STRUCTURED SETTLEMENTS IN THE MEDIATION PROCESS

11/1/2016

STRUCTURED SETTLEMENTS IN THE MEDIATION PROCESS National Structured Settlement Trade Association Master’s Certificate Research Paper The views expressed in this paper are solely those of the author and do not represent or reflect the views, positions, or policies of the National Structured Settlements Association

TABLE OF CONTENTS Summary ................................................................................................................................2 Mediation—ADR ....................................................................................................................3 Structured Settlements ..........................................................................................................5 Mediation Process Survey......................................................................................................7 Conclusions ............................................................................................................................17 Appendix Works Cited

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STRUCTURED SETTLEMENTS IN THE MEDIATION PROCESS Summary “Mediation is one of the most effective methods of preventing, managing, and resolving conflicts.” —Ban Ki-moon, Secretary-General of the United Nations 1 The purpose of this paper is to explore the use of structured settlements in mediation. Both are proven tools to resolve tort bodily injury claims. There are proven methods of mediating bodily injury claims and there are proven methods of using structured settlements to reach the same goal. If both are shown to be successful in settling these claims, then why during the process do these tools often seem in conflict? Can structured settlements be more effectively used in the mediation process by mediators and structured settlement brokers? By exploring good mediation and negotiation tactics utilized across industries and government, can structured settlements be used more effectively in the process? The goal of mediations is to reach a final outcome that is acceptable to all parties. The goal of structured settlements is similar in that parties must reach a final dollar amount; however, the path to reach that number may differ. Structures attempt to meet plaintiffs’ needs with periodic payments breaking down the final number into parts, rather than into one global number. Structures provide a framework for negotiations by identifying and attempting to meet future needs with periodic payments.

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See United Nations Guidance for Effective Mediation.

Arguably, not all cases are conducive to the process of breaking down the final numbers and negotiating the parts. Often, the parties are in significant disagreement over facts and responsibility. There may be multiple parties to a lawsuit or claim, perhaps distracting the process from examining the plaintiff’s needs. However, a large number of cases can be viewed by the settling parties as having many parts, and attempting to settle by addressing the parts can be successful. All settlements will not end with a structured settlement. Settlements by their very nature are compromises, and voluntary on all sides. However, by utilizing the components of periodic payments to address the future needs of the plaintiff, settlements could be reached more quickly and at final numbers that maximize the outcome for all parties. In an effort to understand the mediator’s thoughts regarding structured settlements, a survey was conducted. Thirty-one mediators were selected and sent a survey of thirteen questions, asking their views on the mediation process and structured settlements. The results are clear that although most are favorable to structured settlements, they do not all view it as an important part of the process. Mediation—ADR (Alternative Dispute Resolution) Although the Secretary-General’s comments and discussion are related to negotiating world peace, the basic precepts of what makes mediation successful span all types of mediation—whether world peace, labor disputes, business disputes, or resolving tort bodily injury claims. The parties must enter into negotiation believing in the process; they must be

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prepared and take ownership. It is easy to see that when parties enter negotiations without this, the process is more likely to fail. “The goal of mediation is for a neutral third party to help disputants come to consensus on their own. Rather than imposing a solution, a professional mediator works with the conflicting sides to explore the underlying interests beneath their positions.” 2 However, the parties must understand they, “have total power to prevent mediation from leading to an undesirable outcome.” 3 The mediator should direct the process, not control it. Each party engaged in mediation has control over the process. “Only by understanding each party’s interest can a mediator generate creative solutions that satisfy each party.” 4 Successful mediators, “invent options that acknowledge feels, perceptions, and hurts that might otherwise block meaningful and fair resolution.” 5 Mediation/ADR has been encouraged and supported by courts across the country as the most effective means of resolving torts. Many jurisdictions hold mandatory settlement conferences prior to a case being schedule on the trail calendar. With the courts requiring mediation and settlement conferences, there has been a significant rise in private voluntary mediation in the last twenty years. According to Randall L. Kiser; co-author and principal analyst at DecisionSet “The vast majority of cases do settle—from 80 to 92 percent by some estimates, and there is no way to know whether either side in those cases could have done better at trial. But the findings, based on a study of 2,054 cases that went to trial from 2002 to 2005, raise

From Subramanian, et al., “Mediation Secrets for Better Business Negotiations.” See Subramanian. 4 From Goldberg, “Beyond Blame: Choosing a Mediator.” 5 See Goldberg. 2 3

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provocative questions about how lawyers and clients make decisions, the quality of legal advice and lawyers’ motives.” 6

