A federal appeals court recently ordered the United States to make good on a structured annuity the former Executive Life Insurance Company of New York (ELNY) was paying to a burn victim.
The U.S. Court of Appeals for the Federal Circuit ruling overturned a lower court decision in favor of the government in the lawsuit brought by the family of Trevor Langkamp.
The decision calls attention to the security of long-term annuity promises when an insurance company goes out of business. ELNY was liquidated in August 2013 by the New York superintendent of financial services.
Trevor Langkamp was 17 months old when he suffered severe burns at a property owned by the Department of Army in April 1980. In 1982, Joseph P. and Christina Sue Langkamp, Trevor's parents, filed a complaint under the Federal Tort Claims Act, alleging that the accident was caused by negligent maintenance of the property.
On Nov. 15, 1984, the government and the Langkamps reached a complicated settlement that involved a series of payouts and a structured annuity. The parents received $350 a month until Trevor turned 18, at which time he received a monthly $3,100 payment for life.
The agreement included several lump sum payments as well, culminating in a $1 million payment to Trevor on Dec. 15, 2028.
The U.S. government purchased two structured settlement annuities through ELNY and payments were made for many years. Then Executive Life began having financial problems.
According to a 1994 report, Executive Life Insurance Company (ELIC), the parent company of ELNY, invested 55-60% of its portfolio in high-yield, noninvestment-grade corporate bonds, also known as "junk bonds." At the time, the average insurance company investment in these bonds was between 7% and 11%.
When the junk bond market lost substantial value in 1989, so did investors. In 1991, ELIC was declared insolvent and taken over by the California insurance commissioner. ELNY entered into a state-approved rehabilitation program in 1992, part of which included selling its block of life insurance business to MetLife.
ELNY continued to do business until December 2011, when more than 1,500 annuitants received notices from the New York Liquidation Bureau that their benefits would be severely cut, with some seeing a reduction of more than 60%.
The recipients of these letters had one thing in common – all had received an ELNY annuity as a result of the settlement of a personal injury or wrongful death lawsuit.
A judge approved a liquidation plan for ELNY cut more than $920 million of payments owed to its annuitants.
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The Langkamps received their regular structured annuity payments through July 2013. After ELNY's assets were transferred to Guaranty Association Benefits Company, the Langkamps were informed that their benefits were being cut about 43%.
After seeking the shortfall amount through failed negotiations with the U.S. government, the Langkamps sued in July 2015.
In 2017, Judge Lydia Kay Griggsby ruled for the government, writing that "the plain language of the Settlement Agreement at issue in this case demonstrates that the government has not unequivocally agreed to guarantee the monthly and periodic lump-sum payments required under the agreement."
A three-judge appeals panel heard the Langkamps' appeal in late 2019 and issued a unanimous opinion reversing the dismissal order, remanding the case to the lower court for further proceedings consistent with the reversal.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.