A structured settlement usually refers to the payment of money over a period of time that is agreed upon by parties to resolve a legal dispute. As an example, it is not uncommon for a personal injury lawsuit to be settled by an agreement where the injured party will receive some money up front as well as payments made over time.

One reason for structuring a settlement in this manner is that it may be a good way to provide for an injured party’s future needs. If someone is going to have continuing medical expenses as the result of an injury, a structured settlement will help to assure that money will be available in the future to pay for such expenses.

Another important reason for structured settlements is that they help to resolve lawsuits short of going to trial. If someone is injured in an automobile accident, he or she may bring a lawsuit against the party at fault to recover damages. The latter party’s insurance company will usually step up to defend the lawsuit and pay damages as required under the policy if the insured is found liable.

There are many risks in going to trial. On one hand, an injured party may end up losing and getting nothing or may recover a lot less than he or she was seeking. On the other hand, a defendant’s insurance company may end up paying a lot more on a jury verdict than it would have had to pay in settlement prior to trial. However, the parties are often times so far a part on what they are willing to offer or receive in settlement that it is difficult to resolve a lawsuit in the absence of something like a structured settlement to bridge the gap.

A structured settlement can help bridge the gap because an insurance company may be willing to offer more in settlement if it is able to defer part of the payment until some point in the future. The injured party is likewise able to achieve his or her goal of getting a larger settlement by agreeing to accept deferred payments. The reason for this is the time value of money. A $100 settlement payable immediately still costs an insurance $100. However, the same settlement of $100 would cost the insurance company a lot less money if it could defer the payment until a later date.

Using an overly simplified example, assume an insurance company earns at least 10% per annum on its money. Thus, the $100 that the insurance company has today would be worth $110 a year from now. Looking at it the other way around by "discounting" future dollars to what they would be worth today, an insurance company would only have to pay roughly $90 today in order to fund a $100 settlement a year from now.

A structured settlement is oftentimes funded by an insurance company taking out an annuity. An annuity is a type of insurance product that provides for making future payments to someone (called the "annuitant") pursuant to a schedule that is agreed upon at the time of taking out the policy.

Using the above example, the insurance company (the "annuity holder" or the "annuity owner") would purchase an annuity policy from another insurance company (the "annuity issuer") that would provide for paying the $100 to the injured party/annuitant one year later. Presumably, the cost of the policy would be in the neighborhood of $90, plus a premium that the annuity issuer would charge as consideration for assuming the risk of taking on the payment obligation.

A problem that often arises with a structured settlement is that future annuity payments may not be available for unexpected needs. As a way to deal with this problem, there are companies that are willing under the right circumstances to take an assignment of future annuity payment rights in consideration of a discounted cash payment to the annuitant. This process is subject to court approval, which is the subject of another article on the Mikkelborg website.

The Mikkelborg firm handles work involving structured settlement transfers. The firm has represented companies seeking approval of such transfers in petitions filed with courts in Alaska, California, Oregon and Washington.