No CrossRef data available.
Article contents
Legal Limits on the Structured Settlement of Damages
Published online by Cambridge University Press: 16 January 2009
Extract
A structured settlement is a new way of paying common law damages for personal injury or death. It has received strong support from the judiciary and a very favourable response from the Law Commission in its recent consultation paper. The defendant's insurer, usually after having informally agreed a lump sum figure with the plaintiff, will agree to convert part of the damages into a series of periodic payments. To fund the arrangement the insurer purchases an annuity from a life office. The payments are “structured” to meet the individual's needs and are free of tax in the plaintiffs hands. This is because the Revenue have accepted that they may be considered instalments of capital rather than income. In return for making this arrangement the insurer will bargain for a discount on the conventional lump sum figure. Although the first structure was put in place as long ago as 1981, they were not used in other than a few isolated cases until 1991. Now there are almost two hundred of them, and the annuity market, worth £30 million last year, is expected to grow rapidly. Their increasing use constitutes the most radical reform of our damages system effected in recent years.
- Type
- Articles
- Information
- Copyright
- Copyright © Cambridge Law Journal and Contributors 1993
References
1 Structured Settlements and Interim and Provisional Damages, Consultation Paper No. 125, November 1992, reviewed by the author in (1993) 137(2) Sol.J. 36.Google Scholar
2 But see the author's previous articles “Pensions Replace Lump Sum Damages” (1988) 15 Journal of Law and Society 392;Google Scholar “Structured Settlements in Practice” (1991) 10 Civil Justice Q. 212; “Structured Settlements in Britain and Canada” (1993) 42 I.C.L.Q. (forthcoming); and “The Merits of a Structured Settlement: The Plaintiff's Perspective” (1993) 13 O.J.L.S. 530. For other academic reviews of developments in this country see Allen, “Structured Settlements” (1988) 104 L.Q.R. 448, and Scott (1988) 7 Civil Justice Q. 99. There are many articles by practitioners e.g. Edwards (1989) 86 L.S.Gaz. (26 July); Frenkel, , “Structured Settlements: Practical Considerations” (1989) 5 Personal & Medical Injuries Law Letter (04 and 05);Google ScholarHulls, , “Structuring Personal Injury Awards” (1990) 87 L.S.Gaz. (21 March);Google Scholar Holloway, “Everyone's a Winner” (1992) 152 Post and Insurance Monitor (12 Sept.); Frenkel, “Salvaging the Wreckage and Healing the Wounds” (1992) 136 Sol.J. 8; Whitfield, “The Basics and Tactics of Structured Settlements” (1992) 142 N.L.J. 135. There are now two books on the subject, Goldrein, I. and Haas, M. de, Structured Settlements (1993),Google Scholar and Lewis, R., Structured Settlements: The Law and Practice (1993).Google Scholar
3 However, non-liability to corporation tax has not prevented Health Authorities from arranging structures. By s. 5I9A of the Income and Corporation Taxes Act 1988 the Authorities arc tax exempt, and arc able to reclaim the tax withheld from annuity payments made to them.
4 The main authority is Dott v. Brown (1936) 154 L.T. 484; 1936 1 All E.R. 543. For detailed analysis see Lewis, “The Tax Treatment of Structured Settlements” (1993) British Tax Review (forthcoming).
5 E.g., Boobbyer v. Johnson, The Times, 21 January 1992, the case of NJO cited in Kemp and Kemp, The Quantum of Damages, para. 6A-047, and Moxon v. Senior, unreportcd transcript 10 July 1991, where the damages were reduced by a third for contributory negligence. Cornes, P., Coping with Catastrophic Injury (1993) p. 22 reveals that of cases settled for £150,000 or more by insurers in 1987 and 1988 there were clear indications of reductions for contributory negligence in only nine per cent, of cases, but it features in the negotiations in other cases without the outcome being clear.Google Scholar
6 Ibid. For further details see Bawdon, , “A System where Both Sides Win?” (1992) 6(6) The Lawyer 5.Google Scholar
7 Greene v. Moore, unreported, transcript 9 October 1992.
8 Cornes, P., Coping With Catastrophic Injury (1993), p. 20Google Scholar reveals that even in cases involving damages of £50,000 or more paid by insurers in 1987 and 1988, only 10 per cent, were the result of formal court judgments. Whether this figure includes consent orders is not known. Of personal injury claims in general—most being for very small sums—only one per cent, get as far as the door of a court. Report of The Royal Commission on Civil Liability and Compensation for Personal Injury (1978, Cmnd. 7054) vol. 2, table 12.Google Scholar
9 As in the Boobbyer case above.
10 There is power to do this under R.S.C. Ord. 33, r. 3.
11 As in Payne v. Thackray (1991) 7 Personal and Medical Injuries Law Letter 60.Google Scholar
12 The plaintiff may seek interest at the highest rate, as prescribed by the Judgment Act 1838, s. 17, and an undertaking from the defendant may help avoid the difficulties in obtaining this rate which may be caused by Thomas v. Bunn [1991] 1 A.C. 362.Google Scholar Claiming interest is also referred to by Whitfield, “The Basics And Tactics Of Structured Settlements” (1992) 142 New L.J. 135.
