Are Structured Settlements Sharia Compliant?

April 28, 2015

Sharia is the moral code and religious law followed by many Muslims.  We are sometimes asked whether structured settlements are compliant with the requirements of Sharia Law, particularly whether structure payments include interest?

In fact, no part of any structure payment is interest.  Structure payments are agreed upon payments of damages which defendants, or their insurers, agree to make to injured parties to compensate them for their injuries.  Structured settlements usually consist of a lump sum component, paid to the injured party at the time of settlement, as well as further payments of damages, paid over time.  Just as the up-front cash portion is a payment of damages and therefore not subject to income tax, so too is each monthly structure payment.

The payments of damages, to be made over time, are agreed upon amounts determined at the time of settlement and explicitly set out in a schedule of payments (the structure printout), which is attached to and forms part of the settlement documents (Release or Judgment).  In most cases, it is appropriate that the damages should be paid over time, since the effects of the personal injuries will also be experienced over time, in the form of ongoing medical expenses and income loss.

In order to fund these agreed upon periodic payments, the defendant’s insurer purchases an annuity, as an investment/reserve, which it uses to meet its obligation to make the agreed upon payments of damages to the injured party.  While the defendant’s insurer could, theoretically, simply make the periodic payments out of its general funds, the purchase of the annuity is intended to serve as a reserve and ensure that the exact amounts which it requires to make the periodic payments of damages will be available when needed.

Since the defendant’s insurer owns the annuity, any tax advice slip issued in respect of it is, accordingly, issued to that insurer, not the injured party.  No tax advice slip is ever issued to the injured party, because he is receiving payments of damages, not interest. 

In the final result, it would certainly appear that structured settlement payments are in harmony with Sharia Law regarding interest.