Structured Settlement Blog

Medicare indemnification request by defense counsel is unethical - Florida Bar Staff Opinion 30310

Fri, 18 Nov 2011 09:47:53 -0800

A lawyer should not agree to personally indemnify an opposing party, as it violates Florida rules and a lawyer should not require that another attorney enter into an agreement to personally indemnify an opposing party, as that also violates Florida Rules of Professional Conduct. This was the finding of Florida Bar Staff Opinion 30310, issued on April 4, 2011.

The context for this opinion was "whether an attorney representing a plaintiff in a personal injury matter under a contingency fee agreement may personally sign a settlement release containing a hold harmless and indemnification agreement in favor of the opposing party which would obligate the plaintiff's attorney to indemnify and hold harmless the defendant for any future liability under the Medicare Secondary Payor Act ...'MSPA'."

Paraphrasing the opinion, it said that the Federal Government may recover past paid benefits and future medical expenses it may pay resulting from the injury to a plaintiff in some third party claims or litigation. Defendants and their insurance carriers must report to Medicare third party claims settlements. Damages may be recovered against the defense and plaintiff attorneys if the MSPA's requirements are not followed.

In workers' compensation claims, claimants must repay the Federal Government for past payments. Medicare is considered a secondary payer for any future medical expenses arising from that claim. Settlement proceeds are to pay for claim-related future medical expenses first, and a Medicare Set Aside "MSA" may be used for that purpose.

In third party actions, if the plaintiff does not repay Medicare for past expenses, or does not appropriately take Medicare's future interests into account, this may lead to liability for the defendant. Additionally, due to ambiguity on Medicare's part, it is not clear if an MSA is required for future medical expenses stemming from torts and third party actions. This has led some defense attorneys to request hold harmless and indemnification language to protect them, the defendant and the insurer from potential liability under the MSPA.

With the above as background, the question in front of the Florida Bar ethics counsel was, "May plaintiff's counsel, at the request of defendant's counsel, agree to hold harmless and indemnify a defendant from third party claims arising out of defendant's settlement payments to plaintiff, including a potential claim by Medicare resulting from liability under the Medicare Secondary Payor Act?"

The opinion considered several items.

1. Financial Assistance to Client. Under Rule 4-1.(e), an attorney cannot provide financial assistance to a client except for advancing court and case expenses and the attorney may pay for such expenses for an indigent client. The opinion found that the indemnification and hold harmless given by plaintiff's counsel is not a court cost or litigation expense and therefore it is prohibited by this rule.

2. Conflict of Interest - representation. The opinion found that it is a conflict of interest between plaintiff's counsel and the client to enter into such an indemnification agreement under Rule 4-1.7(a)(2). This is, "because it creates a substantial risk that the representation of the client would be materially limited by the lawyer's personal interest in not having to pay the client's debt."

3. Avoid being a party to client's settlement agreements. The opinion generally stated that unless the agreement covers the lawyer's release of a claim for legal fees, the lawyer should generally avoid being a party to a client's settlement agreement.

4. Violates ethics rules. The Florida opinion cites an Indiana ethics opinion which said, "in cases not involving Medicare and Medicaid, settlement agreements that require a lawyer to indemnify the opposing party violate ethics rules and [the Indiana opinion] did not answer whether that would be the case with Medicare and Medicaid settlement agreements."

5. Defense lawyer should not ask plaintiff's counsel to sign. Citing Rule 4-8.4(a) the opinion says that "a defendant's lawyer should not request that the plaintiff's lawyer enter into such an indemnification agreement." This rule says a lawyer shall not, "violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so though the acts of another."

The Florida Bar ethics counsel's conclusion that a lawyer should not agree to personally indemnify an opposing party and that a lawyer should not require another attorney to enter into an agreement to personally indemnify an opposing party, has some interesting practical possibilities.

One obvious item is how will Florida defense counsel now protect themselves, the defendant and the insurer from the possibility that a plaintiff may not pay back a Medicare lien and may not take Medicare's interests into account for future medical payments.

Also, it will be interesting to see the rationale that other state bar associations will use to when ruling on this same ethical question.

