A Plaintiff's View of Structured Settlements in Personal Injury Litigation
| Publication year | 1985 |
| Pages | 1960 |
| Citation | Vol. 14 No. 9 Pg. 1960 |
1985, November, Pg. 1960. A Plaintiff's View of Structured Settlements in Personal Injury Litigation
A structured settlement agreement is a contract between the plaintiff and defendant in personal injury litigation in which the plaintiff agrees to accept settlement payments over a period of time rather than in one lump sum.(fn1) The plaintiff releases the defendant from tort liability in exchange for the right to receive a stream of payments in the future. To meet its newly created obligation, the defendant may rely on its general assets, fund an annuity or reversionary trust, or pay a third party assignee to fund an annuity or trust.
A structured settlement agreement should be considered where a case involves 1) personal injury; 2) substantial damages; 3) fairly certain liability of a target defendant (i.e., one with a deep pocket, or good liability insurance, or both); and 4) a plaintiff with probable lifetime needs and who is unwilling or unable to invest funds or a plaintiff with no immediate need for funds.(fn2) Any monetarily substantial case in which at least a portion of the plaintiff's award need be or may be comfortably deferred is a good candidate for a structured settlement agreement.
For example, assume that Deep Pocket Co. is a wealthy, fully insured corporation that manufactures filing cabinets. Deep Pocket Co. trains its salespeople to display the versatile features of its product aggressively. The prescribed sales routine includes a demonstration requiring the salesperson to extend the top four drawers of a six-drawer filing cabinet fully, each drawer containing as many files as possible. The company represents to its salespeople, and requires them to represent to customers, that its filing cabinets will remain standing upright under such circumstances.
One day, Susan Jones, top salesperson for Deep Pocket Co. and young widow with three small children, is displaying a filing cabinet's features to a customer. She opens the fully loaded four top drawers, and the cabinet falls on her. Her resulting spinal cord injuries render her a paraplegic.
The stage is set. The four ingredients of the appropriate fact pattern for a structured settlement agreement exist; the accident inflicts injury on the plaintiff (Susan), resulting in substantial damages; there is fairly certain liability of the defendant (Deep Pocket Co.); the defendant is a financially strong company with a good insurer; and the plaintiff needs to provide for herself and her children possibly for the rest of her life.
Deep Pocket Co. and its insurer realize a jury may award astronomical damages to Susan, so they are strongly motivated to settle. At this point, Susan's attorney should know the advantages and disadvantages of a structured settlement as compared to a lump sum payment.
Section 104 (a) (2) of the Internal Revenue Code of 1954 provides generally that "any damages received ... on account of personal injuries or sickness" are exempt from federal income tax.(fn3) If a structured settlement agreement is drafted properly, the after-tax return to the plaintiff may be higher than that yielded by a lump sum settlement. Structured settlement payments can be completely income tax-free to the plaintiff or the plaintiff's estate. In other words, not only the portion of the structured settlement payments attributable to compensation for personal injuries(fn4) but also the portion attributable to investment income on the principal amount of the award(fn5) can be wholly income tax-free.(fn6)
Income tax dangers to the plaintiff lie in the potential Internal Revenue Service application of the constructive...
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