Considerations for the Casualty Insurer in Dealing with Structured Settlements
Recent trends in property/casualty insurance reflects catastrophic insurance losses from earthquakes, hurricanes, and other natural and unnatural disasters reaching unparalleled levels. Property/casualty insurers are anticipating even larger losses in the future. It’s not only the frequency of these natural and unnatural disasters that is debilitating, it is also the population growth. For example, the population in the Atlantic and Gulf regions of Florida and in California have experienced a population growth three or four times the national average for the last three decades.
Faced with this increased exposure and seeking an alternative to traditional methods of managing their risk load, property/casualty insurance companies have turned to capital markets.
The structured settlement market has enjoyed major improvements since the Victims of Terrorism Tax Relief Act of 2001. For casualty insurers, there is now tax clarification: defendants (including casualty insurers) who are periodic payment obligors on specific structured settlements, or otherwise qualify as “parties to a settlement” under IRC 5891 (d), have received tax clarification in the event of a factoring transaction. Provided the applicable requirements of IRC sections 72, 104(a)(1) and (2), 130 and 461 (h) were satisfied when the structured settlement was consummated, these Internal Revenue Code sections remain applicable. In the event of a structured settlement factoring transaction, payers of the periodic payments are not required to withhold tax.
As obligors in specific structured settlements, defendants and casualty insurers also qualify as “interested parties” under the Model State Structured Settlement Protection Act. As such, they are entitled to receive notice to applications and to participate in Court proceedings seeking qualified orders for structured settlement factoring transactions.
As far as future structured settlements go, defendants should reconsider their use of structured settlements as well as their products, protocols and documentation. What is the strategic and operational justification for using structured settlements? Why, and under what conditions, should casualty insurers promote or agree to structured settlements?
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