If most cases settle before trial mediation becomes critical. This is the one opportunity for the parties to have control over the outcome of their dispute. “If trying to settle difference of interest on the basis of will has such high costs, the solution is to negotiate on some basis independent of the will of either side—that is, on the basis of objective criteria.” 7 Identifying that criteria expands the pie providing more areas of discussion and ability to reach compromise on objective parts (e.g., wages, medical care, family support, housing). Structured Settlements Structured settlements have been widely used in the settlement of bodily injury claims for decades. In 1982, Congress passed the Periodic Payment Settlement Act (Public Law 97473). “The law amended §104(a) (2) to clarify that the full amount of a structured settlement’s payments constitutes damages which are received by the victim free of any federal tax liability.” 8 Claim professionals, defendant risk managers, plaintiff attorneys, and judges continue to support the benefit of receiving tax-free periodic payments over an all-cash settlement in resolving catastrophic bodily injury claims. For many years, structures were considered a win-win in settlement negotiations between defendants and plaintiffs. Claim professionals considered them a very useful settlement tool, using today’s dollars to meet future economic needs. However, in recent years,

See Glater, “Study Finds Settling is Better than Going to Trial.” From Fisher, Getting to Yes. 8 See NSSTA, “Federal Tax Policy & Structured Settlements.” 6 7

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structures are often removed from the settlement process and offered as an alternative to cash after settlement is reached. If a structure is offered after an all-cash settlement is reached, plaintiffs still have the full tax benefit of a structure; however, they tend to view them as just an alternative to many other investment options. The benefit of securing the future needs for themselves or a loved one can be lost in a cloud of many other investment options. Keeping the plaintiff focused on the advantages of structures includes: •

Tax-free payments, free from federal and state income taxes

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Payments tailored to meet specific needs

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Protection from premature dissipation

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Payments guaranteed to plaintiff or their beneficiary

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Payments secured by the highest rated life insurers Other investment options may offer a potential greater investment return but come

with significant risk. Even if plaintiffs have skilled professional advice, they are still faced with making the ultimate investment decisions. Therefore, they must stay knowledgeable and vigilant. With all cash available, the potential possibility of dissipation is much greater. Family members and friends become a constant influence, providing more perils to maintaining sufficient funds to cover the future economic needs resulting from the catastrophic injury.

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Further, “a general lack of awareness among claimants and attorneys continues to impact growth in the structured settlement marketplace—and precludes claimants from the benefits and security of structured settlements can provide.” 9 By negotiating a lump sum, then offering a structured option to plaintiffs, claim professionals and mediators lose the opportunity to utilize an extremely powerful settlement tool and the opportunity to educate the plaintiff during the settlement process. It is difficult for a plaintiff to suddenly be faced with the task of understanding how a lump sum will accomplish all of their future needs. Mediation Process Survey To understand if mediators can more effectively use structured settlements, an appreciation of their feelings regarding structures was helpful to this exercise. An anonymous Mediation Process Survey was created and conducted. The esteemed mediators were selected because they are considered the most widely used mediators that handle the most complex and most severe personal injury claims in the country. Thirty-one mediators across the country were carefully chosen. They were selected by this writer based on personal experience (thirtytwo years as a structured settlement broker and a total of thirty-seven years in the property casualty insurance industry) and recommendations of peers. A total of sixteen responses were obtained, giving a 51.6 percent return ratio. The survey received fifteen anonymous responses in addition to one response outside the survey via email. This mediator said “I can’t do it conscientiously in the form presented,” but offered

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See the 2013 Prudential Structured Settlement Claimant Survey.

narrative answers to each questions in an email format. His responses have been incorporated into the overall narrative description of each question. Thirteen questions were asked using a Likert Scale; this measures attitudes and behaviors using answer choices that range from “strongly disagree” to “strongly agree.” The respondents were asked to click a link to anonymously answer thirteen short questions. The cover describes the purpose of the survey and its use to complete the research project. 10 As appreciation for completing the survey, a $10 donation per response was made to Big Brother and Big Sister of Massachusetts Bay. Initial response to the survey was fairly low, therefore personal phone calls were made to each mediator. It was learned that some of the surveys landed in “junk mail,” but the phone call reminder prompted a significant response to the survey. The survey questions: 1. “Successful mediation requires compromise from all parties.” •

40% Agree

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60% Strongly Agree

Unsurprisingly, no one disagreed with this statement. Parties are expected to voluntarily enter into negotiation with flexibility in their position. If most cases settle before trial mediation will require compromise. Either side occasionally shows up with intractable positions, however, they are usually posturing rather than taking a true position. 2. “Successful mediation requires addressing plaintiff’s past, present, and future needs.” 10

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See Appendix.

