Executive Life of New York, will recent lawsuits be the nail in the coffin for structured settlements?

In part three of my review on the Executive Life of New York saga  I look to begin a shift in the conversation to whether the current lawsuits filed against agents who sold structured settlements in states where ELNY was not approved or licensed for sale, have any hope of success. It is a big issue for structured settlement brokers, planners and settlement experts as a successful court challenge and verdict could impact access to E&O coverage, taint the structured settlement concept and financially impact major players in the profession. 

You can check out my prior posts here, as well as part I here. I also want to recommend one of the most comprehensive reviews of the entire ELNY saga by LifeHealthPro which you can access by clicking here. You may also check out another recent Life Health Pro article on the lawsuits by clicking here, although keep in mind Attorney Stone is involved in litigation related to ELNY shortfalls and his commentary should note that fact. 

So the final question and analysis revolves around the potential impact of lawsuits brought in Oregon and New Mexico against brokers from two of the industry giants, Ringler Associates and EPS. There is no question but that there will be substantial assets and legal talent brought to the table by each of these entities and I would imagine that simply getting these cases to trial is going to be a high bar to hurdle. You have contracts written decades ago, involving a liquidated company whose records and compliance were probably incomplete at best. As well you will have a situation where defendant owners of the contracts will argue that they were the real clients of the structured settlement brokers, not the annuitants as they were the ones who paid for and owned the ELNY contracts, which in turn funded the structured settlement agreements.

This long standing concept, that the duty of the broker was to the buyer of the annuity, not to the annuitant, is a foundational concept that is poorly articulated to claimants and trial lawyers. Only when a disaster like ELNY occurs does this fact rise to the surface, as the structured settlement profession likes to present an image where in the defendant broker is actually able to represent the best interests of both sides, when in fact they will deny such a relationship exists when issues of coverage and liability are asserted in cases such as this. At the time of the ELNY melt down there were few if any plaintiff experts to assist claimants with the process, and as such in almost every case, the only broker speaking to the parties at settlement were in fact working on behalf of the defendants. 

If the lawsuits get past the key legal hurdles of client relationship, licensing, state approvals and other procedure, and get to the court room, it is likely in this post 2008 melt down world that most juries would not be entirely sympathetic to the brokers at trial. The outcome of such litigation is uncertain and only time will tell if these cases do in fact get to a jury. In the mean time the very fact of litigation and the on going reminders of how badly the ELNY rehabilitation was handled, how the liquidation was processed in almost total media silence and the deals simply crammed down on the 800 to 1000 short fall payees, is not news the structured settlement profession wants to have repeated in industry publications, legal journals and internet news services. Everyone really just wants for this to go away, but it isn't going away any time soon.

The sad reality is that this is news that needs to be discussed in order to bring some daylight to the sales practices of that era, the shrouded process by which state's such as NY run insurance company rehabilitation situations, as well as a review of other current marketing practices being pushed upon injury clients that could have disastrous financial impacts on these vulnerable people in the next few years. I believe that the current fad of pushing clients into managed trust accounts due to the low rate of return on structured settlements has yet to with stand the inevitable increase in interest rates on bonds as well as a decline in stock market yields. How many of these post 2008 clients who have been steered toward what ever was salable at the time of settlement,  will eventually discover one day that the managed funds they trusted to a structured settlement firm, have declined in value at the exact moment when they need their funds the most? 

The fact is that the income tax free structured settlement annuity product is one of the single most successful planning tools ever devised by the financial community, blessed by and enshrined in the IRC and which has rock solid support from Congress over the last 25 years. Unfortunately the careless sales practices and our profession's propensity to shove problems into the closet and hope they go away, has not served us or the ELNY claimants well in this situation. Just as the original ELNY and other life company liquidations brought about pressure at the governmental level to clean up investment, reserve and financial stability at life companies, I would hope this last chapter might bring light to the last major issue in our profession, that being sale practices which often time purport to be in the best interest of the injury victim, but in fact favor the defendants, the brokers and increasingly the investment advisors who simply want control of the assets being structured. A model where the plaintiff injury victim was dealt with under a fiduciary responsibility standard when it comes to the funding of the structure, would go a long way to improve long term success, avoid sales practice issues and remove many of the last lingering problems in the way we use these amazingly effective and powerful planning tools to protect their futures. 

