Pensions Replace Lump Sum Damages: Are Structured Settlements the Most Important Reform of Tort in Modern Times?

Abstract

settlements, extensively used in North America, have been introduced into this country. These substitute pensions for the lump sums traditionally paid to plaintiffs for their future losses. The pension derives from an annuity bought by the insurer covering the liability involved, and held for the benefit of the injured person. In contrast to the once-and-for-all award of lump sum damages, the pension can be varied and its payments over a period of time. Lump sums can only be replaced in this way if the parties agree out of court to do so. To encourage these private settlements the parties have been given a considerable financial inducement by the state. The result is that structuring will soon frequently be used for the most important cases in tort where the injury is so serious as to cause earnings and other financial losses to accrue into the future. A structured settlement enables an insurer to pay out less money than before, whilst at the same time allowing a plaintiff to draw a higher income from the damages obtained. These gains are made at the taxpayers' expense. From the perspective of the accident victim structured settlements offer at least two new advantages over the lump sum: first, the income generated can be guaranteed against erosion by inflation; and secondly, it is paid free of tax into the plaintiffs hands. This favourable tax treatment, recently conceded by the Inland Revenue, is the key to understanding the attractions of a structured settlement. In effect it increases by at least a quarter the value of the lump sum offered by the insurer. It therefore enables insurers to pay out less to generate the same income for the plaintiff. This fact alone should cause all personal injury lawyers and liability insurers to re-examine their traditional practices; they must change their negotiating tactics whenever a large award is contemplated. The financial package offered by a structured settlement is composed of two elements: the first - also found in the traditional award of damages - is a lump