This article first appeared in the autumn 1997 issue of the Expert Witness.
Unlike their American counterparts, property and casualty insurers in Canada typically (in compliance with Revenue Canada’s Information Bulletin, IT-365R2 dated May 8, 1987) remain liable to pay the periodic payments payable under terms outlined in the settlement agreement. They, effectively, become a guarantor of the life insurance company that underwrites the annuity contract(s) issued in support of the agreement.
The ownership obligations transcend its simple performance as a back-stop to the annuity contract. The property/casualty insurer, as owner and annuitant (beneficiary), must deal with the accrual tax ramifications of the internal interest component of the annuity contract. As an insurance company, however, it has access to the right to take a reserve under Section 1400(e) of the Rules and Regulations in the Income Tax Act (Canada). Since the interest build-up in the annuity contract is approximately equal to the increasing obligations of the defendant insurer to make future payments to the claimant, the two become a virtual wash and the tax cost to the insurer virtually disappears.
What options exist for the non-insured defendant to a personal injury action? Are such entities simply denied access to the structured settlement option as a method of resolving a personal injury or wrongful death action? The problems faced by such a defendant are twofold; the first is that, because it is not an insurer, it may lack the internal expertise to assess the risk that may be involved with the continuing obligations under the terms of the settlement agreement; and secondly, without access to Section 1400(e), it would be responsible for the tax liability arising out of the annuity and unable to take a write-off for the obligations to make future payments to the claimant.
Revenue Canada now permits a defendant to “assign” it’s contingent ownership rights and obligations inherent with the annuity contract and the performance requirements contained in the settlement agreement to a qualified assignee. Under the terms of such an assignment the defendant shall agree to absolutely assign to the assignee and the assignee shall agree to absolutely assume and to substitute its performance in respect of the obligation to make the required payments to the claimant. The plaintiff must agree to consent to the absolute assignment and assumption and agree to the substitution of the performance of the defendant for that of the assignee. The plaintiff may then absolutely release the defendant in respect of the liability of the defendant for damages resulting from the injuries or wrongful death.
The result is that self insured defendants now have access to the tax-free periodic payment option to remediate a claim with respect to personal injuries or wrongful death. In addition to the traditional self insured defendants, the beneficiaries of such an arrangement include defendants of product liability actions where aggregate claims exceed available insurance limits. Foreign insurers defending actions in Canada may avail themselves of such arrangements without modification to traditional structured settlement administration wherein they assign their obligations on all such transactions. Most insurers are not prepared to change their internal systems to accommodate the small number of potential claims that they may be required to defend in Canada. Another opportunity to use structured settlements, where without assignments it would be impossible, include criminal assault or abuse situations under which a victim has a right to initiate a civil action.
Plaintiff’s counsel may wish to lean on the structured settlement broker to ascertain the financial covenant afforded by the arrangement. The financial covenant may be better or worse than it would have been were the defendant insurer to remain as owner and guarantor under the terms of settlement. A report delineating the risks versus the benefits may be beneficial. For the comfort of the claimant, counsel may wish to be provided with a precedent Revenue Canada advance tax ruling of the scheme or alternately make application to Revenue Canada for such a ruling.