Considering a Structured Settlement? Watch Out for Fraud by ‘Bad Apples’

It’s happened again: Millions in payments to child victims of medical malpractice were stolen by fraud. Before you agree to any structured settlement, take these steps to protect yourself.

A hand holding a red apple
(Image credit: Getty Images)

Your child was the victim of medical malpractice, and after a long legal fight you won a structured settlement. You may be relieved, but don’t let your guard down: The people you trust to set up your annuity payments may be out to steal your money.

It’s rare, but sadly, it does happen. Joe Gargan, CEO of The Pension Company, in June pleaded guilty to embezzling nearly $8 million meant for child victims of medical malpractice injuries. He faces up to 30 years in prison. The Gargan scandal is the second time in three years that a structured settlement broker has been sentenced to prison for crimes involving insurance settlements. In July 2017 Michael Woodyard, a broker with structured settlement company Ringler Associates, pleaded guilty to a $4.6 million insurance fraud and was sentenced to 87 months in prison.

What’s a Structured Settlement?

I strongly support structured settlement annuities for accident victims, workers’ compensation cases and almost anyone settling an injury or wrongful death insurance claim. Plaintiffs can use some or all of their settlement funds to purchase an annuity with a highly rated life insurance company that provides safe, tax-free income. A structured settlement is like having your own pit bull that growls when “family and friends” pressure an accident victim for a loan. The annuity pays a specific amount on a certain time table, preventing the accident victim from becoming his own worst financial nightmare, because the payments can’t be changed.

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With tax rates likely rising, the prospect of long-term tax-free income is incredibly appealing. That's why I have counseled accident clients for years to look at structured settlements' benefits.

However, as the Gargan and Woodyard felonies show, the structured settlement industry unfortunately has its share of bad apples. So, if you're settling an injury or wrongful death claim, here’s how to protect yourself:

Rule No. 1: Avoid the Middleman

Make sure that the settlement money that funds a structured annuity is sent directly to the life insurance company. The critical mistake defendants in the Gargan case made was to send settlement money to his firm, not to the insurers that were to issue the annuities. This allowed Gargan, according to his guilty plea, to embezzle millions while concealing his activity through false documents showing that he had purchased the annuities.

Rule No. 2: Use Your Own Broker

Insist that your lawyer use a plaintiff broker to represent your interests. It's not certain from Gargan's guilty plea whether he represented the plaintiff or defense, though an industry insider tells me that he worked for the defense. I'm also told that none of the cases had a broker representing the plaintiff. If they could have but did not, then attorneys for the accident victims made a huge mistake and could face being sued for malpractice.

As Peter Arnold, a respected structured settlement consultant, correctly notes, "For all but the smallest injuries, plaintiffs and their attorneys should insist on using their own structured settlement consultant in negotiations."

Bottom line: Do NOT rely on the defense's structured settlement broker any more than you would rely on the defense's attorneys! The insurance company issuing a structured annuity pays a commission (typically 4% of the annuity cost) to the broker(s) involved. Your structured settlement broker will receive a portion (often half) of the commission so there's no out-of-pocket cost to the plaintiff.

Rule No. 3: Get Everything in Writing

Deception between an insurer and the defense’s structured settlement broker could cost you. Sometimes the plaintiff’s counsel might rely only on the details provided by the defendant's structured settlement consultant.

You’ve got to make sure your attorney insists that all annuity pricing quotations, including injury details — which can be used to calculate the amount of the annuity — be submitted to you in writing. Your attorney should also insist that the insurer confirm in writing all information supplied by the defendant’s broker. If the defense objects, find a plaintiff’s broker!

Rule No. 4: Watch Out for Unethical Conduct

While I'm a strong supporter of structured settlements, I'm appalled when industry players use obviously unethical practices.

Here’s a nice example of an arguable conflict of interest. For years, Pacific Life Insurance has been running junkets for favored structured settlement brokers at five-star hotels in places like Bora Bora, Dubai and the Maldives. Evidence appears to show that brokers have responded by channeling hundreds of millions in annuity sales to the company.

The losers are the accident victims, who might have been better off with an annuity from a competing insurer, as rates offered by annuity companies vary. (Sens. Elizabeth Warren and Richard Blumenthal, if you're reading this and would like more details, please call my office.)

Brokers who go on life insurance junkets are clearly violating the industry's code of ethics, in my opinion. So, what should your attorney do? Have any broker — for the defense or plaintiff's side — state in writing if they have taken any junkets paid by insurance companies. Also, require an affidavit from the brokers that says:

  1. They do not pay commission rebates to any party or insurer,
  2. They fully disclose age-rating to avoid misrepresenting the true cost of the annuity,
  3. They do not attempt to artificially inflate the value of any settlement by using unrealistic present value calculations.
  4. Finally, they will not provide information about this settlement to any factoring company.

Rule No. 5: Guard Your Private Data

Understand how your private data is protected, and obtain this in writing. Some unethical structured settlement brokers pocket huge sums by selling client information to companies that then contact those clients and promise "quick cash" for selling future payment rights. This can completely destroy one of the main benefits of a structured settlement: preventing the injured person from squandering the money.

The money to be made from selling your information is jaw-dropping. John Darer is another respected structured settlement consultant who writes the industry's all-important Structured Settlement Watchdog blog. He recently reported on structured settlement brokers "trafficking hundreds or even thousands of names of annuitants, details of their annuities, annuity issuer, payment streams and contact information in exchange for hundreds of thousands or even millions of dollars."

Before agreeing to work with a structured settlement broker, have them detail — in writing — how their firm protects your information. If someone at the firm misappropriates your information and you can show it, you can take the firm and the broker to court.

Rule No. 6: Protect Yourself from Yourself

"One of the saddest things I see again and again are accident victims who have essentially been cheated out of the proceeds of their structured settlements,” said New York attorney Edward Stone. “We have all seen television, radio or internet ads which urge cashing in structured settlements. There are times when it makes sense to sell a small part of the structured settlement payment stream, but what I find so cruel are companies that buy every last dollar from someone with serious injuries, very poor judgment, and little or no financial experience who then winds up as a ward of the state.

"Families need to always keep in mind that the structured settlement was created to provide a stream of tax-free payments over many years to help the injury victim live as normal a life as possible. It was not intended to help someone with no business experience, who has had serious injuries and possible mental impairment, put that secure tax-free income stream at risk in a business venture.”

There’s a way to prevent that, says Stone, one of a handful of attorneys in the United States who represents people with structured settlements who have been duped out of their money. Language can be inserted into settlement documents to create something like a spendthrift clause, protecting the victim from making poor financial decisions regarding these funds.

"You do this by stating, ‘Neither the beneficiary of this structured settlement nor any other assignee shall have the power to assign the periodic payments to any third party without a genuine hardship and even then only with the advice of counsel. Any purported assignment in violation of this provision shall be void ab initio. This provision has been inserted at the insistence of plaintiff’s counsel to protect the periodic payments described in the structured settlement agreement from dissipation.’”

Structured settlements are an excellent way to ensure long-term financial stability. But there are bad apples in every industry. Accident victims and their attorneys must protect themselves.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

H. Dennis Beaver, Esq.
Attorney at Law, Author of "You and the Law"

After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, "You and the Law." Through his column he offers readers in need of down-to-earth advice his help free of charge. "I know it sounds corny, but I just love to be able to use my education and experience to help, simply to help. When a reader contacts me, it is a gift."