Here is a link to the full opinion. Download Florida Bar Staff Opinion 30310. 4-4-11. Unethical 4 DC to request indemnification on MSP from PC

Structured Settlement article on cbsnews.com

Tue, 08 Nov 2011 09:54:23 -0800

This is a good article about Structured Settlements. The quote by Professor Christopher Coyne, a St. Joseph's University finance professor is very insightful. He said, "Conventional investing logic doesn't apply for plaintiffs in injury or wrongful death accidents. Guaranteed income is vital and few have experience creating plans to meet this need."

Since a structured settlement annuity is the only investment that can provide safe, secure, income-tax free, management-free, payments that cannot be outlived, it is an investment vehicle that should be carefully considered in personal physical injury and wrongful death actions.

This fixed-income allocation is especially critical for catastrophically injured plaintiffs, minors, those who are now disabled or unemployable, and those without the training, experience, education and track record of investing large amounts of money to last a lifetime.

http://www.cbsnews.com/8301-505123_162-20128479/some-structured-settlements-may-offer-significant-advantages/?tag=mncol;lst;1%20#comments

American General Life Insurance Company

Mon, 02 Mar 2009 13:58:40 -0800

AIG recently posted Frequently Asked Questions regarding recent news and American General Life Insurance Company.

Frequently Asked Questions
March 2, 2009

Q. AIG announced a significant fourth-quarter loss and a restructuring of its organization. What can you tell me about this?
A. American International Group's (AIG) fourth-quarter and 2008 year-end results reflected the organization's worsening financial condition. At the same time, AIG and the Federal Reserve Bank of New York announced an overhaul of the government loan, which includes a renegotiation of the terms, as well as a restructuring of the organization. The plan provides access to additional financial backstops should market conditions persist, deteriorate or should the company seek to undertake certain types of divestiture or recapitalization activities. AIG's liquidity needs have been significantly stabilized since last November and they are not drawing upon these backstop facilities at this time.

These announcements by no means end AIG's financial difficulties, however, they afford the company more time to sell assets in order to repay the loan, and hopefully in a better economic environment. For more information, the full press releases are available at www.aig.com.

Q. What does the AIG restructuring mean to American General Life Companies?
A. American General Life Companies (American General) now has the time and flexibility to wait for market conditions to improve and to explore all options available to the business. What will not change is our commitment to our policy holders. Strict regulations ensure that our insurance companies set aside sufficient assets to back up each insurance policy, and these companies remain strong and well capitalized. Policy holders will be fully protected throughout the restructuring process.

Q. What can you tell me about the announcement that AIG will securitize part of the domestic life companies' policies?
A. AIG announced that it will reduce the debt it owes the government, in part, by securitizing a defined block of in-force life insurance policies underwritten by its domestic life companies. This means that AIG will issue senior certificates to the U.S. government, which will in turn sell these certificates when market conditions stabilize or continue to collect the cash flows from the underlying policies.

This securitization program will in no way affect the day-to-day operations of any of our insurance companies and does not prevent the future sale of American General's businesses. We will continue to write new business, administer policies and serve our customers and distribution partners. Our obligations to policy and annuity owners will not change, and our member insurers remain strong and well capitalized.

Q. Is my policy safe?
A. Yes. Our insurance companies remain strong and well-capitalized. We have ample reserves and capital to meet our long-term obligations to policy holders. We continue to operate normally, serving our clients with professionalism and integrity.

Q. Can you tell me more about how policies are protected?
A. Insurance is a highly regulated industry. All insurance companies doing business in the United States are regulated by state law, and required to maintain enough capital and surplus to satisfy their obligations to their policy holders. The type and quantity of investments in which insurance companies may invest surplus capital is also limited by state law.

Although various companies owned by American International Group, Inc. (AIG) are part of a larger insurance holding company system -- including American General Life Companies insurers -- each company is individually responsible for the liabilities associated with the business that it sells. In addition, each insurer is individually regulated by its state of domicile for compliance and financial solvency independent of its parent or affiliates. This includes ongoing financial reporting to the regulator and undergoing periodic financial examination.

In accordance with state insurance requirements and investment guidelines, an insurer's general account is primarily invested in highquality investment grade fixed income securities (bonds). The investment objective of the general account is to optimize yield, adjusting for credit risk, liquidity and liability characteristics.

