AVOID THE PROBLEMS OF ALL-CASH NEGOTIATIONS
EFFECTIVE NEGOTIATION THROUGH STRUCTURED SETTLEMENTS (Cont'd.)
by James J. Yukevich and Alexander Calfo

DECEMBER, 2005
FOR THE DEFENSE

The Problem with All-Cash Negotiation

Actual case: A mother was suing a defendant that was partly at fault in a wrongful death action involving her daughter. The mother was adamant that she would not accept less than $1 million. She saw anything less as an affront to her daughter's memory. The defendant, believing such a sum was unwarranted given lack of complete liability, was offering slightly more than half that amount.

The solution: During negotiations, the mother allowed that she had a concern over who would care for her during retirement. She had planned on having her daughter there to care for her. The defendant's counsel and structured settlement broker worked with her on a stream of deferred payments, including larger lump sums, beginning near retirement to pay for living care. The payment stream over 20 years came to about $1.2 million, but the cost to the defendant was within its targeted range for the case.

To paraphrase an old saying, pretrial negotiations are like a Kabuki dance without the spontaneity: Plaintiff attorneys lay out damages and indignities allegedly suffered by their clients, as well as chronicling the defendant's alleged negligence. In turn, defense attorneys raise exculpatory evidence and refute the plaintiffs' contentions. After that, both sides give a little ground while evaluating the other's willingness to go to trial.

In this process, the major flaw with all-cash negotiations becomes readily apparent: When you negotiate solely with cash, your counteroffers inevitably must involve more cash.

By contrast, the structured settlement tool offers an entirely different way to think about the case. By matching payments with future needs, the periodic payment arrangement of a structured settlement helps both parties focus on appropriate compensation, adding a dose of reality to an arbitrary damage claim. The inherent time value of money provides you with the opportunity to create different payment streams that may be more valuable to the plaintiff without necessarily incurring additional expense for your client. Finally, since the full amount of a structure's periodic payment stream is tax-free-including effectively the investment earnings or time value of money component-the same claim value that the defendant might offer as a lump sum can produce a much greater total payout under a structure. This is why periodic payments have effectively bridged differences during negotiations.

Before discussing how to incorporate structured settlements into negotiations, defense counsel should understand that the term "structured settlement" can refer to numerous payment plans reflecting the diverse needs of, say, a brain-damaged child or a 50-something plaintiff who lost his or her breadwinner spouse in a wrongful death accident. A few of the more common structured settlement payment plans include:

Period certain. This is a straightforward payment stream in which the defendant agrees to fund payments lasting a defined time, such as 10 or 20 years, to help the claimant recoup lost earnings or meet ongoing medical needs. A period certain structure is appropriate when the claimant does not suffer permanent damage and the scope of his rehabilitation is unlikely to change. These payments can be in equal amounts or can include cost-of-living adjustments, stepped payment increases and/or future lump sums.

Life. In cases of permanent damage, plaintiff counsel is likely to insist on payments guaranteed for the claimant's life. Life structures can include payment increases at regular intervals and occasional lump sums to allow for greater flexibility in meeting living and medical costs. A structure for the rest of the claimant's life will provide assurance to the family that the claimant will not outlive his or her money. It is particularly useful when the injury victim is a child with a disabling injury, and the parents are concerned about who will care for the child once they are gone.

Joint life. Similar to a "second to die" insurance policy, a joint life structure keeps paying until both the claimant and the claimant's designee are dead. This is particularly appropriate for spouses who want to ensure their retirement security-for example, a severely injured husband who wants to make sure his wife has financial security in her later years.

Life with period certain.

In recent years, plaintiffs have increasingly demanded minimum guarantees (often 10 to 20 years) attached to their life structures. Should a claimant die before the minimum pay-out, the remaining payments can be made to beneficiaries such as a spouse or child. This form of structure can be a useful tool for reassuring the claimant's family that even if the claimant were to die prematurely, the family would receive appropriate compensation. Alternately, the settlement can include a commutation that upon death will convert unused payments into a lump sum. Note: Joint life with period certain is also a common payment stream.

There are numerous other examples of structured settlements, but the ones listed above are probably the most common.

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