Executive Life of NY, the problem that never seems to end for structured settlements

As laid out in my post from yesterday, ELNY was a problem from the start of the liquidation back in the early 1990's in that all of the annuity obligations and assets to support those contracts were taken over by Met Life, except for the structured settlement contracts. What made these long term contracts so problematic that virtually no life insurance company wanted to buy them? It was the fact that they were priced at a time when ELNY was desperate for cash in flows, so the companies actuaries used interest rate and mortality assumptions that were incredibly aggressive, so as to lower the cost of the ELNY contracts to levels dramatically below those of peer companies to encourage sales. This caused few problems in the early years of the contracts, but when a company has a huge block of life time payments with huge lump sums, compounding elements and other cost inflators tied to a book of assets, and those prudently managed assets are earning far less than the original junk bond yield assumptions, the gap between available assets and future liabilities doesn't shrink, it grows exponentially with each passing year. 

This actuarial fact had to have been well known by the state of NY liquidation bureau, so in order to secure future payments for the ELNY claimants they hired investment managers to watch over the ELNY estate's assets with the goal to get the gap between available assets and future payments narrowed to a degree that their would not be what is commonly known as an unfunded liability. I will not assume to be an expert on the history of the management of this pile of cash, bonds and assets over the following 20 years, but the outcome of the management was that the problem was kicked down the road until it reached a point where it was do or die. The rehabilitation process had run it's course and now liquidation of the ELNY estate and payment of the remaining assets and obligations was the only viable option. This is a very short hand version of how "the gap" was arrived at over two decades of management and why so many people were asked to take a hair cut on their payments as a result. I will leave it to others to examine that 20 year period and why this gap was allowed to grow to the level it ultimately ended it. 

Once this hair cut was negotiated and announced, it became clear that there were going to be haves and have not's, with many of the "have nots" being people or casualty insurance companies whose payments were being made to annuitants in states where ELNY was not approved for sale, but where the agent for the structured settlement company still pushed the sale through. Now in the real world of insurance if this happened in the course of business, typically the life company would have never issue the contract to begin with. However, if it found out there was an error of this nature, they would refund the money, pull back the agent commission and make the client whole and move on. Unfortunately, In the case of ELNY you had an insolvent company with a whole block of contracts written in this fashion, of which the managers of the ELNY estate had to be aware of, but which chose the prudent route available to them in 1991-92 which was to make sure everyone possible was paid for a long as you can possibly pay them, hence kicking the problem down the road for someone else to clean up at some point in time. Shutting down the contracts and refunding the money to the clients was never a practical option so they took the next best course with the theory that it was for the greater good and hoped that returns on the estate might someday close this gap and prevent loss of payments on ELNY structured settlements. 

This has all come home to roost since the final liquidation order and payment allocations in August of 2013 when it then became painfully apparent to the remainder group of claimants that state guarantee fund payments were not going to be adequate to cover their future contract amounts and the original defendants were not going to make up the difference either. In short, due to their state of domicile not being in a state where ELNY was approved to be sold, many of the state guarantee funds refused to contribute toward those accounts, creating a degree of short fall. Further, if the guarantor of the payments was not one of the major casualty companies who owned the non-assigned ELNY contracts, you had in many cases self insureds, defendants or other parties unable to make up that short fall as well. ( It should be noted that one of the least reported elements of this story is that most of the major casualty companies quietly stepped up and paid claims a second time in order to keep many claimants whole, avoiding an even larger pool of claimants getting cut back.) The details of this final liquidation are beyond the scope of this post, but suffice it to say that the legal and regulatory issue of non-approval of ELNY in certain states was used by many state guarantee funds to reduce their contributions to the final pot of money to be carved up. 