State insurance regulations are substantial and are designed to preserve and enhance the solvency of each insurer's general account and to assure that the contractual obligations to its policy holders are fulfilled. These regulations, along with the conservative investment requirements, help to safeguard policy holders.

It is important to note that the guarantees related to individual American General Life Companies insurers' life policies and annuity contracts are backed by the general account of the respective issuing companies. These general accounts support only the obligations of American General Life Companies insurers and are not obligated to support any other AIG businesses. If you would like to see what the state insurance regulators and the National Association of Insurance Commissioners have to say on this matter, please go to What The Experts Say

Q. What are your current ratings?
A. The ratings web page provides ratings of the American General Life Companies, as of March 2, 2009. For more detailed information, please visit the individual rating agency Web sites through links provided on the ratings page.

Q. What do ratings mean?
A. Independent ratings agencies, such as A.M. Best and Standard & Poor's, provide opinions on an organization's ability to meet its financial obligations to its policy holders, creditors and shareholders. Generally there are two components to ratings - a credit rating and a financial strength rating. Credit ratings, or longterm debt ratings, are an evaluation by the ratings agencies of the creditworthiness of an organization and its ability to pay its short- and long-term debt. Financial strength ratings are an evaluation by the ratings agencies of an insurer's ability to meet its obligations to its policy holders.

Q. Someone has approached me about surrendering my American General Life Companies insurance policy or annuity contract. What should I do?
A. Be sure to have all the facts before making a decision about your insurance policy or annuity contract. Here are a few reasons why keeping your current policy or contract is likely the best choice for you:

If you cancel your policy or contract, you may subject yourself to surrender charges that could diminish its cash value.
If your health has changed since you bought your current insurance policy, a new policy could cost you more ... or you may even be turned down for a new policy.
If you are older now than when you purchased your current policy, your premiums will likely be higher.

Q. Would the sale of one or more of the insurers of American General Life Companies impact policy holders?
A. No. The insurance policies written by one of our insurers are the direct obligations of that underwriting company - not AIG or any prospective buyer. The sale of an insurer does not change its obligations to its policy holders. Our commitment to customer service remains the same, and we continue to strive to exceed your expectations in everything we do. Our customer service centers are available to assist you with questions or policy maintenance issues.

Emergency Economic Stabilization Act of 2008 - Senate version

Fri, 03 Oct 2008 13:55:31 -0800

Here is the text of the Emergency Economic Stabilization Act of 2008, the version that the House voted on and passed on October 3, 2008.

Download emergency_economic_stabilization_act_of_2008_senate_version.pdf

Emergency Economic Stabilization Act of 2008 - link

Sun, 28 Sep 2008 13:52:22 -0800

The text, summary and a section-by-section document of the Emergency Stabilization Act of 2008 may be found at http://financialservices.house.gov/.

AIG filing allows "going private"

Tue, 16 Sep 2008 13:49:37 -0800

American International Group, Inc. filed an amendment today with the SEC that may allow a "going private" transaction and allows former AIG chairman Maurice Greenberg to protect his shares. AIG filed Schedule 13D that allows CV Starr, who has retained Perella Weinberg Partners LP, to advise "Reporting Persons" on a myriad of financial options. Besides the "going private" transaction other options include "acquisitions of assets from" AIG, loans, further investments in AIG, seeking board of directors, exploring a "merger, proxy solicitation, tender offer, exchange offer or otherwise", and considering strategic plan items.

The filing further states that CV Starr may engage in discussions or cooperate with management, the board of directors and other AIG shareholders, and or other relevant third parties.

The filing also allows Reporting Persons to sell or transfer common shares, enter into "public or private transactions" and use privately negotiated derivative transactions, and stock options to hedge the market risk of their stock positions.

These actions are subject to appropriate laws including state insurance regulatory laws.

The entities listed as signing the form include, Maurice R. Greenber, Edward E. Matthews, Starr International Company, C.V. Starr & CO. Inc., Universal Foundation, Inc., The Maurice R. and Corinne P. Greenberg Family Foundation, Inc., Maurice R. and Corinne P. Greenberg Joint Tenancy Company, LLC, and C.V. Starr & Co., Inc. Trust.

http://www.sec.gov/Archives/edgar/data/5272/000135982408000022/schedule13da.htm

Structured Settlement Factoring Guide Updated

Sat, 17 Nov 2007 13:46:40 -0800

The Guide to the Transfer of Structured Settlements Annuities has been updated by the National Association of Women Judges. See the news release http://www.primenewswire.com/newsroom/news.html?d=131589 for more information.

