Knowing Rated Age is a Strategic Necessity

If a plaintiff’s health history suggests a shortened life expectancy, and the attorney participates in settlement negotiations without knowing the client’s rated age, they may be at a great strategic disadvantage. Chances are good that the defense already has this information.

For individuals with serious health problems facing them, structured settlements have significant advantages over cash settlements—for who depends on which side is in control.

People with serious health problems, as a group, statistically will live shorter lives than the population as a whole. This fact allows the life carrier underwriting the structure to provide higher periodic lifetime payments to the person with health problems for a given premium payment than would be given to a person with a standard life expectancy. This is called mortality risk, and life insurance companies are in the business of assuming mortality risk.

If the defense negotiates in terms of periodic payments, rather than in the amount it will spend for the benefit of the plaintiff, the defense is in control and will reap the benefit of a rated age. The defense will save on the annuity premium.

If the plaintiff negotiates in terms of how much the defense will spend for the plaintiff’s benefit, rather than in the size of the periodic payments, the plaintiff is in control and will reap the benefit of a rated age. The same amount of premium will produce a greater lifetime periodic payment amount than it would cost for a person who has a normal life expectancy.

To prevent the life insurance company from reaping a windfall in the event the annuitant dies soon after payments begin, the plaintiff should consider a minimum number of guaranteed payments in the structured settlement. If the guaranteed minimum payments will occur during the person’s rated life expectancy, the impact on the payment amount will be minimal. After the guarantee period ends, payments can be set up to continue as long as the measuring life survives.

Prior to settlement negotiations, the plaintiff’s attorney should engage a broker to submit medical records to the underwriters of several companies for the purpose of obtaining a rated age. The Field Underwriters Guide that follows will help determine what medical records will best assist the underwriter in assigning the highest possible rated age. Attorneys are cautioned, however, that the claimant’s consent may be required under the Health Insurance Portability & Accountability Act of 1996 (HIPAA) before private medical records are circulated, either by a plaintiff’s broker or by the defense. See 45 C.F.R. Parts 160 and 164.

Having a rated age allows the plaintiff to know during negotiations how much it will take to provide, for example, monthly income tax-free payments for life with a modest annual increase to help keep pace with inflation. Adding in costs, fees, liens and immediate cash needs, the plaintiff can arrive at a minimum amount that will be accepted in negotiations. Without this information, the plaintiff is operating in a vacuum.

Sometimes, a rated age can serve a legitimate purpose of determining the cost of providing lifetime payments when the measuring life is catastrophically injured and the parties are in wide disagreement over how long the victim will live. In this case, the life insurance company is in a perfect position to settle the dispute by issuing an annuity with guaranteed lifetime payments, purchased at a discount because of a rated age. The cost of the annuity will be somewhere between the present value of lifetime payments based on the projections of the plaintiff, whose lifespan projection typically is the higher of the two, and the lower projection of the defense.

If the plaintiff’s attorney is unaware of how a rated age can affect the annuity’s cost, and never considers it, the defense is in a position to negotiate in terms of periodic payment amounts and not in present-value cash. If the parties agree in terms of future payment times and amounts, the defense is in a position to reduce its cost by shopping for the annuity after the settlement terms are reached.

If no cost was represented by the defense, the plaintiff may have no recourse as long as the benefits are paid as promised. If the cost or “present value” was stated or otherwise implied, and turns out to be less, the plaintiff may have a cause of action for fraud. See Macomber v. Travelers Property and Casualty Corp., 804 A.2d 180 (Conn. 2002) (defendant or insurer must not only provide payments as promised but must also spend what it represented as the cost); and Lyons v. Medical Malpractice Insurance Ass’n, 286 A.D.2d 711, 730 N.Y.S.2d 345 (2d Dept. 2001) (contractual privity exists in a settlement, and intentional or negligent misrepresentation of an annuity’s cost by the defense constitutes fraud).

But, if the plaintiff’s attorney doesn’t even consider a rated age when the client’s health history suggests an impaired life expectancy, the short-changing may never be detected.