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13.33% Not a Factor

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66.67% Agree

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33.33% Strongly Agree

Although the majority agree or strongly agree, some felt this was not a factor. This is interesting, in that each party should come to mediation prepared with a full examination of the plaintiff’s needs. Addressing these needs does not require meeting all of them but acknowledging they exist provides multiple dimensions for negotiations. 3. “Interests define the problem. The basic problem in a negotiation lies not in the conflicting positions, but in the conflict between each side’s needs, desires, concerns, and fears.” 11 •

6.67% Disagree

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13.33% Not a Factor

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46.67% Agree

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33.33% Strongly Agree

Throughout this research, it has become apparent that Roger Fisher and William Ury are two of the foremost experts and authorities on negotiations. The majority did agree or strongly agree with their statement. Negotiations on the basis of basic human needs motives the parties to agreement. Basic human needs include: i. Security ii. Economic well-being

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From Fisher, Getting to Yes.

iii. Sense of belonging iv. Recognition v. Control over one’s life. Structured settlements specifically consider these needs in the form of future periodic payments. 4. “Finding a mediator who ‘focuses not on rights, but on interests, to help the parties find a solution that satisfies their underlying needs, desires and concerns’ will result in a settlement more favorable to both sides.” 12 •

13.33% Not a Factor

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66.67% Agree

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20% Strongly Agree

Most agree with this. Objective criteria within the context of a settlement will include future wage loss, future medical expenses, attendant care, housing, education, etc. Defendants do not always bear responsibility for all of these needs; however, funding many of them with periodic payments will demonstrate to the plaintiff more good faith negotiations. 5. “According to Michael W. Olsen, by using a structured settlement at mediation, a skillful mediator can ‘expand the pie’ by making both parties in a dispute realize that having their interests met need not come at the expense of others.” 13 • 12 13

20% Disagree

See Goldberg, “Beyond Blame: Choosing the Right Mediator.” See Olsen, “Mediation Saves Socrates.”

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6.67% Not a Factor

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73.33% Agree

Surprisingly, many did disagree; however, the clear majority agreed. Olsen’s article, written for The American Journal of Mediation, explores a real historical event that argues a different outcome would have occurred: Socrates would live rather than die by hemlock poisoning, had mediation been used rather than a jury trial. Further, a mediator would have explored means to satisfy both sides’ needs in a win-win solution. By using structured settlement to meet plaintiff’s future needs, a mediator can demonstrate a win-win for both plaintiff and defense without conceding a win-loss option. 6. “Preparing the parties in advance of mediation by making them aware that a structure will be applied in the process is the most successful approach in mediation.” •

13.33% Disagree

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33.33% Not a Factor

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26.67% Agree

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20% Strongly Agree

This question brought very interesting results, with almost half disagreeing or seeing this as not a factor. In Question 5, a large percentage agreed that “expanding the pie” offers a win-win outcome; therefore, it should be essential to know what the parts to the pie will be prior to mediation. Knowing the pieces to a life care plan and researching the “real” versus the trial numbers is critical. Being informed regarding income needs, housing needs, education needs, child care needs, etc., all become critical parts to the

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pie. Knowing that mediation is a compromise and knowing the real numbers for a winwin outcome is critical to success.

7. “Having a structured settlement consultant attend mediation is helpful with acknowledging and addressing the plaintiff’s future needs.” •

26.67% Not a Factor

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66.67% Agree

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6.67% Strongly Agree

The majority agreed. Having a consultant present allows changes to offers as negotiation proceeds. As “pieces of the pie” are explored and concessions to future needs can be met, there are more opportunities to explore various ways to meet those needs. The consultant can answer questions regarding the benefits, taxes, guarantees, and security of the life company payments. 8. “The effective skills of the structured settlement consultant vary greatly and can positively or negatively affect mediation.” •

6.67% Strongly Disagree

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13.33% Not a Factor

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53.33% Agree

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26.67% Strongly Agree

This question received similar results to Question 7; a majority agreed or strongly agreed. As with any profession, there are some good consultants, some that are so-so, and some that are either ineffective or obstructionists. Having a skilled broker who has 12

done their homework before mediation can have a significant positive impact. Skilled consultants have worked with many life care planners, understand Medicare and Medicaid issues, have multiple resources available to identify real cost of future care, and poess a thorough understanding of the Affordable Care Act (ACA) and how it impacts the settlement. Being fully versed in all of these area is a valuable resource during mediation to the plaintiff, defense, and mediator. 9. “‘Structured settlements constitute a private sector funding alternative to taxpayerfinanced assistance programs to meet the ongoing, long-term medical expenses and basic living needs of seriously injured victims and their families.’ –the Hon. John Lewis, a civil rights leader and member of Congress.” 14 •

