Property and Casualty Insurance

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The Mixed Blessing of Property and Casualty Insurance
As principals of a financial firm that provides all types of financial planning, business consulting, insurance analysis and product implementation, a number of the authors of this book, including the attorney co-authors, are very familiar with the benefits of insurance.
We all see Property and Casualty (P&C) insurance as an important part of any asset protection plan—both for the practice and personal assets. In this chapter, we will define P&C insurance coverage and discuss its uses and limitations in the context of asset protection planning.
What Is P&C Insurance?
There are two “categories” of insurance: Life and Health (L&H) and Property and Casualty (P&C). L&H insurance includes all life insurance and health insurance, as well as disability insurance and long term care insurance. P&C insurance is designed to protect against property and casualty losses. Often, P&C insurance is referred to as “property and liability” insurance because it protects people from all types of liabilities. Examples of P&C coverage include: auto-mobile, homeowners and renters, umbrella liability, professional liability, medical malpractice, general liability, flood, earthquake, premises liability, errors and omissions, products liability, and others.
P&C insurance is designed to “indemnify” the insured. The insurance industry’s definition of “indemnify” is to “make whole” or to restore the status quo. In other words, if you suffer a loss and have P&C coverage, you will be “put back” into the same financial place you were before the loss (minus any applicable deductibles or co-payments). As such, P&C coverage will cover your legal bills and other loss adjustment expenses, as well as the actual loss. These other expenses may include the costs of adjusters, estimates, expert testimony, or other associated costs.
P&C insurance coverage is very important given today’s litigious society and the “American Rule” of legal fees. As mentioned before, there is no out of pocket cost (or deterrent) to the plaintiff under this system, yet the defendant is responsible for the actual loss and associated fees. Therefore, if you didn’t have P&C insurance but still won your case, you still might have tens—if not hundreds—of thousands of dollars in legal fees and related expenses. As such, it is usually worth buying insurance to avoid these costs and the inconvenience and aggravation, let alone the potential judgment or loss.

A photo by Vadim Sherbakov. unsplash.com/photos/Hi9GSwWkCJkBest Uses Of P&C Insurance
As we mentioned above, there are various types of P&C insurances. The most common P&C insurances are homeowners (or renters) and automobile insurance. Average Americans generally have these forms of coverage because they have a mortgage on their home or because they have a loan or a lease on a car. Yet, in a way, one does not own the home or car yet—the bank or credit department does. As such, they require collateral. Buyers must insure the asset while they are paying for it. Once the debt on a home or car is paid off, there is no bank or finance company requiring insurance protection. Of course, we would never recommend completely dropping all insurance on the home. The odds are very slim that they will suffer a house fire or burglary, but the costs of insurance are very small relative to what clients could lose.
Another common type of P&C insurance is the umbrella liability policy. For a very reason-able premium, you can get an additional one to five million dollars of excess liability insurance on top of the liability protection you may have from your homeowners or auto policies. You should seriously consider an umbrella policy.
Other popular P&C coverage includes professional liability insurance and premises and products liability insurance. As a physician, medical malpractice insurance, premises liability insurance, and other overhead insurances are wise options, if not requirements.
Four Limitations Of P&C Insurance
While some P&C insurance always makes sense as part of the asset planning for every Doctor, there are limitations to this tool. That is why we typically recommend using the other asset protection tools we describe in this Lesson, in addition to any insurance. Let’s examine these limitations individually.

1. Policy Exclusions
Often we find that clients are completely unaware of the “fine print” P&C exclusions and policy limitations. Of course, they often become aware of such exclusions after it is too late. For example, many clients fail to realize that their “umbrella” policy only applies if certain underlying insurance coverage amounts are in effect. If your liability limits on your homeowner’s policy or auto policy are too low, then you’ll have to pay out of pocket before the umbrella coverage is in effect.