It was written by two judges along with an executive of J.G. Wentworth, a factoring company. J.G. Wentworth is listed as a "Gold Sponsor" to the National Association of Women Judges. A gold sponsor contributes $30,000 a year over 3 years, see NAWJ sponsor list.

For more information about the the guide see National Association of Women Judges website and click progrrams and publications.

Attorney Fees and Private Annuity Rules

Tue, 23 Jan 2007 13:43:56 -0800

In their article entitled "Attorney Fees and Private Annuity Rules" TAX NOTES, January 22, 2007, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=958185 Messrs. Raby and Raby embark on an intriguing discussion on this topic and argue that deferred attorney fees fit under the private annuity rules.

On page 311, item 4. they state that, "We believe that, looking at the economic reality of what has occurred, section 72 is broad enough to treat as annuity contracts obligations calling for payments in periodic installments at regular intervals, especially when the obligor has arranged for actual annuity contracts issued by insurance companies to be used to fund the payments. That is all that a private annuity is - an unsecured promise to make periodic payments over a period of time or for the lifetime of one or more annuitants. Since the attorney has traded his inchoate claim against the client for a third party obligation, with the trade being effective when the settlement takes place, the attorney has received an annuity contract."

One should note that the proposed Treasury regulations

http://www.irs.gov/pub/irs-regs/14190105.pdf

are concerned with Section 1001 of the Internal Revenue Code, which provides rules for determining the amount of gain or loss reported from the sale or other disposition of property and not deferred compensation.

Executive Life Policyholders get $295 million distribution

Fri, 05 Jan 2007 13:40:38 -0800

Former Executive Life Insurance Company policyholders who "opted in" will share $295 million in addtional distributions from an arbitration award. This resulted from a dispute being resolved between the National Organization of Life & Health Guarantee Associations and the California Department of Insurance.

See the full press release from the California Department of Insurance:

http://www.insurance.ca.gov/0400-news/0100-press-releases/0060-2007/release002-07.cfm

See also the Business Insurance article on this same topic:

http://www.businessinsurance.com/cgi-bin/news.pl?newsId=9169

468B Single Claimant Guidance Request on Treasury's 2006 Priority Plan.

Tue, 10 Oct 2006 13:38:08 -0800

The Treasury Department has announced that the Society of Settlement Planner's request to clarify section 468B's tax treatment of a single-claimant qualified settlement fund is on their 2006 Priority Guidance Plan. In its August 15, 2006 joint statement it stated that the 264 projects should be completed between June 2006 and July 2007. This request has been with Treasury since June 19, 2003. http://www.irs.gov/pub/irs-utl/2006-2007pgp.pdf.

John McCulloch leaves Allstate for EPS

Wed, 06 Sep 2006 13:35:00 -0800

Allstate Life Insurance Company announced today that John McCulloch, the manager of Structured Settlements at Allstate, has accepted the position of Vice President of Marketing for EPS Settlements. This move is effective September 16, 2006. Ron Johnson, Assistant Vice President of Allstate Life Insurance Company will take over managing the Structured Settlements department. Mr. Johnson has over 20 years of experience as an officer of Allstate Life Insurance Company.

Murphy v. IRS decision and Comments

Fri, 25 Aug 2006 13:30:36 -0800

Here is a pdf of the Murphy v. IRS case Murphy v. IRS --- F.3d --- 2006 WL 24113372, D.C. Cir., Aug. 22, 2006 (Slip opinion No. 05-5139).

There has been an AP wire article on this that was carried in the New York TImes see New York Times . Tax Code on Emotional Damages Tossed. August 22, 2006.

Also there wasn at least one commentary in the financial wires on this topic on August 23, see financial blog reaction to Murphy.

In addition there are several tax and other blogs on this topic. Please see taxprof where many are listed.

