A Primer on Annuity Contracts, Structured Settlements, and Periodic-Payment Judgements

By Riccardi, Anthony H.; Ireland, Thomas R. | Journal of Legal Economics, Winter 2002 | Go to article overview

A Primer on Annuity Contracts, Structured Settlements, and Periodic-Payment Judgements


Riccardi, Anthony H., Ireland, Thomas R., Journal of Legal Economics


Introduction

Economic experts will increasingly be called upon to play roles that involve consulting and testifying about annuity contracts, structured judgments, and periodic payments. These roles may occur in the context of assessing settlement proposals or providing direct testimony before, during and after trials. In New York, this is a regular part of the tort process for all types of tort actions because of New York's Structured Judgement Laws (CPLR 50 - A and B). However, twenty nine other states1 have some sort of periodic payment laws, particularly in circumstances involving uncertainty about the degree to which severe injury has diminished a claimant's post-injury probabilities of survival. A periodic payment law is simply a law that provides for a compulsory distribution of payments over an extended period of time. In all states, structured settlements are possible with the purchase of annuity contracts, or alternatively, through reversible trusts or through other fixed payment schedules. These mechanisms can provide real benefits for claimants in tort actions. These are benefits with which forensic economists need to be conversant.2 This is a primer designed to provide forensic economists with the rationales behind these alternatives to lump sum payments and to provide an introduction to how they work.

The decision of Judge Louis F. Oberdorfer in the case of TarpehDoe v. United States (1991) speaks clearly to the equity problem that arises when there is no agreement between the parties about adequately compensating a plaintiff over the remainder of an undetermined period of post-injury life. Judge Oberdorfer was responding to a situation in which an individual (in this case a child) had been injured catastrophically and the experts for the two sides in the litigation presented different views of the mortality probability distribution of the child, whose name was Nyenpan Tarpeh-Doe. Judge Oberdorfer wrote:

This conflict of expert opinion as to Nyenpan's life expectancy creates an issue that is difficult to resolve equitably. A lump sum award of damages may be too crude an instrument. If the 8.3 year estimate is too low, the plaintiffs will lose relief to which they are plainly entitled. If the 55 year estimate is too high, they will realize a gross windfall at great expense to the taxpayers. There should be a way to minimize the guesswork. It can be determined with reasonable certainty what it will cost to maintain Nyenpan per year, i.e. $ 84,680.00, adjusted in future years for inflation (or deflation).

A solution may be available through one of several alternative mechanisms: (1) defendants could undertake to pay an annual amount (adjusted for inflation) for the benefit of Nyenpan during his lifetime; or (2) defendants could be required to contribute to a trust a discounted principal sum measured originally by the 55 year life expectancy anticipated by plaintiffs' experts, with distributions by the trustee from income and, if necessary, from principal, in amounts appropriate to maintain Nyenpan during his lifetime with the remainder reverting to defendants at his death. See, e.g., Friends For All Children v. Lockheed Aircraft Corporation, 563 F. Supp. 552 (D.D.C. 1983); 587 F. Supp. 180, 202 (D.D.C. 1983). Finally, it is conceivable that (3) commercial insurance companies would be willing to bid on a commercial annuity, the cost of which would be measured by Nyenpan's life expectancy as determined by the insurance carrier on the basis of actuarial experience generally adjusted to reflect Nyenpan's unique condition. See, e.g., Nemmers v. United States, 795 F.2d 628,635 (7th Cir. 1986); but see Friends for All Children, 563 F. Supp. at 553. Accordingly, the accompanying Order will require counsel for both parties to investigate these alternatives and to file on or before September 9,1991 either a joint proposal or separate ones for payment by defendant of the cost of maintaining Nyenpan during his remaining years. …

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