13 Under. R.S.C. Ord. 80. As indicated above, the need for such consent does not bar a structure. According to the evidence submitted to the Law Commission by the Master of the Court of Protection in March 1993, the court had participated in 87 structures. The author estimates this to be about half of all the structures which had been put in place at that time.
14 Marshall v. Westminster City Council, unreported, transcript 8 March 1991.
15 This was a fortunate decision because in fact it was the Municipal Mutual that later become insolvent. Most of its obligations were taken over by the Zurich Insurance Company in early 1993.
16 Law Commission Consultation Paper No. 125, op. cit. note 1 above, para. 3.32.
17 It has been suggested that some form of policing of the new class of tax-free annuities might be required. Safeguards could include requiring that the court approve any settlement involving such annuities, or that solicitors for both sides should certify that the annuity was purchased in respect of a personal injury case. See Ashcroft, , “Structured Settlements; A Practitioner's Viewpoint”, p. 4 (unpublished paper presented to the Law Commission, June 1992).Google Scholar
18 Ibid.
19 Medical Defence Union v. Department of Trade and Industry [1980] Ch. 82.Google Scholar
20 Evidence of the Medical Defence Union to the Law Commission, December 1992. However, the MDU has been involved with two structures in Canada.
21 Fenn, P. and Dingwall, R., “Medical Negligence and Crown Indemnity” in Harrison, A. and Gretton, J. (eds.), Health Care Law UK 1989 (1990);Google ScholarJones, M., Medical Negligence (1991) p. 290;Google ScholarLewis, , “Health Authorities and the Payment of Damages by Means of a Pension” (1993) 56 M.L.R. 844.Google Scholar
22 In fact the claim is usually dealt with by the Motor Insurers' Bureau, acting in its capacity as the UK Green Card Bureau. Under a system organised under the auspices of the United Nations the Bureau is deemed to be the insurer acting on behalf of 31 countries which have signed certain agreements. However, the funds for the settlement will derive from the overseas insurer.
23 If so it is possible to apply for a certificate of exemption under the Double Taxation Relief (Taxes On Income) (General) Regulations 1970 (S.I. No. 488). The annuity may then be paid to the plaintiff gross, thus saving the foreign insurer the need to reclaim the tax. No allowance for this possibility was made by Newstead, “The View from Somerset House” (1989) 7(10) The Litigation Letter 78. He refers to the need to deduct tax in the case of a foreign insurer as an “absolute requirement” under The Income And Corporation Taxes Act 1988, s. 437(1). This ignores s. 788(3) of that Act which permits the provisions of a double tax treaty to override anything to the contrary in UK domestic law.Google Scholar
24 The various EC directives are discussed by Devine in (1993) 81 B.Ins.L.J. 10,Google Scholar and Coates, , “Europe and the Way Ahead” (1993) 2 International Insurance Law Review 38.Google Scholar They are contained in Maitland-Walker, J., EC Insurance Directives.Google Scholar
25 The Times, 10 August 1989.
26 Croxon, , “Has a Court Power to Make an Order other than a Lump Sum for Damages for Personal Injury?” (July 1990) AVMA Medical and Legal Journal 4.Google Scholar
27 Watkins v. Olafson (1990) 50 C.C.L.T. 101.Google Scholar
28 Op. cit. note 1 above, para. 3.71 et seq.
29 Kemp, and Kemp, , The Quantum of Damages, para. 6A-058.Google Scholar
30 Macmillan, and Yamasaki, , “Myths and Misconceptions Concerning Structured Settlements” (1987) 20 Hawaii Bar Journal 137 at p. 143.Google Scholar
31 This may not always be easy to achieve. For example, even though an insurer may be entitled to avoid a defendant's liability policy in respect of a road accident, the insurer may be obliged to satisfy any judgment obtained against the defendant. The insurer's obligation stems from the Road Traffic Act 1989, s. 151, but it does not arise until seven days after the date of judgment. A structure may therefore only be possible if the insurer agrees that the formal proceedings required under the Act need not be instituted.
