Structured Settlements: Are They Right for You?

September 4 2018

Most of the time, when a plaintiff is injured and awarded damages by the courts, a lump sum payment will be ordered. Essentially, what this means is that the court will total all of the damage amounts from the various heads of damage that were awarded, such as general damages or cost of future care, and the total amount of money is ordered to be paid to the plaintiff all at once. However, on occasion the courts will order a structured settlement. A structured settlement is a settlement agreed to between the parties where the plaintiff receives the amount of their damages on a periodic, scheduled basis. There are both positives and negatives to receiving your damage settlement in this fashion.


When will the Court Order a Structured Settlement?

The Supreme Court of Canada discussed structured settlements in Watkins v. Olafson. The Supreme Court determined that the courts cannot order damages payable by a structured settlement unless there is legislation that permits it or both parties agree. The court will have the ultimate discretion as to whether or not a structured settlement is appropriate, and they will not order damages to be paid in this way unless they deem it to be in the best interests of the plaintiff. One of the considerations that the court will look at is the likelihood that the plaintiff will go through their entire lump sum payment in a short amount of time if they are to receive that much money all at once: a structured settlement alleviates this fear.


What are the Advantages and Disadvantages to a Structured Settlement?

  • Structured settlements provide a plaintiff with certainty, as the plaintiff is guaranteed to receive the same amount of money on a regular basis (usually monthly).
  • Perhaps the most significant advantage to receiving your damage award as a structured settlement instead of a lump sum is that the plaintiff will receive the monthly payments tax-free: no income tax will be paid on the periodic sums. If the plaintiff receives their settlement as a lump sum, the court will generally order that the money be invested. This investment of damages will earn interest. Canada Revenue Agency requires that the plaintiff pay income tax on the interest that is earned from their invested lump sum damage settlement.
  • In addition, when a lump sum damage settlement is invested, there is usually a cost associated by way of a payment to the party who manages the money. Structured settlements do not generally have this type of management fee.
  • Another advantage of a structured settlement is that the award is set out in a contract that is non-assignable. What this means is that the money is protected from creditors and is protected in the event of a matrimonial breakdown.
  • Generally, structured settlements take inflation issues into account and provide for increased payments to meet and provide adequate protection against inflation.

In the recent Alberta case of  S. (K.) (Litigation representative of) v. Willox the plaintiff requested a structured settlement, and the defendant did not argue against it. In this case, the plaintiff was an infant; one of the advantages to a structured settlement was that the court did not need to determine the child’s life expectancy, like they would have done if the award were for a lump sum; if the infant had died sooner than was projected, a lump sum amount may have turned out to be excessive. In addition, there would not be a tax gross-up on future costs of care in a structured settlement.

However, even if it appears a plaintiff is an ideal candidate for a structured settlement, courts can order that the money be paid as a lump sum and placed in the hands of a trustee to manage on the plaintiff’s behalf, as in the Alberta case of Labrecque v. Heimbeckner. This is because a major downfall of a structured settlement is that it can be difficult to predict a plaintiff’s needs in the future. Therefore, it can be an impossible task for a court to create a schedule of periodic payments that will meet the requirements of the plaintiff in the future. For example, assume that the structured settlement payment amounts are simply meeting the plaintiff’s basic needs every month, but do not leave a lot of money left over as savings. If the plaintiff suffers a setback one month and requires additional care, they won’t have the funds they need at that time to meet their increased needs. In addition, placing the lump sum in the hands of a trustee ensures that a plaintiff will not dissipate the funds and thereby not leave enough for their cost of future care. By their very nature, structured settlements are not flexible and do not allow a plaintiff to make choices for themselves as to how they will spend their damage award. Once an award is made as a structured settlement, it cannot be liquidated into a lump sum in the event that a plaintiff needs emergency cash.

If the court is considering a structured settlement award, it must be assured that the award is secure. These types of awards are usually financed by annuity contracts issued by a life insurer. The court must be satisfied that the insurer is viable and has the financial strength necessary to meet the lifelong commitments under the annuity contract.


Which Type of Settlement is Right for Me? 

Whether a plaintiff decides they would like a lump sum damage award or a structured settlement is specific to each person, and will depend on the facts of their particular situation. Whatever type of award is made has certain risks associated with it, and courts have stated that it is not possible to conclude which type of settlement is riskier.

If you have been injured and you have questions about whether a structured settlement or lump sum damage award is right for you, contact CAM LLP for a free consultation to discuss the best type of settlement to meet your future needs.