The suit, filed last January in the U.S. District Court for the District of Massachusetts, pits lead plaintiffs Norma Ezell, Leonard Whitley and Erica Biddings against American International Group Inc. and several AIG subsidiaries.
The plaintiffs allege that settlement consultants participating in an AIG-approved broker program set up “an association-in-fact,” with a view to maximizing profits on structured settlements and defrauding the plaintiffs. The plaintiffs also allege that the brokers involved misrepresented the terms of the proposed structured settlement and received, but failed to disclose, their commissions.
In a motion to dismiss the complaint, filed on March 31, the defendants argue that the plaintiffs received “exactly what they bargained for in settlement.” The defendants say the plaintiffs are not entitled to damages because:
The racketeering claims are barred by a four-year statute of limitations. (The settlements were concluded in 2003 and 2009.)
The alleged non-disclosure, until 2015, of a 4% broker commission runs counters to the plaintiffs’ earlier acknowledgement that a 4% commission level was an “industrywide standard.”
Publicly filed litigation respecting the same issues and dating to 1999 undercuts plaintiffs’ assertions that a legal basis for their claims were only recently knowable.”
The plaintiffs failed to explain how the defendants could “fraudulently conceal” a broker commission that the plaintiffs conceded is an industry standard.
In an opposing motion filed on April 21, the plaintiffs dismiss the defendants’ arguments. Regarding the broker commission, the plaintiffs state that, “Defendants provide no evidence to contradict Plaintiffs’ allegations that Defendants hid those commissions from Plaintiffs and that Plaintiffs were unaware that the commissions were taken out of the premiums.”
The pleadings shed light on a big, not very well known part of the U.S. annuity market.
Structured settlement consultants are insurance professionals authorized to help with the purchase of the annuities used to satisfy all or part of personal injury tort claims. Instead of paying out damages all at once, in one lump sum, a defendant involved in a negotiated structured settlement provides tax-free, periodic payments to a claimant who has suffered a physical injury or illness.
Structured Financial Associates, an Atlanta-based structured settlement broker, pegged new annuity premiums written for structured settlements at about $5.8 billion in 2016. That compares with $5.3 billion in 2015 and $4.8 billion in 2012.
Awards have also increased over the years. In 2016, the average case size was about $230,320, as compared to $212,610 in 2015 and $192,472 in 2012.
Allegations of lack of transparency about compensation come up throughout the 49-page Ezell case complaint, as well as in suits filed against other players in the structured settlement market in recent years.
In a 2008 case, Hartford vs. Spencer, consultants for Hartford were accused of retaining, but failing to disclose, 15% of the agreed settlement as a commission.
In a 2015 case, Aviva vs. Griffiths, the insurer’s representatives were accused of withholding key information, including the dropping of a capital maintenance agreement guarantee that exposed annuity payments to greater financial risk.
In the structured settlements market, the commission is baked into the price, and the annuities used to fund the payouts are subject to approval by the property-casualty companies that insure the defendants. The P&C companies’ purchasing parameters and relationships with annuity brokers are not always clear. The transactions can leave claimants wondering whether they could have secured better terms if the process were more transparent.
“We've seen reform in a wide variety of financial products and markets, including suitability and disclosure rules respecting commissions and costs,” says Mark Wahlstrom, president of Wahlstrom & Associates, a Scottsdale, Arizona-based structured settlement consultant. “Our market has largely been immune from change…. We have an antiquated system without many of the same professional oversight standards that other financial service professionals deal with.”
In some suits over structured settlements, plaintiffs object to the annuity carriers chosen to settle the claims. Plaintiffs are especially critical when a P&C company uses its own life and annuity division to manufacture the structured settlement annuity.
Sometimes, the claimant is prevented from buying an alternative product because of restrictions established by the P&C carrier during settlement negotiations.
P&C Carriers With Leverage
Even when a claimant can shop for the annuity provider, the selection of alternative issuers may be limited. Fewer than a dozen carriers are affiliated with the National Structured Settlements Trade Association. The list includes AIG, MetLife, Liberty Mutual, New York Life, Prudential Financial, Pacific Life and USAA. All the companies are highly rated.
But a difference in price of even one or two percentage points can translate into a substantial difference in total annuity payments. That price must include , among other variables, the standard 4% commission paid to the consultants, which is usually split evenly between the brokers for the defense (the P&C carrier) and plaintiff, or plaintiffs.
Structured settlement consultants say the best practice is for the consultant to disclose the compensation at the outset of settlement negotiations. Tim Morbach, a structured settlement consultant who is executive director of The Settlement Services Group, says he details his compensation in a disclosure form for claimants to sign. The document also describes the advantages and disadvantages of structured settlements, settlement choices (lump sum or tax-free, periodic payment) and the parties’ fiduciary responsibility.
Or, rather, the lack of fiduciary responsibility. For, as the disclosure form makes clear, insurers and settlement brokers don’t owe claimants a “best interest” standard of care. Structured settlements are governed by the same product suitability rules that apply to other insurance arrangements.
Critics of retail annuity issuers often complain about the financial incentives and other incentives, such as trips to exotic destinations, that the issuers offer the consultants and brokers. Critics of structured settlement providers often have similar complaints about use of incentives in the structured settlement market.
Some structured settlement market observers say that the consultants who do avoid compensation-related conflicts of interest may take a cookie-cutter approach to product selection. Those consultants may simply recommend the lowest-cost product, even when another product might be more appropriate.
Morbach says another problem is that brokers may automatically assume that an annuity will be the funding vehicle. Morbach contends that many claimants will benefit from having a structured settlement backed by stocks, bonds, trusts, mutual funds and life insurance, in addition to an annuity.
“All of these asset classes should be in a structured settlement,” Morbach says. “That's where you really need a strong settlement planner, as opposed to a broker. It’s silly to just chase down the lowest-cost annuity.”
Market watchers interviewed said they doubt a large-scale shift toward fee-based compensation will change how the structured settlement marks any time soon.
“There's a drive on the plaintiff’s side to really be a full-service financial consultant, says Joseph Dehner at attorney at Frost Brown Todd L.L.C. “That could spur a shift to fees. But I don’t see injured parties suddenly wanting to pay every year a fee over and above the built-in commission.”
Market watchers are also skeptical about the idea that a big decline in commissions is on the horizon.
Even small structured settlements tend to be complex affairs, involving multiple jurisdictions, different life and casualty companies, disclosures, evidence to be presented in court or arbitration, and due diligence to ensure that settlement terms are up to standard.
Some critics of the current structured settlement market want to remove consultants from settlement annuity sales, to allow for direct-to-consumer transactions and, presumably, better prices.
“This is a bad idea,” Morbach says. “Leaving claimants, including catastrophically sick and injured people, to their own devices is a recipe for mischief. Structured settlements entail a process — not just a purchase — requiring the counsel of an experienced professional.”
Even if structured settlement consultants and the 4% commission are here to stay, plaintiffs might be able to achieve more favorable terms, particularly in large class actions, if they could buy annuity products outside of P&C insurers’ approved lists of carriers; or if they could buy annuities with the kind of institutional pricing retirement plans get.
“Institutional pricing could potentially lower the cost of the annuity purchase by 1 to 2 percentage points,” Wahlstrom says. “Flexibility in pricing would improve the yields for plaintiffs. And it would encourage more structured settlements, which are a social good.”
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