactory way. The documents included the relevant forensic reports (in this case an AME report and a QME psychiatric report), the reports of vocational experts, the ledger of benefits paid and the proposed Medicare Set-Aside.

The parties had agreed to start with mediation rather than a Mandatory Settlement Conference, so both sides prepared mediation briefs. I spoke several times with my broker and also sent him the briefs. He had prepared a structure proposal which I served on the mediator and the defense attorney. On the day of the mediation, my broker was present, as was defendant’s. My client I and I met before the mediation with our broker, so that he could explain anything that she needed to know to better understand the process.

Despite the professed desire of both sides to reach a settlement agreement, the mediator’s efforts to narrow the gap, revisions to demands and offers produced on the spot by both brokers, who had computers and printers with them, the parties were not able to reach agreement. There was a gap of almost $200,000 between defendant’s final offer and applicant’s demand.

In the following days, I several times sought calculations from my broker for lesser sums than our last demand, to see if they would work. I compared annuity amounts to what my client would likely get at trial, after the fee was taken out and non-Medicare-covered items deducted (since the monthly annuity is intended to replace indemnity and some of the medical expenses). I came to the view that unless defendant offered a certain dollar amount, I simply could not recommend this settlement. In the meantime, after the collapse of good faith settlement negotiations, I had filed a penalty petition for failure to make adequate permanent disability advances and a Declaration of Readiness. We were quickly set for a Mandatory Settlement Conference. At the MSC there was no further attempt to settle, and the case was set for a one-day trial within a few months.

Fortunately the defendant decided to change law firms, and the new attorney reviewed everything and came to the same view as I had of the value of the case -- $130,000 more than their previous “final offer” plus a few other items of value. When the amount they offered was structured, it provided my client with a monthly payment that would approximate the best she could do if she went to trial. It also allowed her cash up front in the amount that she felt would be good for her to buy some much-needed creature comfort items. We a negotiated an MSA guarantee so we did not need to wait for CMS to approve the settlement or risk collapse of the agreement if CMS came back with a higher amount, a “hold harmless” on the liens, and a lifetime custodial Medicare Set-Aside account at defendant’s expense, so my client would be relieved of any uncertainty and paperwork associated with medical expenses.

Besides finding the best priced annuities for this case, my broker’s staff communicated with my client about how to set up the right type of bank accounts and obtained the documentation needed (e.g., birth certificate or other proof of age and identity).

After the attorneys dickered over the language of the settlement documents and the proposed Order, and after the client had a chance to review the documents and the Informed Consent, the parties met at the WCAB for signing and a walk-through several weeks before the trial was set to begin.

I assured my client that after the judge approved the Compromise and Release, I and my broker and his staff would be there to answer questions that may arise concerning the annuities, the plan documents, etc. Because I know from years of experience that my client is getting the necessary attention and service, the burden on me seems lighter. But just to make sure that I am not putting myself in the line of fire, I did an individualized, detailed Informed Consent similar to the sample.

 
A recent case stumbled through a mediation and an MSC but settled some weeks before trial.
   
 
Preparing a written case analysis

As part of preparing my client for settlement, I do a written case analysis showing the client the very most that can be obtained if we go to trial and win everything we are claiming. This is a sobering starting point for all concerned. I warn about the difficulties of proving the non-statutory 100% case. The case may be tried piecemeal over a long period of time. If there are different opinions from each side's vocational expert, the judge may decide to rely solely on medical evidence; either side may appeal and delay the process. Changes in the law during the ensuing months may shrink the value of the case. I point out that after trial, they will receive payments every two weeks (assuming the check is mailed and delivered timely) and hassles over receiving medical treatment are bound to continue if not get worse.

I also point out to my client that any award under 100% will be paid out at some point and a smaller weekly life pension will then begin. If the injury occurred in 2003 or later, and they are rated at 70% or more, I discuss the still-unresolved COLA issue. An annuity is more attractive, because one knows exactly what one will be receiving. If the annuity provides for a COLA, there is some protection against inflation.

