Like Sylvester Stallone at the end of “Rocky,” the structured settlement industry is getting pummeled.  The industry’s production last year was barely two-thirds what it was ten years ago, in real terms. Shrinking profit margins have caused most life insurers to exit the market, leaving only eight companies issuing this type of annuity.

Now, two lawsuits have hit the industry and both raise serious questions about unrecognized risk with structures’ use. As a longtime believer in structures’ value, I nevertheless think the issues raised in both filings show that the industry desperately needs to improve controls on the $5-plus billion in settlements it handles each year. (See values for 2014 life carrier structured settlements on page 2.)

Last month, a federal judge in Oregon upheld a Magistrate’s decision denying a motion by Ringler Associates, a major structured settlement company, to dismiss a class action suit involving the now-liquidated Executive Life of New York (ELNY). At issue is Ringler’s use of ELNY annuities to resolve claims involving people who lived in states where ELNY wasn’t licensed.

The Judge stated, in part:

“Defendants knew that the annuity it was procuring in this case would provide insurance intended to benefit Plaintiffs with secure annuity payments for life. As such, Plaintiffs can plausibly claim to have been third-party beneficiaries to all of Defendants’ interactions, agreements, and contracts…. As such, Plaintiffs have stated a plausible claim for negligence under both Oregon and Alaska law.”

The case now goes to discovery and this is where things could get problematic for Ringler and, importantly, risky for claims insurers that Ringler worked with on the settlements in question.  A key issue: Did the claims professionals or Ringler’s consultants know prior to securing ELNY annuities that ELNY was unlikely to be able to meet its future obligations?

This is no idle conjecture. I was a structured settlement consultant during the 1980s, when ELNY was issuing structured annuities.  At the time, there were clear warnings about ELNY’s future given its excessive reliance on the unstable junk bond market.

Moreover, Baldwin United’s failure in 1983 had already shown how a run on assets at an undercapitalized insurer could cripple its ability to meet future obligations.

Despite the warning signs, many claims professionals were known for pushing the use of ELNY annuities to save money, even as ELNY’s undercapitalization became too obvious to ignore. 

A nightmare scenario for the structured settlement industry is that a memorandum appears or someone comes forward during discovery indicating that a claims person had knowledge that ELNY might not be able to meet its obligations.  If so, not only would Ringler face a potential significant bad faith claim but so might the claims company. 

ELNY’s shortfall has already forced multiple insurers, including Travelers and AIG, to incur significant expenses on claims they already “settled” with an ELNY structured settlement. AIG’s top claims executive, Rick Woollams, told a structured settlement convention that ELNY’s liquidation forced his company to double-pay many claims from the 1980s, according to someone who heard the speech.

The second lawsuit weighing on structured settlements is a $4 million fraud and breach of contract suit filed on behalf of multiple underwriters.  This suit, also filed against Ringler Associates, includes remarkably specific and damaging information describing the alleged diversion of $4 million meant for annuity purchases to resolve injury claims. 

Additionally, according to the claim, there were multiple instances in which a company official allegedly overstated annuity costs to underwriters and allegedly forged documents. (The complaint suggests that the annuities in question were not structured annuities.)

This latest lawsuit could not come at a worse time for the structured settlement industry. The last thing it needs are detailed allegations that a major company’s internal controls were so lax that $4 million could disappear without anyone’s knowledge.

As a longtime plaintiff advocate, my immediate thought in this case involves the injury victims who were supposed to be beneficiaries of the annuities.  In their case, the liability against the underwriters (and/or other defendants) would appear to be clear.

Structured settlements depend on support from the claims industry and that support will wane as allegations (and evidence!) of fraud, breach of contract, negligence and other issues by structure consultants keep piling up. Every consultant and company needs to take responsibility and make amends or the whole industry will continue to suffer.

 

 Chart created by Melissa Evola Price based on information released by 8 life insurance companies.