Common fatal flaws of asset protection planning, Pt. 2
By Ike Devji
PRO ASSET PROTECTION
Editor's note: Part one of this article discussed the best and worse asset protection and preservation planning available. Part two looks at some real-life examples of insufficient coverage and explains how to make sure your clients are adequately covered.
What about my “umbrella” policy?
It is a great idea to have an umbrella policy, but you and your liability carrier have different ideas about what "umbrella" means. To you, it means everything; to your carrier, it means specific events in the base policy, covered to specific increased limits, and governed by a specific set of exclusions detailed in the fine print of your policy. Clearly, two very different definitions. The lesson here is that there is no real way to insure yourself against a universe of possible exposures and have every single one covered to an unlimited dollar amount. Nor is this reasonable to expect of your liability coverage. For example, the top 10 civil verdicts in the State of Arizona for 2007 ranged in value from $6 million against a pharmacy that dispensed prescriptions which combined caused a patient’s death, to $360 million on a dispute over a real estate deal. Do you think their E&O coverage applied and was adequate?
Some real examples of the “impossible” that actually happened and resulted in large claims:
Parents away for the weekend return to find that a teenager died at their home from the drugs he brought with him to a party their child hosted
A chiropractor adjusts a patient’s hip and the woman dies on the table from cardiac arrest — he is sued for wrongful death
A long-time, trusted employee of medical practice molests a minor female patient during treatment
Employees of a moving company get drunk, severely beat another employee and lock him in company truck in company yard over the weekend
An LLC for real estate development is pierced and a passive member is held jointly and severally liable for the actions of the other members
A dentist works on an elderly patient who goes home and dies of unrelated heart attack hours later. The dentist is sued for wrongful death.
The liability insurance business model is a pretty simple one: Take in lots of premium payments, pay as few claims as possible and the difference equals shareholder profit. That’s right; they make money in part by reducing and limiting the number of claims against the premiums that you and the other insureds pay. This is not a value judgment, simply a statement of a straightforward business equation. As you know, the first thing that happens when you make a claim is that you spend time on the phone with a variety of people at the insurance company. These people take the facts and make a determination as to whether or not the event is covered under your policy, whether it can be excluded from coverage or if the amount of available coverage can be reduced by some percentage because of some contributory negligence by you, the insured. In some of the most egregious cases, the insurance companies framed the insured and knowingly used vendors like fire inspectors who falsely claimed that fire damage to the insured’s homes and businesses after earthquakes was related to arson and not covered.
Another put “Deny, Delay, Don’t Pay” on the cover of the training manuals they give their adjusters so that they can “paperwork” people and their valid claims to death. Does this mean we should give up and not carry insurance or only carry minimal coverage? Of course not. It just means that the insurance system, like most things, is imperfect and that we need to be aware of this. We want those we help protect to be empowered, and to take steps to make the coverage they do have an effective source of protection.
For example, we like seeing the insurance policy in place to cover the costs of defense that can easily be six figures before the fight even really starts. We have seen changes in how the coverage limits are calculated, such as in some of the malpractice liability policies that many of our thousands of physician clients must carry. These changes include making the coverage limits inclusive of the cost of defense. What this means is that if you have a $1 million insurance policy and the carrier spends $400,000 defending you, you only have $600,000 left to pay any resulting actual judgment.
So, how do we help make sure that the coverage is enough? Pretty simple. We buy all the insurance we can reasonably afford, and make sure we have the appropriate riders and umbrellas in place. Then we present a hard, uncollectible target beyond the limits of the policy. Most, if not all, lawsuits are motivated by the potential financial gain to the plaintiff and their attorney. As just one example, examine the gap between the average national medical malpractice verdict of around $3.9 million and the average national liability policy in this area of $1 milion. This means the defendants were left holding the bag for $2.9 million. In most cases, plaintiffs and their attorneys don’t chase people beyond the limits of the policy if there is nothing else to take or if there is nothing that they can get their hands on with any reasonable certainty. A properly protected individual is uncollectible, at least for the most-part.
We want to present a deterrent and make it clear to the plaintiff that we have this policy in place that covers this event and that there is nothing beyond that policy of any value to them that they will be able to take from us by force. They may sue, they may win, but they will never collect. If there is an instance of liability that prompts a properly asset protected individual to offer some settlement amount above the policy, great, but the defendant decides to do so on their terms, as opposed to being held up at the point of a gun by a verdict and an unsympathetic jury.
When faced with the scenario of an uncollectible defendant, what would you do? If you are like most plaintiff’s attorneys — especially those of the contingency fee variety — you settle and move on to the next case. Hopefully the next defendant is an easier target, because you won’t, as the attorney, get paid unless you win and collect. People who are protected in the way we and others in our business suggest take the steps they can, address the exposure to their family’s wealth in a responsible manner, and move on with their lives and work and practice in their chosen profession as fearlessly as possible.
This article scratches the surface of what you need to consider when evaluating your exposures, asset protection planning and the countless options available. I encourage you to act today, seek experienced counsel, and keep looking for more light and information that will help make sure you and your family get to keep and enjoy the fruits of your labors. Remember it’s not just what you make, it’s also what you keep!