Liability insurers charge premiums in exchange for an agreement
to cover certain claims against their policyholders. When settling
a tort claim against a policyholder, the insurance company can pay
a lump-sum of cash or, in some cases, will enter into a
"structured settlement" with the claimant. Here, the
insurance company purchases an annuity (or a stream of payments
over a set period of time) from, for example, a life insurance
company, under which the beneficiary/claimant will receive these
payments to settle the claim. However, the process of buying an
annuity generates certain transaction costs in the form of a
broker's commission payable by the liability insurer to the
life insurance agent. If the liability insurer were to purchase a
stream of payments for the amount owed to the claimant but the
claimant received less than the insurer paid, what should we call
the missing funds: fraud or the price of doing business?