40% Disagree

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6.67% Not a Factor

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53.33% Agree

The Congressman is a tremendous supporter of structured settlements. He continues to support the tax-free benefit of structured settlements because he sees the great value to plaintiffs. The question received very interesting results with 40% disagreeing and 53.33% agreeing. Studies have repeatedly shown that windfalls of cash dissipate in a very short period of time, whether from winning a lottery, an inheritance, or settlement of a personal injury claim. The difference with a personal injury settlement is that the windfall is intended to cover future economic needs. If the funds are dissipated and the future needs remain, plaintiffs must resort to public funding. If money is secured for 14

As quoted by the National Structured Settlements Trade Association.

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those future needs with guaranteed tax-free future periodic payments, public funds are less likely to be needed. 10. “Structured settlements present an opportunity to acknowledge plaintiffs’ pain and grief by accommodating their needs, according to The Center for Resilience, LLC.” 15 •

6.67% Strongly Disagree

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13.33% Disagree

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33.33% Not a Factor

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46.67% Agree

Although almost half agreed, the majority did not agree. However, Dr. Leo Flanagan of The Center for Resilience, who has worked with survivors from many major traumatic events (including survivors from 9/11, Hurricane Sandy, and the Sandy Hook School shooting), has personally witnessed the truth to this statement. His work toward recovery for these victims includes assisting them with defining their desires and needs for a fulfilling life. Defining those needs and identifying ways to meet those needs facilitate them moving toward long-term post-traumatic growth. Plaintiffs have endured the most catastrophic injures, perhaps injuries include amputations, brain injuries, severe burns, paralysis, and death of a loved one. By asking plaintiffs to identify their future needs and then meeting those needs through secure future periodic payments will allow them to move forward toward a maximum recovery. 11. “Plaintiff attorneys care less about meeting client’s needs than reaching a final number.” 15

See the Center for Resilience.

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6.67% Strongly Disagree

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46.67% Disagree

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6.67% Not a Factor

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26.67% Agree

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13.33% Strongly Agree

Although the respondents are split with 46.67% disagreeing and 40% agreeing. Negotiations that are solely focused on a final bottom line number attempt to force settlement based on the will of the attorney and not on the needs of the client. Skillful mediators and strong claim professionals can direct negotiations to objective criteria versus “final numbers,” resulting in a win-win. 12. “Internal rate of return (IRR) on the annuity is a significant factor in electing a structured settlement over a lump sum.” •

33.33% Disagree

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46.67% Agree

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20% Strongly Agree

A significant majority either agree or strongly agree with this statement, meaning low IRR on the annuity negatively affect selecting a structured settlement. However, the statistics on the numbers of cases structured reveal that low interest rates have not reduced the numbers of structured settlements. From 2013 to 2015, while interest rates were at a historic low, premium continued to increase. In 2015, a total of $5,347,578,153 was recorded in structured settlement premium, while the yield on a ten year US

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Treasury bond was 2.1%. 16 The majority of plaintiffs are ill equipped to manage large sums of money for extended periods of time. Securing future economic needs with a fixed rate tax-free structured settlement with no management fees has been the most proven method to protect long-term needs. Dissipation of principle through mismanagement and squandering is a much greater risk than locking in a lower structured settlement interest rate. Numerous articles have been written about professional athletes going broke within five years of their last game. 17 Athletes make millions during their careers and have access to the best financial advice money can buy, risking to obtain the best return on their investments. However, it still comes down them making the final investment decisions, and frequently, they end up broke or in bankruptcy. Statistically, plaintiffs face the same challenges; however, with catastrophic injuries and a lifetime of disabilities, they are less likely to find a means of earning additional income like a retired athlete who can make a living with endorsements. The settlement is a one-time opportunity to secure their future needs. There is no going back to defendants if they lose their settlement funds. 13. “Plaintiffs who elect a lump sum over a structured settlement either have less than expected over a period of time or have dissipated the entire amount.” 18 •

20% Disagree

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13.33% Not a Factor

See TSSA, “Federal Tax Policy & Structured Settlements.” See Torre, “How (and Why) Athletes Go Broke.” 18 See the 2013 Prudential Structured Settlement Survey and the 2012 American General Life Companies Structured Settlement Survey Report. 16 17