I review my file and assess the pros and cons that will affect trial outcome: is the client a convincing witness? Are the injuries significant enough to get beyond the rating on a LeBoeuf or similar theory requiring vocational evidence? Are there dueling vocational or medical experts whose opinions will cancel each other out? Will the WCJ or WCAB decide that a report is not substantial evidence, or that additional medical evidence is needed?
 
A sobering starting point is a written case analysis showing the client the very most that can be obtained if you win at trial on all issues and are sustained on appeal.
   
 
Communicating with the structure broker by providing a precis of the case with a value range

I send an email or letter to the broker with the major medical reports, the MSA if available, my assessment of the case’s worth, my comments on defendant’s stance, etc., and ask the broker to draw up a proposed demand for a structured settlement.

Here is an analysis read to the client at the start of a meeting in my office where the broker was present. I gave my client a copy before I read it out loud. A more formal analysis was mailed to a client and his guardian ad litem, before a Mandatory Settlement Conference at which the brokers for both sides were to be present. In that case the client had been uncooperative and unavailable for an office or even telephonic conference.
 
I ask the broker to draw up a proposed demand for a structured settlement.
   
 
Negotiating a Structured Settlement

As I noted in Managing the Big Case, “In big cases, I am often negotiating directly with the adjuster, at their request. Many people in the business world regard attorneys as deal killers, because we tend to focus on minutiae and let our egos get in the way of sound business judgments. The adjuster is hell-bent on getting rid of the case, while their attorney may see the open case as an endless billing opportunity. The adjuster may want the defense attorney’s involvement to be limited to dealing with the documents after agreement is reached. Of course, make sure that your opponent knows that the adjuster is dealing directly with you, to avoid ruffled feathers or worse, complaints to the State Bar. If, on the other hand, you find the defense attorney much easier to deal with than the adjuster, you may decline the invitation to deal directly with the adjuster.

Sometimes it helps to have the structure brokers deal with each other, while you stay in the background. Like realtors, they have an incentive to preserve and close the deal. If you're having problems with opposing counsel or the adjuster, the broker may be able to intercede at a higher level in the corporate structure.

In some cases, I have arranged a meeting between myself, the structure broker, and my client. I may suggest that a responsible relative attend the meeting, if my client has difficulty understanding and making decisions, or if the relative may undermine the settlement if they don't understand what's going on. Structure brokers are usually very good at explaining the benefits of a structured settlement, since it is something they do on a daily basis. Before the meeting begins, I go over my written settlement analysis with my client, so they know the best that they can do if they go to trial. If you skip this necessary step, your client will be measuring the structure offer against things they heard on daytime television in personal injury attorneys’ ads. They must have a realistic view of the value of their case before they can compare it to what is being offered in a structured settlement. Also, the structure broker usually has several breakdowns of the money available and will offer to rearrange the money to meet the client’s needs.

In some cases, the defendant’s attorney would request a meeting with their structure broker. I would want mine present. At such a meeting, I would not have my client present since there is not yet any agreement on what is on the table.

In summary, negotiating the structured settlement has different permutations, although generally there are only a few variations. It is important to be available for meetings, phone calls, e-mail correspondence and the like during the run-up to the final deal.“

 
Negotiating the structured settlement has different permutations.
   
 
If talks bog down, suggest mediation

There are many reasons to avoid trial. It is standard settlement language that “the parties wish to avoid the risks and hazards of litigation and to buy their peace.” When talks are unsuccessful, mediation may make both sides more realistic about the value of the case. See Is Trial Always Your Best Option? When to Consider Mediation. In the case I discussed above, while the parties failed to reach an agreement at or immediately after the mediation, the production of briefs allowed both sides to understand the other’s arguments, forced everyone to digest the evidence early on, rather than on the eve of the MSC or trial, and ultimately influenced the new defense attorney’s assessment of the settlement value of the case.
 
