ISSUE: WHAT ABOUT LIABILITY INSURANCE? WHY CAN’T WE SIMPLY INSURE OUR WAY TO SAFETY?
This is a reasonable and common question we get from clients and advisors alike. In the most egregious cases of arm-chair quarterback misinformation, we actually see uninformed advisors telling their clients that the only Asset Protection they need is a good umbrella policy – THIS IS FLAT OUT WRONG for the kind of successful people we protect. Why? Because they are successful, visible and typically have assets above and beyond just the insurance policy itself, they are good targets from a net-worth perspective.
1. Our position on Liability Insurance (as distinct from Life Insurance – which will be the subject of part two of this discussion) is pretty simple: Buy as much liability insurance as you can afford, assume it won’t be adequate and have a plan B;
2. 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. As just one state’s example, the top ten civil verdicts in the Sate of Arizona for 2007 ranged in value from $6 million against a pharmacy that dispensed prescriptions that combined to cause a patient’s death to $360,000,000 million on a dispute over a real estate deal. Do you think their E&O coverage applied and was adequate? Here’s the link to the State bar’s article if you want to see it yourself:
http://www.myazbar.org/AZAttorney/PDF_Articles/0608CivilVerdicts.pdf
Just 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 during a party their child had from the drugs he brought with him;
– Chiropractor adjusts a patient’s hip and the woman dies on table from cardiac arrest-he is sued for wrongful death;
– Long time, most trusted employee of medical practice molests a minor female patient during treatment;
– Employees of moving company get drunk and severely beat another employee and lock him in company truck in company yard over weekend;
– LLC for RE development is pierced and a passive member is held jointly and severally liable for the actions of the other members;
– Dentist works on elderly patient who goes home and dies of unrelated heart attack hours later, dentist sued for wrongful death.
3. The 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 insured pay. This is not a value judgment, simply a statement of a simple 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 who take the facts and make a determination as to whether or not the event is covered under your policy or if 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 have even framed their insured and knowingly used vendors like fire inspectors who falsely claimed that fire damage to their insured’s homes and businesses after earth quakes was related to arson and not covered. Another even 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 I help protect to be empowered and to take steps to make the coverage they do have an effective source of protection. Also, if for no other reason, we like seeing the insurance policy in place to cover the costs of defense – which can easily be six figures before the fight even really starts. We have also 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 $1MM insurance policy and the carrier spends $400K defending you, you only have $600K left to pay any resulting actual judgment.
4. SOLUTION – So how do we help make sure that the coverage is enough? Pretty simple – we buy all the insurance we can reasonably afford, 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 MM and the average national liability policy in this area of $1MM. What that means is that the defendant was left holding the bag for $2.9MM.
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 (we hope!) and that there is nothing beyond that policy of any value that you will be able to take from us by force. You may sue, you may win, but you will never collect. If there is an instance of liability that prompts a properly Asset Protected individually to offer some settlement amount above the policy, great, but the defendant decides to do so and the terms they are willing to make the offer under 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 and the monolithic strength of the planning we typically put in place, 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 and hopefully the next defendant who 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 have taken the steps they can, addressed 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. In the end that’s what all good Asset Protection planning really comes down to, taking the right steps at the right time – NOW.