Structured Settlements and Personal Injury Compensation - Introduction
So what exactly is a structured settlement?
Structured settlements are usually a form of personal injury compensation, but are, in certain circumstances, also used in divorce settlements. For the moment we will ignore their use in divorce for the sake of simplicity. In the sphere of personal injury compensation they can be awarded to those entitled to damages under the law of tort, but only in those legal systems where they have been introduced. Specifically, they enable a successful personal injury plaintiff to be compensated by the award of a long-term income instead of a lump sum payment. They are also known as periodic payments, structured settlement annuities and more correctly as personal injury damages annuities. They normally take the form of a specialized annuity contract. Payments are made by installments over a specified period or may last for the duration of a recipient's life. They are set within a legal framework and awarded at a level intended to meet in full the financial losses, including recurring and annual losses, brought about by the injury in question. These would normally cover, at the very least, ongoing medical expenses and basic living needs. Funding is either by the defendant's purchase of an annuity policy, by reinsurance from a life insurance company or by a government body, should a government body be the paying party. Payments are made direct to the plaintiff. They may be agreed and entered into privately (for instance, in a pre-trial settlement), or in some jurisdictions they may be imposed by a court order.
Where they are part of the law covering damages for personal injury, the greater the degree of personal injury, the more likely it is that a structured settlement (i.e. periodic payments) will be used to settle at least part of a claim. Such arrangements are particularly well-suited to compensating cases of permanent or long-term disability, severe injury, dependent family members in cases of wrongful death and cases involving the guardianship of minors or others deemed unfit to run their affairs. These might include the worst examples of industrial injury, workplace injury and road traffic accident injury. For instance, a structured settlement annuity could be used to compensate someone with a severe brain injury deriving from an automobile accident. Cases of medical negligence where drastic and lifelong consequences ensue might also be best compensated by a structured settlement. In some instances a personal injury claimant could be suffering from a long-term physical sickness, such as mesothelioma caused by contact with asbestos fibers in the workplace, or silicosis caused by breathing rock dust in a mine.
Generally speaking, the courts seem to take the following factors into account when deciding whether periodic payments or lump sum payments are in the best interests of the claimant:
- whether the defendant has sufficient means to fund an adequate scheme of periodic payments;
- whether or not the claimant has suffered catastrophic injuries;
- whether the claimant will need to depend on community support in order to live their life or whether they still retain basic life skills;
- the claimant's age;
- the claimant's employability;
- the educational background of the claimant;
- to what extent would the claimant be harmed if they were to receive a lump sum and then spent it;
- whether the claimant requires the money for a specific purpose, either now or in the future;
- whether the scheme of periodic payments is practicable (having regard to all the circumstances of the case);
- the claimant's competency;
- the claimant's experience of handling money; and
- whether the claimant has a plan or a method of payment that is better able to meet their interests than periodic payments by defendant.
Very often, personal injury compensation settlements are split into two components. A lump sum is awarded to cover the stress, trauma, pain and initial expenses brought about by the injury and its immediate aftermath, whilst the long-term and recurring losses that result from it are covered by periodic payments, these being the 'structured' part of the settlement.
The actual amounts to be paid over the schedule of the structured settlement are calculated by specialist actuaries. The arithmetic can be complex because aspects of benefits, taxation and medical insurance have to be factored in, as well as inflation and interest rates over time. The award might also include contingency funding to meet certain anticipated events of financial consequence.
Broadly similar legislation has been enacted to allow the use of structured settlements in Canada, the USA, the United Kingdom, Australia and most of the original states of the European Union, although with some variation in definition, standards and rules of implementation.