Murphy v. IRS: IRC 104(a)(2) nonphysical damages are excludable

Thu, 24 Aug 2006 13:09:48 -0800

Murphy v. I.R.S. --- F.3d --- 2006 WL 24113372, D.C.Cir., Aug 22, 2006 (Slip Opinion No. 05-5139).

Quick summary

What the Murphy court said is if you are emotionally harmed or if your reputation is injured, you get to keep all of the damages and not pay any taxes.

Longer Summary

A federal appeals court ruled that the government cannot tax compensation for non-physical injuries. Citing the Sixteenth Amendment to the Constitution, it ruled that a portion of the tax law, Internal Revenue Code (IRC) § 104(a)(2), is unconstitutional as compensation for a non-physical personal injury is not income because the award is unrelated to lost wages or earnings. It only affects Washington DC, but it will broadly affect civil rights, whistleblower and employment cases.

Implications of the Murphy decision

Here are some initial thoughts:

Assumptions: Don't assume that IRC 104(a)(2) is set in constitutional, legislative or judicial concrete.

Relevance: The Murphy ruling only affects taxpayers in the Circuit Court of Washington DC.

Structured Settlements: There is no change for cases where the origin of the claim is a personal physical injury and the action is based on tort or tort type rights. Therefore it does not directly affect Structured Settlements. Keep in mind the following:

If an action has its origin in a physical personal injury or physical sickness, then all damages (other than punitive damages) that flow therefrom are treated as payments received on account of physical injury or physical sickness whether or not the recipient of the damages is the injured party. For example, damages (other than punitive damages) received by an individual on account of a claim for loss of consortium due to the physical injury or physical sickness of such individual's spouse are excludable from gross income. In addition, damages (other than punitive damages) received on account of a claim of wrongful death continue to be excludable from taxable income as under present law). Small Job Protection Act of 1996, H.R. 3448, Report of the Committee On Ways and Means, House of Representatives. Report 104-586, 104th Congress 2d Session. May 20, 1996.

See also 26 U.S.C.A. 104(a)(2) and 26 CFR § 1.104-1.

IRS: The IRS has several choices. Among other things, it can appeal the decision, come up with more precise regulations for IRC § 104(a)(2), adopt the ruling nationally, or do nothing.

Plaintiffs: Plaintiffs and their attorneys will rejoice at this ruling, and likely move quickly for similar decisions in other circuits.

Assignment providers for taxable damages: This may affect insurance companies who provide assignments for taxable damages. Since at least now in one Circuit court there is no tax issue to solve by deferring tax-free damages, i.e. damages for non personal physical injuries.

Structured Settlement agents: Structured Settlement agents should be aware of this case especially when considering presenting cases with tax-free damages to potential providers for assignment.

Other types of income: This ruling may also affect some insurance proceeds, and possibly potential damages for loss of reputation to a business and not just to a natural person.

Broader implications: There may some constitutional implications and it may embolden anti-tax groups even though it only covers one small portion of the tax code.

Background of Murphy case

Ms. Murphy filed a complaint that she was blacklisted by the New York Air National Guard and obtained a $70,000 award from an Administrative Law Judge (ALJ) - $45,000 for mental pain and anguish and $25,000 for injury to her professional reputation - which was affirmed by the Department of Labor Administrative Review Board. She declared her award as income and paid taxes $20,665 in 2000. She later filed an amended return and sought a refund. The IRS denied the refund and she sued the IRS.

Murphy's arguments

Murphy made two arguments in her complaint. The first was that her compensatory damage award was for "personal physical injuries" under IRC § 104(a)(2). This argument was rejected by the court. She had claimed "somatic" and "body" injuries as a result of the blacklisting. However, the Government argued and the court concluded that she received the award on account of her mental pain and anguish and for injury to her professional reputation, not for her bruxism (grinding of teeth) or other physical symptoms.

The second argument made by Murphy was that IRC § 104(a)(2) was unconstitutional when applied to her award because her award was not "incomes" within meaning of the Sixteenth Amendment, which allows Congress to "...lay and collect taxes on incomes...". This argument was upheld by the court. The court's ruling hinges on the whether Murphy's compensation is "incomes" as under the Sixteenth Amendment or "gross income" as defined by IRC § 61(a) as the Supreme Court found these two to be "coextensive" in Helvering v. Clifford, 309 U.S. 331, 334 (1940).