When talks are unsuccessful, mediation may make both sides more realistic about the value of the case.
   
 
Avoiding liability with necessary writings

In order to avoid malpractice liability, and to provide the best possible service, I do a detailed and individualized informed consent. I provide detailed information on how to manage the MSA (unless there is a custodial arrangement), and I give the client information on how to get medical insurance in those cases where the client does not have Medicare or other medical coverage. Your structure broker should be able to help you with this or put you in touch with a mentoring attorney who can help you.

 
A detailed and individualized Informed Consent limits liability.
 
The Compromise and Release in a structured settlement is longer than the ordinary one as it includes addenda relating to the annuities, assignment of rights, language required by the Internal Revue Code to protect the tax-free nature of the annuities, etc. The annuity company will generally refuse to allow any changes to their language, which implies that once the assignment occurs, the assignor (insurer) is relieved of all obligations to make payments. While this language is necessary for tax reasons, it can create liability for the applicant attorney if the annuity company fails and no recourse is provided for in the agreement.

Thus, it is essential to include recourse language. No matter how much the defendant may balk, I insist that the following sentence be included in the settlement documents, preferably in the Compromise and Release itself: “Notwithstanding any other provision in any addendum, in the unlikely event of failure of funding of any of the provisions herein, Defendant [Insurer] is responsible for payment. If a dispute arises pursuant to this paragraph, the issue shall be submitted to the WCAB for decision and jurisdiction is therefore reserved on this issue." In addition, try to get the defendant to spell out what procedure is required in this unlikely event (such as how and to whom the injured worker is to give notice, who will resolve the dispute, etc.). At the minimum, keep this at the WCAB. You don’t want to have to bring a federal suit later.

I also want to attach a "Characterization of Settlement Proceeds" necessary to protect the client’s Social Security rights, if they are receiving Social Security Disability. My structure broker prepares this as part of the many services he provides.

I also prepare a proposed Order with this language: “I have considered and find that Addendum “[Hartman Formula Addendum]” is a reasonable characterization of the settlement amount. FINDING: The life expectancy estimates and proration of indemnity benefits over the Applicant’s lifetime as well as the allocation of benefits contained in Addendum [Insert appropriate letter or number] are noted and approved.”

Not all WCJs will approve this, but try to get at least the first sentence in the order. The informed consent provides some protection in that the client acknowledges that no particular language is binding on the Social Security Administration.

Also include this in the order: “WCAB jurisdiction is reserved in the unlikely event of annuity default.”

While it is important to be flexible and not let a good deal fall apart over a small detail, I also do not want to be in the line of fire later should anything go wrong. A big case could mean big liability and big headaches if the client becomes disgruntled.

It may appear at times that everything is falling through the cracks, that nothing is moving towards completion. It is especially frustrating when there is no Medicare guarantee (that the carrier will pay any difference if Medicare/CMS demands more than the proposed set aside), and you have no idea if/when CMS will approve the settlement. Defendants claim they do not do guarantees, but I have gotten them at times, usually when a trial is looming and I refuse to agree to a continuance.
 
It is essential to include recourse language, no matter how much the defendant may balk.
   
 
Aftermath: Be available to help

I don't consider the case over when I get paid. Rather, it is over when the client no longer calls with questions relating to their life after workers’ comp. Your structure broker is also available for post-approval help.

 
The structured settlement process is over when the client no longer calls with questions relating to their life after workers’ comp.
 

Marjory Harris, Esq. began practicing law in 1974 as a defense attorney and later became an applicant's attorney and a certified specialist. She continues to represent injured workers in the San Francisco Bay Area and Inland Empire, and mentors attorneys on big cases.

Reach Marjory Harris at (888) 858-9882 or email to MHarrisLaw@verizon.net
www.workerscompensationcalifornia.com