32 Report of the Royal Commission on Civil Liability and Personal Injury (1978; Cmnd. 7054), vol. 2, table 104.Google Scholar
33 Op. cit. note 1 above, para. 3.38. There was a suggestion that the court had such a power in Metcalf v. London Passenger Transport Board [1938] 2 All E.R. 352.Google Scholar
34 See Miers, D. R., Compensation for Criminal Injuries (1990),Google ScholarGreer, D., Criminal Injuries Compensation (1991),Google Scholar and Foster, D., Claiming on the Criminal Injuries Compensation Board (1991).Google Scholar
35 The presumption then being that compulsory liability insurance will be in force and that compensation can be obtained at common law, or from the Motor Insurers Bureau as discussed below. There are other exceptions to the scheme, including injuries received as a result of domestic violence.
36 The Criminal Justice Act 1988, ss. 108–117 establish the scheme, but under s. 171(1) it only comes into effect from a day to be appointed. Miers, , op. cit., p. 11 states that this is some years away.Google Scholar
37 PerDiplock, L.J. in R. v. Criminal Injuries Compensation Board, ex p. Lain [1967] 2 Q.B. 864, 883.Google Scholar
38 (1936) 154 L.T. 484; [1936] 1 All E.R. 543
39 Op. cit. note 1 above, para. 3.33.
40 Letter from the Home Office to the Commission, 14 July 1992.
41 See paras. 9 and 12 of the revised 1990 scheme, H.L.Deb. vol. 163, cols 410–417, 8 December 1989; Greer, op. cit., appendix B. However, the Commission suggests that the scheme might require amendment.
42 Frenkel Topping in its evidence to the Law Commission, April 1993, note that they were consulted by the Board who, at that stage, were hoping eventually to follow the path of Health Authorities and themselves fund structures.
43 H.C.Deb. vol. 221, cols. 501–507 (18 March 1993).
44 Letter from the Home Office to the Law Commission, 13 April 1993.
45 Williams, D.B., The Motor Insurers Bureau;Google ScholarAtiyah, P.S., Accidents Compensation and The Law (4th ed., 1987) pp. 247–252;Google ScholarColinvaux, R.L., The Law of Insurance (6th ed., 1990) pp. 350–362.Google Scholar
46 Lewis, , “Insurers' Agreements not to Enforce Strict Legal Rights” (1985) 48 M.L.R. 275, 279.Google Scholar
47 The current agreements are reproduced in Goldrein, I. and Haas, M. de, Butterworths Personal Injury Litigation Service, vol. 1, Div. 3F.Google Scholar
48 Even if the tax could be reclaimed problems would be caused by the Bureau's present system of funding. This is based upon insurers contributing to the cost of claims paid in the current year rather than when the accident occurred.
49 Op. cit. note 1 above, paras. 3.33 and 3.36.
50 For example, the Bureau deals with claims by allocating them to insurers to handle on its behalf. It would be unlikely that the additional costs resulting from a structure would be spread equally among its members, and a system of compensation would have to be devised.
51 Evidence of the MIB to the Law Commission, March 1993.
52 Avoidance is possible under the Road Traffic Act 1988, s. 152(2).
53 The memorandum and articles of association of the Bureau were amended in June 1992 so as to replace the “domestic agreement”, and avoid the necessity for changes having to be signed by every member of the Bureau.
54 Ashcroft, , op. cit. note 17 above, p. 15. Certain information given in this section has been supplied to the author by Mr. Snook, claims manager for the Bureau.Google Scholar
55 By R.S.C. Ord. 37 r. 8 and r. 9. The procedural issues are examined by Brennan, D., Provisional Damages (1986), p. 31.Google Scholar
56 R.S.C. Ord. 37 r. 8.
57 Op. cit., para. 5.21.
58 Ibid.
59 However, they may be for a “reasonable proportion” of the damages the plaintiff would get at trial.
60 Op. cit. note 1 above, para. 5.21.
61 Contrast Cherry, “Interim Payment And Provisional Damages” [1993] (1) Quantum 6.
62 (1993) 9 Personal and Medical Injuries Law Letter 18.
63 McKellar, F., Structured Settlements: A Practitioner's Manual, p. 33,Google Scholar and Gross, and Campbell, , “The American Experience” in Goldrein, I. and de Haas, M. (eds.). Structured Settlements (1993), p. 232.Google Scholar
64 Winslow, “Structured Settlements in Employment Litigation”, Los Angeles Lawyer, April 1988.
65 Kagels, , “Structured Settlements under Superfund” (1992) 4(3) Environmental Claims J. 349;CrossRefGoogle ScholarGross, and Campbell, , op. cit., p. 230.Google Scholar The National Structured Settlement Trade Association estimates that over the next 10 years or so structures for environmental claims could exceed those for personal injury.
66 Further developments are signposted by Middlemass, “Structured Settlements” (1992) Canadian Lawyer (Dec. issue) 41.
67 Op. cit. note 1 above, para. 3.87.