Sometimes known as viatical settlements, court judgments or settlements that call for payments by the defendant to the plaintiff over time offer advantages to both parties. The defendant can pay from revenues as they become available, increasing available funds with which to pay plaintiff. The plaintiff will receive a stream of payments that may exceed, even when valued in present terms, what the defendant would have been willing or able to pay in a lump sum. The plainitff will also be assured a stream of income, rather than a lump-sum payment that might be squandered.

About half of the states have enacted statutory provisions governing the award of structured judgments.These statutes vary in the breadth and detail.

New York’s structured judgment law is perhaps the most comprehensive in the nation. It requires the periodic payment over time of all personal injury awards of more than $250,000 for future losses. The extent and complexity of the New York scheme has been the source of much confusion among lawyers and judges in the state since its enactment in 1986—especially concerning the present valuation of future damages.

The New York Court of Appeals attempted to resolve some of these problems in Bryant v. New York City Health and Hospitals Corp., 93 N.Y.2d 592, 716 N.E.2d 1084 (1999) (noting that the judiciary had labeled the statute as “circuitous,” “vexing,” “every Judge’s nightmare” and “at best . . . ambiguous [which] can lead to inexplicable results”).Some lawyers argue that much clarification is still needed.See Michael D. Hess, “Help Wanted: Consulting Economist,” New York Law Journal (March 29, 1999).

In recent years, many states have enacted laws that govern the transfer of structured settlements —implementing strict disclosure requirements to prevent unscrupulous “factoring” companies from luring structured settlement payees to sell their payment rights for a meager lump sum amount. See, e.g., North Carolina’s Structured Settlement Protection Act (N.C. Gen. Stat. §§ 1-543.11 to- 1-543.15). See also “Strange Bedfellows Reshape Structured Settlement Industry,” Claims Magazine (Nov. 2001).

Structured settlements raise many other interesting issues. For example, are these settlements a kind of investment, making the defendant-payor an issuer and the plaintiff-payee a purchaser of securities? See Dave Luxenberg, Why Viatical Settlements Constitute Investment Contracts within the Meaning of the 1933 and 1934 Securities Acts, 34 Willamette L. Rev. 357-389 (1998).

Problem (apply New York statute)

Awards for past damages and attorneys' fees, as well as the first $ 250,000 of awards for future damages, are immediately payable in a lump sum ( CPLR 5031 [b], [c]; 5041 [b], [c]). Defendant is then required to purchase an annuity contract that will "provide for the payment of the annual payments of such remaining future damages" (CPLR 5031 [e]; 5041 [e]). Further, the "annual payment for the first year shall be calculated by dividing the remaining amount of future damages by the number of years over which such payments shall be made and the payment due in each succeeding year shall be computed by adding four percent to the previous year's payment" (id.).

Attorneys' fees based on past damages and the first $ 250,000 of future damages are easily computed by deducting the fee amounts from presently payable sums ( CPLR 5031[c]; 5041 [c]). Attorneys' fees for future awards are ascertained by determining the present value of future damages and correspondingly reducing that amount by the present value of attorneys' fees.

The court, additionally, must "enter a judgment for the amount of the present value" of the annuity contract "that will provide for the payment of the remaining amounts of future damages in periodic installments" (id.). The present value of the annuity contract "shall be determined in accordance with generally accepted actuarial practices by applying the discount rate in effect at the time of the award to the full amount of the remaining future damages, as calculated pursuant to this subdivision" (id.).

What does this mean? Assume a jury awards a plaintiff the value of future lost wages: $50,000/year for 25 years (plus 4% inflation). Assume that annuity contracts are currently paying 7%.

See attached spreadsheet.

Example

Consider the case of Salgado v. County of Los Angeles
80 Cal.Rptr.2d 46 (Cal.1998). Jabes Salgado was delivered in a county hospital, where the doctors failed to notice his mother's diabetes and other risk factors in her pregnancy. As a result Jabes was born with permanent nerve damage in his right arm.

The Salgados sued the hospital for medical malpractice and sought an award to pay for Jabes's future medical treatment and therapy. The jury found negligence and awarded future economic damages, past non-economic (pain and suffering) damages, and future non-economic (pain and suffering) damages.

After the jury's award, the hospital moved the court to reduce the award for future pain and suffering pursuant to a stautory cap. The trial judge agreed.

The hospital then moved to have each of the awards that compensated for future damages reduced to an annuity - a series of monthly payments over the expected life of Jabes - as allowed under California statute. How should this be computed? (More>>)