Legal Structure

The typical structured settlement arises and is structured as follows: An injured party (the claimant)

settles a tort suit with the defendant (or its insurance carrier) pursuant to a settlement agreement

that provides that, in exchange for the claimant's securing the dismissal of the lawsuit, the defendant

(or, more commonly, its insurer) agrees to make a series of periodic payments over time. The insurer, a

property/casualty insurance company, thus finds itself with a long-term payment obligation to the

claimant. To fund this obligation, the property/casualty insurer generally takes one of two typical

approaches: It either purchases an annuity from a life insurance company (an arrangement called a "buy

and hold" case) or it assigns (or, more properly, delegates) its periodic payment obligation to a third

party which in turn purchases an annuity (which arrangement is called an "assigned case").

In an unassigned case, the property/casualty insurer retains the periodic payment obligation and funds

it by purchasing an annuity from a life insurance company, thereby offsetting its obligation with a

matching asset. The payment stream purchased under the annuity matches exactly, in timing and amounts,

the periodic payments agreed to in the settlement agreement. The property/casualty company owns the

annuity and names the claimant as the payee under the annuity, thereby directing the annuity issuer to

send payments directly to the claimant. If any of the periodic payments are life-contingent (i.e., the

obligation to make a payment is contingent on someone continuing to be alive), then the claimant (or

whoever is determined to be the measuring life) is named as the annuitant or measuring life under the

annuity.

In an assigned case, the property/casualty company does not wish to retain the long-term periodic

payment obligation on its books. Accordingly, the property/casualty insurer transfers the obligation,

through a legal device called a qualified assignment, to a third party. The third party, called an

assignment company, will require the property/casualty company to pay it an amount sufficient to enable

it to buy an annuity that will fund its newly accepted periodic payment obligation. If the claimant

consents to the transfer of the periodic payment obligation (either in the settlement agreement or,

failing that, in a special form of qualified assignment known as a qualified assignment and release),

the defendant and/or its property/casualty company has no further liability to make the periodic

payments. This method of substituting the obliger is desirable for property/casualty companies that do

not want to retain the periodic payment obligation on their books. Typically, an assignment company is

an affiliate of the life insurance company from which the annuity is purchased.

An assignment is said to be "qualified" if it satisfies the criteria set forth in Internal Revenue Code

Section 130 [3]. Qualification of the assignment is important to assignment companies because without it

the amount they receive to induce them to accept periodic payment obligations would be considered income

for federal income tax purposes. If an assignment qualifies under Section 130, however, the amount

received is excluded from the income of the assignment company. This provision of the tax code was

enacted to encourage assigned cases; without it, assignment companies would owe federal income taxes but

would typically have no source from which to make the payments