Case Study: Andy’s Daughter’s Car Accident
Andy was sued for more than $150,000 when his teenage daughter was involved in a car accident while using his car. Andy was certain that his insurance policy covered his daughter. Only then did his insurance agent tell Andy that the policy no longer covered his daughter, since she had recently moved out of the house. There was an exclusion from coverage for child drivers if they did not reside in the same residence as the parents. Now, Andy alone faced a lawsuit which cost him over $150,000.
The lesson to be learned from Andy’s story is simple: Know your policy and the limitations contained therein!

2. Inadequate policy limits
Even if your insurance policy does cover you on a particular lawsuit, the policy coverage may be well below what a jury will award. You must pay any excess above the coverage out of your own pocket. If you were hit by a large judgment, would your policy cover you completely?

3. Insurance forces you to lose control of the defense
Even if your insurance policy covers against a specific claim, you must consider the consequences of filing a claim. You have lost negotiating power because your insurance company will dictate when the case is settled and how much the case settlement will be. While this may not matter with a personal injury car accident lawsuit, a case against you professionally is another matter. Here you More

Buy-Sell Agreement

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The One Contract Your Practice Must Have
Though the odds of a premature death of a practice partner are not high, the same cannot be said about a life changing disability. Because both of these risks can have such devastating effects on the finances of the practice and the future income of the remaining healthy partners, we find it troubling that so few Doctors properly address this risk.
A medical practice is a business. As such, it is created for the purpose of generating financial benefit for its owners. Practice CEOs are supposed to take calculated risks and manage these risks to maximize long-term after-tax income. There is no excuse for them to completely ignore the potentially devastating risk of disability or death of physician-partners. Are you the de facto CEO of your practice? If so, how are you protecting against these risks?
Most states prevent non-Doctors from owning professional medical practices. This is certainly true in California. California Business and Professions Code Section 2052 provides that “any person who practices or attempts to practice, or who advertises or holds himself or herself out as practicing… [medicine] without having at the time of so doing a valid, unrevoked, or unsuspended certificate…is guilty of a public offense, punishable by a fine, by imprisonment in the state prison, by imprisonment in a county jail not exceeding one year, or by both the fine and either imprisonment.”
Additionally, California Business and Professions Code Section 2400 provides that “corporations and other artificial legal entities shall have no professional rights, privileges, or powers.” The policy expressed in Business and Professions Code section 2400 against the corporate practice of medicine is intended to prevent unlicensed persons from interfering with, or influencing, the physician’s professional judgment.
This means that, as compared to a regular business owner, a Doctor building a medical practice is not generally building wealth for his or her family. If you want to ensure that you do build wealth for the family through your practice and actually turn your practice into a “wealth building engine” for your family, you must draft, fully-execute, and fund a Buy-Sell agreement.
In this chapter, we will discuss the reasons why a premature death or disability of a partner is such a big risk and what the financial repercussions are of failing to address this issue. We will then discuss the “medicine” for such an ailment—the Buy-Sell Agreement. We also address the importance, and method, of funding the agreement and how to work with the right team of advisors. With all of this knowledge, you should be motivated and prepared to address this important issue in your practice.

Always Expect The Unexpected
As owners of a professional practice, Doctors can spend 10 hours per day, six or seven days per week getting their practices to the point where the practice provides a measure of security for their families. We know, because we have been there ourselves. Nonetheless, those who ignore one fundamental legal contract jeopardize all of their hard work. This very important legal contract is the Buy-Sell agreement. This is an agreement that all owners sign, agreeing how the practice will be valued at the time of one partner’s death or disability, and how the purchase of the shares will be paid.
Without a Buy-Sell agreement, partners and remaining families have no guidelines as to how a practice will deal with an early death or the disability of a physician-owner. At a time when the family is grieving or caring for a disabled family member and possibly struggling to pay their bills, they will look to the remaining partners’ practice to help them in their time of need. At the same time, the remaining partners may be struggling to get by without the services of a valuable partner. The last thing either of these two groups need is a struggle over money. In too many cases, the absence of a Buy-Sell agreement at the time of death or disability can cause bankruptcies for the families of all of the partners. More