Defendants are Not Obligated to Cover Annuity Payments in the Case of Carrier Insolvency

Structured settlements most often take the form of fixed payment annuities, for the most part funded by the tort defendant (or its liability insurer) in a wrongful death or personal injury suit, but are the resulting periodic payments always guaranteed to be paid in full? Not necessarily.

In the recent United States Court of Federal Claims decision in Lanclos v. United States, it was determined that a tort defendant is not obligated to pay the shortfall in structured settlement annuity payments to a plaintiff if and when the annuity issuer (here, Executive Life Insurance Company, or ELNY) becomes insolvent. Following a line of ELNY-related decisions, including the recent holdings in Hendrickson v. United States and Langkamp v. United States, the Federal Circuit found that the particular language of the settlement agreement guaranteed that the defendant would purchase an annuity for a set term of years but did not guarantee that the defendant had the responsibility to fulfill any short-fall of those annuity payments as well (this is like Shaw, but unlike Langkamp, in which the Court held that the government-defendant was responsible for the deficit).

In 1986, plaintiff Jennifer Lanclos agreed to resolve a tort settlement with the defendant that “guaranteed” monthly periodic payments for the greater of 30 years and were then to become contingent upon Ms. Lanclos’ life thereafter. The defendant purchased the annuity from now-insolvent ELNY, and although ELNY successfully paid plaintiff periodic payments for nearly 27 years, only a portion of the periodic payments were covered by guaranty association funding after the liquidation. Seeking to recoup the loss of the remaining periodic payments due under the annuity, plaintiff brought suit against the defendant. In doing so, plaintiff argued that the defendant itself guaranteed the periodic payments in the underlying settlement agreement, and subsequently breached that agreement by failing to ensure that all payments were made.

Here, the term “guaranteed” was up for debate. In the structured space, “guaranteed” is often a term of art meaning payments “guaranteed” for a period certain, and then “contingent” on a measuring life thereafter. The plaintiff asked the court to interpret the agreement such that if the defendant “guaranteed” payments, the payments must be made by the defendant to the plaintiff regardless of whether the carrier was able to do so. The Lanclos court declined to do so, holding that “guaranteed” establishes that “an annuity that is measured by an annuitant’s life will continue to make payments in the event of death before the end of the guaranteed period.” While the defendant in Lanclos had agreed to purchase an annuity that would exist for the later of 30 years or until the plaintiff’s death, the agreement did not contain any specific language creating an ongoing obligation for the defendant in the case of issuer insolvency.