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Structured Settlements - How They Work

A structured settlement is a type of settlement normally used in accident and medical negligence claims as an alternative to the payment of a lump sum by the defendant to the claimant.

A structured settlement may have three components. The first is an interim payment (or payments), which is normally set to cover costs and expenses met by the claimant before settlement. This would include medical and legal costs up to the date of the settlement of the claim. The second component is a series of payments, normally met by an annuity, payable in regular instalments in payment of damages. The annuity is normally set up to increase with inflation or at a fixed rate designed to approximate the expected rate of inflation. Lastly, there is a further lump sum to cover contingencies which may not be met by the annuity payment.

The most difficult aspect of the structured settlement arrangements in practice is that relating to the annuity. The main issues are:

  • the expected lifespan of the annuitant, bearing in mind the effect of the injuries suffered;
  • the payment frequency;
  • what the annual increase in the annuity will be bearing in mind that medical care costs have risen faster than the retail prices index (RPI) as a whole (an annuity can be set up to rise by the rate of the RPI or a fixed percentage – normally 3 or 5 per cent);
  • what products and annuity rates are available in the market place;
  • whether the annuity is funded by the purchase of an annuity from an insurer or 'self funded' by the defendant (this is not uncommon where the defendant is a public body); and
  • whether, as is common where the claimant is young and has injuries which do not reduce life expectancy, there is an insurer willing to provide an annuity for life which increases by the RPI.