Commutation Agreement: Definition, Purpose, and Key Elements

A commutation agreement is a legal document that provides for a lump-sum payment to a beneficiary in lieu of future periodic payments. This type of agreement is most often used in the context of structured settlements, which are court-ordered payment plans that provide compensation for personal injury or wrongful death claims.

If you have been awarded a structured settlement, it means that you will receive regular payments over a specified period of time. However, you may prefer to receive a lump-sum payment instead of waiting to receive smaller sums over time. This is where a commutation agreement comes into play.

A commutation agreement allows you to exchange your future payments for a lump-sum payment from a funding company. The funding company will typically pay you a discounted amount, based on the present value of your future payments. This means that you will receive a smaller amount than the total value of your structured settlement, but you will receive it all at once.

Purpose of a Commutation Agreement

There are many reasons why someone may opt to enter into a commutation agreement. Some of the most common reasons include:

– The need for an immediate lump sum of cash for a large purchase, such as a down payment on a home or business venture.

– The need to pay off high-interest debt or credit cards.

– The desire to invest the funds in higher-yielding opportunities, such as stocks, businesses, or real estate.

– The need to cover unexpected expenses, such as medical bills or repairs.

Key Elements of a Commutation Agreement

When entering into a commutation agreement, it is important to understand the key elements that make up the document. These elements include:

– Payment terms: The agreement will outline the terms of the lump-sum payment, including the amount, the timing, and any fees or expenses associated with the transaction.

– Transfer of rights: The agreement will transfer your rights to receive future payments to the funding company, which will in turn assume the responsibility of making the payments.

– Release of liability: By entering into the agreement, you are releasing the party responsible for making the future payments from any further obligation to pay you. This means that you cannot later seek additional compensation from the original payer.

– Representations and warranties: The funding company will require you to make certain representations and warranties about the structured settlement, including the fact that you are the rightful beneficiary and that there are no outstanding liens or encumbrances on the payments.

– Consent and approval: In most cases, the agreement will require the consent and approval of the original payer, as well as any court that oversees the structured settlement.

Conclusion

A commutation agreement can be a useful tool for those who need cash now rather than later. However, it is important to carefully consider the terms of the agreement and seek the advice of an attorney before signing. With the right guidance and understanding of the key elements, a commutation agreement can provide a much-needed solution for those seeking financial flexibility.