There has been a steady trend in several provinces over the last five years toward legislating mandatory structured settlements in certain situations. Recently, the Ontario government got on the bandwagon. Last month, it introduced bill 14, the proposed "access to justice act," which includes a new provision making structured settlements mandatory in medical malpractice cases if the settlement is requested by either the plaintiff or the defendant and is above a "prescribed amount."The terms of the settlement are set out in proposed changes to s. 116 of the Courts of Justice Act, and stipulate that the payments must be in the form of an annuity contract issued by a life insurer, that it will not attract income tax, and that it includes protection from inflation.
However, the court would also have the power to order that a lump sum payment be made in whole or in part if "the plaintiff satisfies the court that a periodic payment award is unjust, having regard to the capacity of the periodic payment award to meet the needs for which the damages award for future care costs is intended to provide compensation."
Structured settlements are typically imposed in cases where the plaintiff is an infant or minor or is otherwise clearly unable to handle their own affairs. But there is a growing debate over whether they should be mandated much more often than they currently are.
Structured settlements have been around in Canada since the late 1970s: it's fair to say they have saved countless numbers of injured or incapacitated persons from squandering their awards.
Bob Baxter, principal at Baxter Structured Settlements in Toronto, calls it the "lottery mentality." According to research in the field, about 25 per cent of lottery winners have nothing left within two months. At the end of the first year, it's 50 per cent. After five years, 90 percent are broke.
Baxter, who has been in business since the late 1970s, believes plaintiffs should have the right to make choices about when they take cash or when they use a structured settlement. But it can be a concern to see plaintiffs fall for the cash so often, he says, especially where there are large settlements, and when there are circumstances that suggest a structure, for at least part of the money, would be better.
After noting that structures not only spread out income but can also greatly increase it, Baxter says, "There are a lot of people who take million-dollar settlements in cash and not consider the structure. This past month, we've lost three of those."
Frank McKellar, of Guelph, Ont.-based McKellar Group, says there is a steady regulatory drive toward mandatory, court-ordered structured settlements for a number of reasons. One is the desire of the casualty industry to eliminate additional costs, such as the gross-up of awards (the additional amount needed to cover the taxes that would otherwise be owing on a lump-sum award). Structured settlements eliminate the need for gross-ups, which can run into millions of dollars on large claims.
Governments also want to keep the casualty insurers' costs contained, because that helps reduce increases in insurance premiums. Getting rid of things like gross-ups and management fees for professional management of a lump sum (which a structured settlement does not require) helps do both, McKellar says.
That issue is now spreading to medical malpractice costs in Ontario, because premiums for that insurance are also on the rise.
Annuities that use life expectancy tables, with the risks of loss built in (as life insurance companies do but casualty companies do not) also ensure greater financial stability in the financial system, McKellar says. While covering an injured person's needs for as long as they live, it also takes the guesswork out of the process for the trial judge.
And even when interest rates are on the rise, annuities very often offer a better return, he says, because they are free of tax.
"Don't forget that five per cent tax-free, for most people, is worth about eight or nine per cent taxable, because when you get a large amount of money and you put it on earned income or you invest it on its own, it creates quite a high tax burden."
There are also annuities linked to the consumer price index, which resets its interest rate annually, he notes.
Baxter says mandated structures may not always be in the best interests of the plaintiff if, for instance, the plan offered by the defendant's insurer is not attractive to the plaintiff. The defendant, he says, can typically offer only one version of a structured settlement.
"At this point in time, from my experience, a lot of people are taking the cash. And these are people who may not be able to handle $600,000 or $800,000 or $1 million in cash. There's a lottery mentality that seems to creep in."
People often misunderstand how interest rates work under a structure, he says. Like McKellar, Baxter says they forget how the tax situation can change the outcome. They have dreams of getting into real estate, or a financial planner comes in and says, "I can get you 15 per cent." He may, on a couple of vehicles for a short term, but it's taxable.
Mandated structures, says Baxter, are best for people who need money management. He refers to one instance, in which a young man who was awarded $800,000 and had little education decided to have his father, a former construction worker, manage the money.
"There is not a lot of logic to the decision-making."
He adds that at least some of almost any award should be put into a structure, as that is what it is for — steady, long-term support. Many people even have trouble with a regular pay cheque, he notes.
"Then this money is thrust upon them, and all of a sudden they have glory in their eyes. It's a shame. So there is a place for mandated structures, but I think the defence should have the opportunity to introduce more than one annuity."
It would be best with court-ordered structures to order the concept, and not a particular plan, says Baxter. That way, there is less opportunity for the plaintiff to argue against using a structure because of its particular features, when the real motive is the lure of the large cash sum.
A good compromise, when plaintiffs who have often been functioning with very little money through the course of litigation now want to go shopping, is to take some in cash and put the rest into the structure, he says.
He cites one young client who was awarded $150,000. He put only half into a structure and was broke in three months.
"I asked him how long it would have been before he went through the rest if he had taken it all in cash, which he wanted to do. He said probably another three months."
Baxter says the man called him periodically over the years to thank him for the base income, because it allowed him to get a mortgage on a house, among other things.
"They all don't phone me and say, 'Thanks very much Bob.' But some do."