Dispelling the No.1 myth of asset protection

Mar 01, 2008, 5:00am

Certainly, asset protection planning is a crucial part of a client's wealth planning today - especially for physicians. Everyone acknowledges that there is some risk of a beyond-insurance limits lawsuit for any doctor. If this is true, and proper asset protection may actually help you BUILD wealth, then such planning cannot be ignored.

Key Points

As consultants to hundreds of physicians, we encounter many misconceptions about asset protection planning every day. In this article, we will address the most important of all misconceptions regarding asset protection: that this area of planning is not important, because physicians don't lose assets to medical malpractice lawsuits. The thinking of many physicians around the country and, unfortunately, their advisers, is that there is little to no risk of a physician losing his or her personal assets in a malpractice claim, especially if there is the typical $1 million to $3 million in malpractice insurance coverage.

There are a number of key issues in this analysis to review. We will take each one individually.

Finding proper data is difficult

We, like you, like to see data before making judgments or forming opinions.

However, in this area, tracking how many physicians who lose personal assets in malpractice actions is very difficult, if not impossible.

That is because the legal system makes public filed cases and judgments rendered, but does not make public the collections of those judgments.

There are no reporters who publish what happens once a judgment is rendered.

Did the plaintiff, with a judgment in excess of coverage limits, simply settle for the amount of the medical malpractice insurance? Did the plaintiff and his attorney pursue the personal assets of the physician and his family to satisfy any excess judgments? These are questions for which there are no answers in the published materials.

Every week in the malpractice reports we review, there are tens of malpractice actions decided in the states in which we practice.

Most decisions are for the physician defendant, some are small judgments for the plaintiff, and a few, every week, are very large judgments for the plaintiff. This may be the same in your location, as well.

Nonetheless, we can only hypothesize what will occur once these very large judgments are rendered. It seems that many physicians and their advisers simply assume that the plaintiffs in these cases will walk away from very large judgments, and simple settle for the malpractice insurance coverage.

Let's look at a couple of reasons why this may not be so.

Payments, not evictions

A common theme heard in speaking to physicians and their advisers around the country on this topic seems to be, "I have never personally heard of anyone losing their home to a lawsuit." Therefore, the conclusion is that it doesn't happen.

However, if one understands the goal of litigation and the plaintiffs, this certainly isn't surprising. What does occur, instead of eviction, is that the plaintiff with the judgment will file a lien on real estate, levy bank accounts or put liens on them, and essentially put levies or liens on any assets of the physicians to the amount of the judgment owed to them.

The goal is not to kick the physician out of his or her home, but to make the doctor take a loan against the home to pay off the excess judgment. And this, we can assure you, happens with regularity.

Consider this situation - a true story from David's practice:

"In New York, I had a couple come to see me. He was a cardiologist and she an OB/GYN. They said that she, the OB/GYN, had just been successfully sued for a 'bad baby' case in which the judgment rendered against her was $4 million - $2 million more than her personal malpractice coverage. I told him, at the time, that there was nothing I could do, since there was already a judgment.

"While I have not spoken to the client since, I ask you, do you think that the plaintiff and their attorney who rightfully won a $4 million judgment would simply settle for the $2 million of insurance coverage when they could put a lien on the $1.5 million of equity in the defendant's home in a matter of two hours, with the cost to the attorney being about $500?"