So, as I wrap up part II of my examination of the ELNY liquidation and the litigation that is currently in process, we can summarize the issue so far as one where it was clearly evident at the time of the ELNY melt down that the company was in trouble and it should not have been a market used by structured settlement professionals. We had just witnessed the liquidations of Charter Life, Baldwin United and Monarch Life a few years earlier, the press was loaded with stories about the issues with junk bond financing and the risk to companies such as Reliance and Executive Life. AM Best reports of that era clearly showed that 90%+ of ELNY holdings were in junk bonds, yet this fact was largely ignored as long as they had the appropriate ratings. The competitive pressure to get the lowest cost for casualty companies on the structured deal was substantial, the NY entity offered the hope of larger state guarantee fund security and as a result hundreds of millions of premium was placed with ELNY that in retrospect never should have been written given the risks.

That it was industry practice at that time to argue that where the defendant was located, as regards licensing and sales approval, was more important than where the claimant resided is certain to be a key argument in the current litigation and may turn out to be a fatal error over the long haul for the structured settlement profession. In part three of this series tomorrow I will look at the current litigation and the implications to the structured settlement profession as law suits tied to this issue of licensing and state approval moves through the courts. 

ELNY; the crazy aunt in the attic for structured settlements professionals that just won't go away

Executive Life of New York, or ELNY, is a name that still sends shudders down the spines of structured settlement professionals, trade associations and major structured settlement brokerage firms decades after the junk bond laden company was first put into receivership back in the early 1990's. The question now is will recent litigation being brought by savvy class action trial lawyers against the brokers who sold these contracts in the 1980's resurrect a whole series of questions as to how they were sold in the first place, the role of trade associations and State of NY regulators supervision of the assets during the 1990's and  action leading up to and through the final liquidation in August of 2013. 

Some background is necessary before we get to the news on the litigation working it's way through courts in the Pacific Northwest and the Southwestern US. 

Executive Life of New York was one of the subsidiaries of First Executive Corporation, managed by Fred Carr and part of the junk bond era cadre of companies that bought, sold and financed the Drexel Burnham Lambert trading operation. Once concerns were voiced about the safety and liquidity of these investments held in annuity and insurance company portfolios, there was a slow motion crash of both the California and NY subsidiaries, with the unfortunate element being that at that time in the structured settlement profession, most of the big name firms were selling Executive Life contracts as fast as they could ship them out the door. All this despite what should have been general knowledge regarding the fragile nature of the company, the risk of a run on the assets by annuity holders and with a general disregard for diversification of credit risk. 

In fact, the primary reason ELNY became so stuffed with assets and liabilities is that the State of NY was well known for providing superior protection and guarantee fund amounts for claimants, so you could argue that brokers cynically diverted more money to the NY company once concerns were voiced about the CA subsidiary, so as to mitigate plaintiff attorney and client concerns over the long term safety of the deal. This tactical "forum shopping" allowed them to continue to sell cut rate annuity products that saved casualty companies money on claims, while giving the implicit protection of the NY State Guarantee funds to trial lawyers in the event something did go south. 

However, a funny thing happened on the way to liquidation, which was that ELNY, unlike it's California counter part, was not approved to be sold in a wide range of states, a fact that it appears was conveniently over looked by both the brokers, brokerage firms and ELNY compliance staffs, despite the fact that it is in fact illegal to sell insurance in a state where either the broker is not licensed or the company is not approved by the state insurance department.  The structured settlement profession hung their hat on the argument that the client was actually the casualty company and or assignment company, so where THEY were located mattered more than where the actual claimant was located.

This ugly little fact lay dormant as it didn't really impact anyone while the company was under the supervision of the State of NY and benefits continued to be paid to claimants. However, once the managers of the liquidated estate of ELNY finally realized that their future obligations would be impossible to meet with the remaining assets, the domino's started to fall and the issue of where the annuitant lived had a substantial impact on state guarantee fund contributions and in the final determination of who got paid and who had to take a hair cut. 

In part two of this review and analysis, which will be published tomorrow, I will explain the importance of this issue of where the annuitant was domiciled, where the contract was sold, who was licensed in what state and why it was a major determination of who got paid in full on claims and who did not. Also, a look at the court cases, changing public opinion on the treatment of the annuitants and possible governmental action to investigate how the structured settlement profession arrived at this point.