Court's analysis

The court went through an historical analysis. It first stated that the taxing power of Congress extended to any "gain derived from capital, from labor, or from both combined", citing Eisner v. Macomber, 252 U.S. 189, 207 (1920). The court then cited Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430-31 (1955) where under the IRC and "by implication, under the Sixteenth Amendment - the Congress may "tax all gains or 'accessions to wealth.'"

Human Capital

The court then supported Murphy's argument that the award was not a gain or an accession to wealth but instead a return of capital -- "human capital" the court argued. It cited Gary S. Becker, Human Capital (1st ed. 1964); Gary S. Beck, "The Economic Way of Looking at Life," 43-45 (Nobel Lecture, Dec. 9, 1992). The court then discussed the concept of human capital and Murphy's and the Government's arguments.

Is compensation for injuries income?

The court then clarified the discussion and focused on a single issue. "The question in this case is not, however, about a return of capital - except insofar as Murphy analogizes human capital to physical or financial capital, the question is whether the compensation she received for her injuries is income".

To determine this, the court looked at whether the award of compensatory damages is "a substitute for [a] normally untaxed personal...quality, good or 'asset'". The "in lieu of test" was used in the court's analysis. The court ruled that the compensation was to make her whole in lieu of something normally untaxed, i.e. to make her emotionally and reputationally whole. Therefore, the court argued that the compensation she received in lieu of what she lost cannot be considered "income" and therefore the Sixteenth Amendment does not allow the Congress to tax the award. This conclusion was however tentative subject to further examination.

Framers' intent

The court further examined whether the framers of the Sixteenth Amendment and Congress when they implemented it, thought that compensatory damages for a nonphysical injury would be "incomes". The court also reviewed an Attorney General's opinion, state legislation at the time and the view of the IRS.

The question the court asked was, "Therefore, we must inquire whether 'the people when they adopted the Sixteenth Amendment,' or the Congress when it implemented the Amendment, would have understood compensatory damages for a nonphysical injury to be 'income.'"

The court concluded that the House Report on the 1918 Act was not helpful, and agreed with the Government's argument that the Attorney General's 1918 opinion and the Treasury's ruling in that same year to support that the Sixteenth Amendment's term "incomes" does not extend to compensation for non-physical injuries. The court cited that 39 of the then 48 states and the District of Columbia in 1913 treated damages recovered for "mental suffering" the same as compensatory damages for a physical injury. Also, the court found cases involving defamation and similar nonphysical injuries in 34 states and five states that allowed alienation of affections, which is also a nonphysical injury. The court concluded that the term "incomes" back in 1913 did not include physical personal injury damages, and therefore it does not include damages for a nonphysical injury unrelated to lost wages or earnings capacity.

The court also considered the conclusion of the IRS when it first looked at this issue. The IRS said that damages for a loss of personal reputation were not income because it was an attempt to make the plaintiff whole. Sol. Op. 132, I-1 C.B. 92, 93 (1922); see also Hawkins v. Commissioner, 6 B.T.A. 1023, 1024-25 (U.S. Bd. Of Tax App. 1927)

Conclusion of Murphy's court

Therefore the court used two lines of reasoning to decide that damages solely for non-physical personal injuries are not income as defined by the Sixteenth Amendment. The first was that compensation for damages such as well-being or reputation are a personal attribute and are therefore not damages received in lieu of income. The second was that the drafters of the Sixteenth Amendment would have said that compensation for nonphysical injuries should not be seen as different from physical injuries, and therefore damages on account of nonphysical injuries should not be income, and therefore not taxable under this amendment. Therefore the court concluded it is unconstitutional for a provision of section of IRC § 104(a)(2) to tax damages that are not earnings or wages.

The case was remanded to the District Court and ordered that the taxes paid be refunded along with interest.

This information is not tax or legal advice and as tax information and laws are ever changing it is advised you obtain professional advice in these two areas.

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Welcome

Thu, 24 Aug 2006 13:03:42 -0800

Welcome to my blog.

I consider myself to be a student of Structured Settlements. One goal of this blog is to relay interesting information about this topic to readers.

Please let me know if I can ever improve on this goal.