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53.33% Agree

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13.33% Strongly Agree

Numerous studies have been done over the years supporting this statement, but the recent Prudential and American General studies are fairly conclusive. Although plaintiffs cannot be forced to accept a structured settlement, more education and support should be provided to encourage them to take advantage of the tax-free structured settlement. Often, they hear about a structured settlement for the first time during mediation. They have little time to comprehend the enormity of their task to manage a large sum of cash to secure the future of themselves or a loved one. Once they have their cash settlement, refocusing them to address future needs is difficult. Many family friends and advisors have quickly come to their aid to offer advice and to steer them to take all cash. During mediation, they should be encourage and educated to focus on meeting their future needs with periodic payments. Conclusions Are there more effective methods to use structured settlements in the mediation process? The survey concludes that settlement is a compromise and most mediators view structured settlements favorably. Further, the mediators went on to state structures are in the best interest of plaintiffs and their families. All agree settlement is a compromise, therefore, plaintiffs and defendants must enter mediation with an understanding that what may be allowed at trial is not necessarily what they should bring to the mediation process. Life care reports and economist reports that will be presented at trial must be fully appreciated but may

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not reflect the actual needs of the plaintiff. Compromise will require each side approach mediation with a realistic understanding of the actual future needs. It was the research from Fisher and Ury , Goldberg and Harvard Law School Program on Negotiation that tells us that negotiations based on needs rather than will motivates the parties to agreement. Structures by their nature focus the parties on the plaintiff’s needs. We learned from Olsen that if the parties identify their interests or needs the mediator has the ability to accommodate both parties in a win/win situation. When structures are used in mediation the future needs of the plaintiff can be clearly identified providing a focus and basis for negotiating beyond will. Even if the parties do not agree on the cost of those needs the areas of dispute become clearer. If all sides agree the plaintiff is severely injured and needs future attendant care and do not agree on the cost of the care the area of dispute becomes narrower. Future economic damages are a clear component of any catastrophic injury claim. Being prepared for mediation with valid supporting documentation of the cost of future care allows the process to proceed negotiating on specific criteria. The areas of disagreement crystalizes allowing all side to negotiate specifically on that one area and allow for them to come to agreement on others. Structured settlements provide an ideal method to negotiate based on plaintiff’s objective needs and allow the mediator to offer win/win solutions to both plaintiffs and defendants.

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Appendix

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Works Cited American General Life Companies. “Structured Settlement Survey Report.” 2012. Survey. Center for Resilience. College of Business at University of Notre Dame Mendoza. 28 April 2016. Conference Presentation. Fisher, Roger, and William Ury. Getting to Yes: Negotiating Agreement without Giving in. 2nd ed., Penguin Books, 1991. Glater, Jonathan D. "Study Finds Settling Is Better than Going to Trial." The New York Times, New York ed., 7 Aug. 2008, p. C1. The New York Times, www.nytimes.com/2008/08/08/business/08law.html?_r=0. Accessed 23 Oct. 2016. Goldberg, Stephen B. "Beyond Blame: Choosing a Mediator." Negotiation, 1 Jan. 2006. Hindert, Daniel, et al. Structured Settlements and Periodic Payment Judgments. Law Journal Press, 1986. National Structured Settlements Trade Association. "Federal Tax Policy & Structured Settlements." National Structured Settlements Trade Association, www.nssta.com/resources/federal-tax-policy-structured-settlements. Accessed 23 Oct. 2016. National Structured Settlements Trade Association. "Federal Tax Policy & Structured Settlements." National Structured Settlements Trade Association, www.nssta.com/resources/federal-tax-policy-structured-settlements. Accessed 23 Oct. 2016. Olsen, Michael W. "Mediation Saves Socrates." American Journal of Mediation, vol. 3, 2009. "The Only Four-Page Guide to Negotiating You'll Ever Need." Harvard Management Update, PDF ed., 1996. 28

Prudential. “Prudential Structured Settlement Survey.” 2013. Survey. Speranzini, Jane. “Mediation Process Survey.” 2016. Survey. Subramanian, Guhan, et al. "Mediation Secrets for Better Business Negotiations: Top Techniques from Mediation Training Experts." Negotiation, 2010. Torre, Pablo S. "How (and Why) Athletes Go Broke." Sports Illustrated, 23 Mar. 2009. United Nations. United Nations Guidance for Effective Mediation. Sept. 2012, peacemaker.un.org/sites/peacemaker.un.org/files/GuidanceEffectiveMediation_UNDPA2 012%28english%29_0.pdf. Accessed 20 Oct. 2016.

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