Critical Questions of Due Diligence in Annuity-Based Structured Settlements
By Richard G. Halpern
Although annuity-based structured settlements have accounted for more than 95% of all structured
settlements, recent developments have resulted in changes that may have profound implications for
plaintiffs counsel attempting due diligence in deciding whether to recommend a particular proposal. In
this installment of "Direct Examination," we address the critical questions in determining the proper
course of action.
Q: How have plaintiffs counsel evaluated the security of proposed annuities in the past?
A: Before 1990, plaintiffs counsel concerned about the safety of structured settlement annuities would
usually consult the Bests rating (Alfred M. Best & Company, Oldwick, NJ) of the annuity issuer in
question. Many attorneys would accept only A+ ratings, but the majority of attorneys (as well as courts
in infant and incompetent cases) would accept annuities with a Bests rating of A or higher. The late '80s
and early '90s saw the use of additional rating services for confirmation of safety, including Standard &
Poors, Moodys, and Duff and Phelps.
Q: Did this constitute due diligence?
A: Certainly. Prior to 1991, nothing had occurred that would cause a logical person to question the
approach. Until the failure of Executive Life, reliance on the ratings services as an indicator of future
stability was a method that had proven effective over the years.
Q: Are the financial ratings services a valid basis for determining the future financial stability of annuity
A: No, because the recent failures of highly-rated annuity companies have demonstrated that the ratings
are not an accurate measure of future stability.
In May of 1989, Bests gave the Executive Life Companies their highest rating of A+, and Standard &
Poors gave them their highest rating of AAA (Bests introduced the A++ as their highest rating sometime
in 1992). Yet two years later, in April of 1991, the Companies