Lump-sum damages or periodic payments?

We have all heard of states carrying statutes on their books that have long outlived their usefulness. Arizona has precisely such statutes that have a direct bearing, upon the use of annuities in medical-malpractice cases.

Before the Arizona Supreme Court issued its opinion in Smith v. Myers, any party in a medical-malpractice action could elect to receive or pay future damages for economic losses in periodic payments. A.R.S. § 12-582(A). Future economic losses included such items as medical expenses and lost wages from bodily injury that accrued after trial of a claim. Defendants almost always made that election. A party objecting to periodic payments could prevail only by establishing clear and convincing evidence that good cause existed not to try a claim under the statutes. A.R.S. § 12-583.

The period-payment statutes were adopted to counter increases in medical-malpractice insurance rates. Traditionally, personal injury and wrongful death damages have been awarded in a "Lump Sum" at the conclusion of trial. Thus, the successful plaintiff receives a sum that, if invested at a reasonable interest rate, should provide enough money to cover expenses that may eventually arise.

UPDATE: In our last issue, we discussed the issue of whether voluntary intoxication can act as an exception to the "intentional acts" exclusion in homeowners' and property policies. Although the Arizona Supreme Court denied review of that issue, the court has accepted review to determine whether the burden of proof should rest upon the insurance carrier to prove that the insured had sufficient mental capacity despite being intoxicated or whether the insured bears the burden of proving his or her lack of mental capacity to form an intent to act because of intoxication.

181 Ariz. 11, 887 P.2d 541 (1994).

Under that method, tort victims have immediate access to the full amount of their awards, providing defendants have sufficient assets to satisfy the judgment. Tort victims have neither been required to invest nor to account for the money to anyone, much less to those who caused their injuries. Damages awarded at trial, once paid, immediately became the property of tort victims to do with as they saw fit.

In contrast, under the periodic-payment statutes, future damages were theoretically paid to injured plaintiffs only when those damages accrued. Thus, instead of receiving immediately available lump sums that included compensation for anticipated economic losses, plaintiffs were awarded judgments specifying the amount they were entitled to receive each succeeding week, month or year to cover that period's expected damages.

Under the statutory scheme, defendants, their liability carriers or both were required to provide funding for the future payments. The primary method of providing funding was to purchase annuity contracts from "qualified insurers." Alternatively, defendants or their liability carriers could bind themselves to make payments when due, if the defendants or carriers met the Statutory requirements. Either way, a plaintiff received a promise to pay in the future instead of a lump-sum award.

While medical providers and their liability carriers applauded the statutes, the Arizona Supreme Court could not reconcile the statute with article 2, section 31 of the Arizona Constitution, which provides that "[n]o laws shall be enacted in this State limiting the amount of damages to be recovered for causing the death or injury of any person." Despite the safeguards the Arizona legislature attempted to build into the periodic-payment statutes, the court found a number of faults. First, because the full amount of an annuity is not presently available for a beneficiary's use, it has less immediate worth than a lump-sum payment.

In addition, the court found that annuities carry other risks that further lessen the value of a structured pay out. The most serious of those shortcomings is that the obligor on the annuity may face insolvency before the plaintiff recovers all sums to which he or she is entitled. According to the court, "both recent history and good sense teach us that no commercial institution, not even a large insurance company that today appears financially strong, is immune from the uncertainties of the marketplace."

The court found the problem was compounded by the fact that, in the event of a default, a malpractice victim has little recourse. Once funding was provided and approved by the court, the defendants were discharged and their liability-insurance carriers were deemed to have satisfied the obligation to pay damages. Thus, the victims' only remedy may be against the insolvent company that issued the annuity.

The Arizona Court of Appeals acknowledged the problem but decided it was substantially reduced by the trial court's retention of jurisdiction to oversee the payment of judgments. The Supreme Court, however, disagreed. The court noted that the periodic-payment statutes do not explicitly grant such power. Furthermore, even if the laws could be interpreted to allow a plaintiff to petition for early disbursement of funds, that approach would likely be too expensive and time-consuming to meet immediate needs. Not only would the plaintiff be forced back into court, but also the Supreme Court assumed that annuity companies would aggressively resist any alteration of their contracts without the assessment of substantial monetary penalties against the beneficiaries.

Finally, the Supreme Court found that the periodic-payment statutes limited damages in yet another way. If an injured medical-malpractice victim dies earlier than the jury predicted, payments ceased in some instances, even if the total judgment had not been satisfied. When a Court or jury attempted to determine how long a medical-malpractice victim would live and set a value on future economic loss, it did not necessarily follow that actual damages were lessened if he or she died earlier than anticipated. On the other hand, if death occurred later than predicted, the law did not require the medical provider, its insurer or the annuity company to suffer an increase in the amount of the earlier judgment. "When any estimate of future loss proves to be incorrect, common wisdom and sound public policy dictate that the error should inure to the benefit of the tort victim rather than the tortfeasor. Yet, the periodic-payment statutes would seem to be working in the opposite direction."

For all the reasons that the Arizona Supreme Court found the periodic-payment statutes so objectionable, medical providers and their insurance carriers favored the statutes and almost always elected to pay future damages for economic losses in periodic installments. Although the statutes are still on the books, they have essentially passed into oblivion because of the Supreme Court's ruling that they limit the recovery of damages in violation of the Arizona Constitution. The court noted, that a plaintiff in a tort action may always voluntarily agree upon a "structured settlement" that includes future periodic payments or the purchase of an annuity. "Such person has an opportunity to accept or reject the risk associated with the arrangement."

Christopher Robbins is a senior member of the law firm of The Cavanagh Law Firm, practicing in appellate, insurance coverage and insurance bad-faith litigation. He can be reached at (602) 263-2796 or at crobbins@cavanaghlaw.com.
Theresa Franks is a senior litigation paralegal with The Cavanagh Law Firm, and is an active member of The Cavanagh Law Firm's Year 2000 Task Force. She can be reached at (602) 263-2537 or at tfranks@cavanaghlaw.com.