Lawyers and structured settlements: what should a lawyer do for clients in the AIG crisis?

As I sat watching the AIG crisis unfold yesterday, I immediately started to think about the many structured settlements (annuities) that I have recommended over the years to my clients.  Structures provide a great way to allow large sums of money to gain interest (tax free) for injured clients.

I'm starting this blog entry to serve as a clearing house for information for personal injury lawyers seeking information to inform their clients about any risks now associated with using a structure.  I should also say that there may not be any significant risk, but at this point I can't find any definitive source that has analyzed the risks and benefits of structures in the economic and insurance crisis we may be facing.

I'll be updating this link as I find sources of information.  If you have come here seeking information and have a helpful link, please post it in the comments section and we'll add to the data base.

11:09 AM September 16, 2008

Update:  11:35 am

Looks like some of the folks who broker structures are starting to jump on the vacuum of information for lawyers in this situation. John Darer at 4Structures has written an article this morning on the subject.  He also gave me a call to discuss this. LINK to STORY  John says, in part:

First, the AIG core insurance business (life, health, annuities) is not what has caused the impairment.  AIG is a leader in many lines of insurance worldwide.The company operates globally on multiple silo business model. The toxic assets are confined to a single business unit.

Insurers must set claims reserves and actuary certification of asset liability matching is required by New York and most other states.

At the time of this writing there has been no announcement of  bankruptcy, but please note that Insurance regulators work to protect the interest of structured settlement annuitants. There is precedent. In re: Monarch Life bankruptcy creditors were not able to get at the structured settlement assets, even in the absence of secured creditor protections common in today's structured settlements. Executive Life annuitants are still getting paid and that impairment happened in 1991.

So what this says to me is that the insurers are set up in such a way that if the bad debts begin to destroy certain aspects of the business, other sectors will still stand.

John also discussed Qualified Assignments and how they add a second lawyer of protection.  You can find a list of Annuity Companies and where they do their Qualified Assignments here.

As i understand it, a qualified assignment and insurance agreement makes the client a secured creditor in the annuity contract.  This would give priority in bankruptcy, I assume. (checking on that).

11:59 AM UPDATE

My friend Bryan Milner who is affiliated with Millennium Settlements has sent me an email and is working on an article for his website at the moment.  I'll update later when he is finished with his post.

He pointed out that all of his products sold in NC have the protection of the NC Life & Health Guarantee Association, which is essentially the equivalent of the FDIC for insurance in NC.  From their website: 

The North Carolina Life & Health Insurance Guaranty Association is a statutory entity created in 1974 when the North Carolina legislature enacted the first version of the North Carolina Life & Health Insurance Guaranty Association Act (a link to the Act can be found in the Additional Info section). The guaranty association is comprised of all insurers licensed to sell life insurance, accident and health insurance, and annuities in the state of North Carolina. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guaranty Association Act enables the guaranty association to provide protection (up to the limits spelled out in the Act) to North Carolina residents who are holders of life and health insurance policies and individual annuities with the insolvent insurer. It also provides coverage for certificate holders of direct group policies or contracts and for unallocated annuity contracts.

So what sort of coverage does the Guarantee Association have?

If your insurance company fails, the maximum amount of protection provided by the North Carolina guaranty association for each individual is $300,000 no matter how many policies you bought from your company. The maximum coverage for an unallocated annuity is $5,000,000 per contract owner.

And of course, the Guarantee Association only kicks in if the insurer is licensed in NC.  How do you find out if they are?

How can I find out if my company is licensed in North Carolina?
Call the North Carolina Insurance Department at 800.546.5664. The department maintains complete and current records of all insurance companies licensed to do business in the state.

UPDATE 1:52 pm

CNN hasa  pretty good Q&A on AIG and why it affects a lot of folks.  It is certainly a "don't panic" post, but seems to reflect the information posted above about how assets are held and also how Guarantee Associations can step in if the insurer fails.

CNN 5 Things you Need to Know About AIG

Q:  I have insurance through AIG. How worried should I be about the problems at the company?

At least in the short term, you probably don't need to be worried at all. The problems are with the AIG holding company, not the individual insurance company subsidiaries that you do business with, according to a source with New York State's insurance regulator.

Even if AIG's holding company is forced to file for bankruptcy court protection, there's a good chance that the subsidiaries will continue to operate normally with no disruption in claims payments. That has happened in the case of other insurance holding companies bankruptcies in the past, such as Conseco

UPDATE Sept 17, 2008 1:30 pm

Well, looks like I bought myself some AIG.  And so did you, and you and you.  We all own AIG now since the Federal Government now owns 80% of AIG.  They are calling it a "bridge loan" but every "bridge loan" I've ever heard of did not have the lender taking over the company.  And it looks like "we" have replaced the CEO of AIG with the former CEO of Allstate.  Yikes.

Anyhow, some updates on what to do with structured settlements.  My frined and structure expert, Brian Milner, worked his fingers to the bone yesterday putting together some documents to address the AIG Issues.  You can find them at    Millenium AIG Q&A   & Protection for AIG Customers

Bryan has included some really good infomation in there.  I also sent him a Q & A late last night that I think my clients will be asking me.  As soon as he gets all of it answered, I'll post the response.

UPDATE Sept 18, 2008 10:00 am

Bryan has come through on the Q&A for me.  This particular thread is getting pretty long, so I'm going to post it in a new thread which can be found at: Q & A for Lawyer's Clients about Structured Settlements and the AIG Problem.

Comments

[John Darer]

Chris, the qualified assignment release and pledge agreement is the form of qualified assignment used where secured creditor status is desired. A simple qualified assignment or qualified assignment and release won;t do the trick. Further it's important to check the UCC in their state as a UCC filing may be needed.

[Hardison Wood]

Good work Chris. New posts are up.

On Lehman: http://www.ncproductlaw.com/2008/09/articles/financial-armageddon/

On AIG:
http://www.ncproductlaw.com/2008/09/articles/aig-the-apocalypse/

Forgive the religious language. It's my ancient schooling getting the best of me.

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[structured settlement lump sum buyer]

Chris,

Thanks for the interesting article and keeping it updated. On a side note, it's unfortunate what the State of North Carolina has done with their Structured Settlement Protection Act. As a structured settlement purchaser it is impossible to complete a structured settlement factoring transaction in the state because of the updated laws.

Some structured settlement brokers and attorneys are pleased with this, but at the end of the day it makes a structure a weaker product because if the annuitant needs cash, there is no way to cash out such a product in the State of North Carolina any more.

Just my two cents.