Uncle Sam seems to have come through for the structured settlement sector. A recent ruling made by the third U.S. Circuit Court of Appeals has allowed individuals to pledge their structured settlement payments as a loan or an assignment, industry sources say.

The latest case, Jaquette vs. CNA, sets an important precedent in the ongoing battle between insurance companies and structured settlement companies over whether settlement payments can be diverted to third-party buyers.

The Court ruled that the anti-assignment clause in a structured settlement is unenforceable because the law does not expressly limit the power to assign structured settlement payments. Thus, the ruling required CNA Insurance Co., a subsidiary of holding company CNA Financial Corp., to forward Jacquette's annuity payments to First England Funding, LLC, a structured settlement purchaser.

"It's an important ruling for the industry," said James Lokey, president and chief executive officer at Settlement Capital Corp., a company that specializes in the purchase of structured settlements for personal injury, insurance annuities and wrongful death settlements. He also noted that the ruling should make it easier for structured settlement companies to enforce their rights and to collect payments when these are diverted.

"Other courts are making the same findings," added Lokey.

He cited two courts in Georgia that held that annuities are contracts subject to the Uniform Commercial Code (UCC) and are not insurance policies. While insurance companies have always maintained that the anti-assignment clause should be applied in structured settlement payments, under the UCC the clause is unenforceable.

He also mentioned that in 1999, 21 states introduced legislation to regulate the sale of structured settlement payments, and that 11 states enacted laws controlling the transfer of these payments.

"These statutes are good for the industry because they ensure the rights of individuals to assign their payments with certain limitations and disclosures," he said. "They also improve our ability to collect on payments, making the bonds more attractive, which should lower spreads and, in turn, provide more money to our customers."

These regulations are part of a greater sector trend.

"The industry is headed toward more regulation through legislative efforts," stated Lokey. "As soon as there is certainty in our ability to buy these settlements without difficulty from the insurance companies, then we will have a more liquid market, and the rates to sellers will go down."

The legislative efforts are also geared toward working with insurance companies. Currently, both the funding companies and the insurance companies are looking to amend Internal Revenue Code 130 (IRC 130) to clarify the tax issue as it relates to these transactions. "IRC 130 is really the code that underpins the entire industry from the insurer's perspective," noted Lokey.

The amendment to IRC 30 would simply codify what the experts have already stated. Insurance would not suffer tax consequences as a result of these third-party transactions.

"The insurance companies, however, want this certainty," said Lokey. "Hopefully we'll be able to do that this year."

Though Lokey does not predict a lot of growth in the industry, he says that about $300 million in structured settlements should be securitized this year.

"The funding companies currently hold that much in their inventory," he stated.

He predicts that in addition to Settlement Capital, Peachtree Settlement Funding, Singer Asset Finance and J.G. Wentworth Advanced Funding will access the private-term market this year.

"Except for Settlement Capital, none of these companies have securitized in the past year," he said. "That's why there's about $300 million in unsecuritized product."

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