Philip Kane gave a lot of thought to becoming an instant millionaire--then decided against it.
The former maintenance man could have received almost $1 million in cash to settle his personal injury case after he fell 30 feet from a ladder while changing light bulbs atop a 55-story high rise in downtown Los Angeles.
Instead, Kane, 44, opted for a "structured settlement," which will give him $2,200 a month for the rest of his life, a lump sum of $200,000 for him or his heirs at the end of 20 years and a $98,000 college fund for his two daughters, now 15 and 13.
"I've never had a whole bunch of money and if you've never had it, it's kind of scary. I'd be afraid I'd blow it all," explained Kane, who shattered both ankles and several vertebrae in the fall and no longer is able to work.
The structured settlement Kane accepted is something that is becoming more prevalent in cases where large sums of money are paid to injured parties.
Besides providing financial security to the injured party, these long-term payments, all arranged as out-of-court settlements that enable both sides to avoid the costs and uncertainties of a protracted trial, also take pressure off an overburdened court system. Additionally, advocates say, structured settlements prevent financially unsophisticated victims from squandering their money and turning to welfare.
Created an Industry
The growing use of structured payoffs--which can pare as much as 15% off the cost of a lump-sum award, saving the defendant and its casualty insurance company sizable sums--also has created a multibillion-dollar industry for firms that specialize in putting them together.
It also is generating harsh words from some personal injury attorneys, who claim that their clients are getting less than they deserve and that the system allows losing defendants in personal injury cases to get off easier than they should because they have lower actual costs with a structured settlement.
While industry-wide statistics are not available, interviews with structured settlement firms across the country show that business is booming, with new firms springing up regularly.
"The business has developed to the point where we have touched most of the available market--every major personal injury lawsuit on the court calendar." said David Ringler, whose 10-year-old Newport beach-based firm, Ringler Associates, is one of the oldest and biggest structured settlement companies in the nation. "Wherever there is a settlement, there is an opportunity to use this technique," Ringler said.
A spinoff of the insurance claims business, the settlement industry has grown from a handful of consultants or brokers to about 250 firms nationwide during the last decade. A combination of escalating verdicts, mounting lawsuits and favorable tax laws have helped this heretofore little-known industry to flourish. Industry officials estimate that structured settlements accounted for $2 billion in annuity premiums last year. Indeed, many firms individually point to a substantial increase in business in the last several years.
Cases Have Doubled
Ringler, for example, said his 32 consultants, in 26 offices throughout the nation, handled more than 4,000 cases last year, double the amount in 1983. He declined to say how much in sales that represented.
Roger Harbin, a financial services actuary with the Safeco Life Insurance Co. in Seattle, said his company issued $100 million in annuities in 1984, compared with $62 million in 1983 and $36 million in 1982.
Basically, a structured settlement spreads the injured person's compensation over a long period or throughout his lifetime. Some cash is paid immediately to cover outstanding medical or legal expenses; the remainder is paid in installments through trust funds or annuity policies purchased from a life insurance company by the losing defendant in the personal injury suit.
It is the broker's job to help negotiate the cheapest, safest annuity with the plaintiff's attorney, tailor that annuity program to the injured party's medical and financial needs and take care of any administrative details that might arise during the life of the annuity. The broker generally receives a fee of 4% of the cost of the annuity for his efforts.
A typical structured settlement might work like this: A man crippled in an airplane crash is offered $1 million by the airline. Instead of taking the money all at once, he decides to take a structured settlement of $50,000 a year for life.
Sets Up an Annuity