Without court permission, factored structured settlements are subject to a 40 percent excise tax.

Doug Bates, assistant vice president with the Washington-based American Council of Life Insurers, said that the issue involves the special tax treatment granted to annuities issued to cover structured settlements.

Mr. Bates noted that the earnings on the annuity that cover the structured settlement are not taxable to the individual. One reason for this, he said, is to encourage the use of structured settlements to pay liability judgments.

However, he said, a practice recently emerged in which a company would purchase the stream of payments for the structured settlement from the individual in exchange for cash upfront, a process known as factoring.

However, Mr. Bates said, the tax code says that if an annuity receives preferential tax treatment, as is the case with a structured settlement, the payments cannot be accelerated.

But, he added, there is confusion in the law about the tax treatment of a structured settlement after factoring. It is possible, Mr. Bates said, that the insurance company might be liable for any tax consequences even if the company had no knowledge of the factoring.

John Lobert, senior vice president of state government affairs with the Downers Grove, Ill.-based Alliance of American Insurers, added that factored structured settlements are subject to abuse from unscrupulous companies.

Injured parties, he said, are vulnerable to predatory practices by some third-party companies that acquire structured settlements for a fraction of their true worth.

"This tax penalty will discourage this practice," Mr. Lobert said. "It's truly a win-win for victims and insurers."

Factoring companies in defending the sales have said they provide settlement recipients with cash they need for purposes such as purchasing a home or taking advantage of a business opportunity.