Successful business owners and doctors face many different kinds of risks. The following real story* illustrates significant exposures in one physician’s planning.
Failure to Adequately Insure and Implement Legal Planning
I was personally involved in this case earlier this year as an anti-fraud consultant. A doctor’s husband was at fault in a car-pedestrian accident and struck and seriously injured someone walking their dog in the neighborhood and the medical bills and other economic losses incurred by the victim quickly exceeded $500,000, the limits of the doctor’s automobile liability insurance policy. Sadly, the defendant couple had been insured for a greater amount the year before and had canceled their $1 million umbrella policy, presumably to save $400 a year.
Their insurance carrier quickly agreed to pay the limits of their policy and when they realized they’d be personally liable for medical bills, pain, and suffering and other claims, the physician and her spouse went on a “fraudulent transfer” fire drill. They set up an LLC for the office building held in their own names, quit claimed the condo they had purchased for their son to use while in college to him, tried to equity strip their home and incorrectly claimed that the $900,000 vacation home they held as “tenants in common” in another state was unavailable to their creditors. All these moves (except keeping a full equity vacation home in your own name) would have been reasonable, prudent and fully legal if they had been properly done in advance of any problem. In this case, not only were their 11th hour moves ineffective against the existing exposure, they created additional jeopardy in the form of civil and even criminal penalties up to the level of a felony for engaging in conduct designed to delay, hinder or defraud a known creditor. Once the facts were explained to them and the legal counsel advising them on this issue at pre-trial mediation, they quickly wrote a check for $550,000 from their retirement savings to add to the policy limits of their insurance policy and wisely settled the case to avoid very significant additional liability in both the form of an award and in the required costs of defense, which would have easily been six figures.
Important Planning Lessons:
We’ve previously discussed that asset protection and risk management are always proactive and the single biggest mistake that doctors make in their own asset protection planning is doing nothing. You cannot plan against a pre-existing exposure or manage risk after a problem, you can only manage crisis, which is always more dangerous and expensive. Doing so is not only legally ineffective, it is illegal, can create additional civil and criminal penalty risk and even deprive you of your rights to other remedies, like bankruptcy.
Insure Until It Hurts
I’ve previously provided an article on why umbrella policies are vital basic asset protection for everyone, as well as a separate discussion on why umbrella policies on their own are insufficient protection. Insurance, perhaps after compliance and following best practices in all areas, is the first and most predictable and effective line of defense. As mentioned above a specific incident can create multiple exposures including both the award itself and the legal fees required to obtain adequate legal representation. A $1 million personal liability umbrella policy is the bare minimum every doctor should have, ideally more.
Pay Attention to How Assets are Titled
Relying on some form of tenancy is not a substitute for real legal planning that gets assets into appropriate legal wrappers like trusts and LLCs, as two common examples. In this case, as our defendant doctor and her husband are in a community property state, both of them were named with the following result:
1. All their jointly held community assets were put at risk. Like many couples, they married young and the majority of their wealth was earned during the marriage and was exposed regardless of whether titled to her, him, or both of them.
2. The nearly $1 million vacation home, although outside the state, was fully available to the injured plaintiff who had a claim against both of them.
3. The vehicle was fortunately not owned by the medical practice, as it would have been sued as well.
*Actual example, only identifying details have been intentionally changed to preserve the privacy and attorney-client privilege of those involved.