Financial Matters
Financial Matters:
Reducing Your Malpractice Insurance Premiums
July 2003
W e’re routinely asked by physicians throughout the country to answer questions on a variety of topics. However, in our combined experiences, we’ve never been as inundated with calls as we have in the last year regarding the malpractice insurance situation. Doctors from all specialties and from all regions of the country have called us looking for ways to reduce their malpractice premiums or to find alternatives to their traditional carriers.
From these consultations, some common situations that you can probably identify with have emerged. Consider the following:
• A dermatologist considers paying mid-five figures for tail coverage as he goes to part-time status, while the insurer has just been downgraded from an “A” to a “C” rating. This physician wonders whether spending this kind of money is worth it, and wonders what the chances are that the insurance company will even still exist if he needs it.
• A single specialty group in Virginia struggles to find any type of malpractice coverage. The members are looking at an alternative to completely forego malpractice coverage.
These situations aren’t isolated. But what can be done? What can you as a physician do in response to this malpractice insurance crisis? In this article, we outline a number of alternatives.
Make Asset Protection a Priority
We recommend to physicians that they shield their wealth from potential lawsuits, including malpractice claims. While this has certainly been a priority over the last decade, at no time has it been more important than in this malpractice insurance crisis. Take, for example, the first physician mentioned above, who’s considering tail coverage. If he decides to forego the tail coverage, he absolutely must protect all assets from potential lawsuits -— so he can’t lose them in a malpractice claim. However, even if he does pay that exorbitant tail coverage premium because the financial health of the insurance company is so shaky, he would be very wise to implement an asset protection plan, rather than solely rely on the insurance company.
Because premiums have become so expensive many physicians are considering reducing their coverage from traditional limits to lesser limits. While this may make sense, it’s only part of the equation. If you decide to reduce your malpractice insurance coverage, this goes hand in hand with implementing an asset protection plan -— to protect all of your family wealth. An ideal solution is one that not only reduces your cost of malpractice insurance but also provides the same level of protection for your family. It makes no sense to reduce coverage limits and then leave your personal assets exposed to lawsuits and creditors. That’s why asset protection is so important.
While an in-depth discussion of the tools and strategies that asset protection professionals use is beyond the scope of this article, we’ll list a number of tactics here. However, as with insurance planning, you must implement these strategies and tools before there’s a problem.
Consider the following four strategies for protecting your assets:
1. Shield the practice’s most valuable asset –— its accounts receivable (AR) — through a leveraging or enhanced factoring strategy. Often, this can create significantly more after-tax retirement wealth, in addition to protecting the AR from medical malpractice claims.
2. Shield the practice’s equipment and/or real estate. Do this by implementing limited liability companies (LLCs) to own the real estate or equipment, leasing back the assets to the operating practice.
3. Protect personal assets through the use of state and federal exemptions. States vary greatly on the types and levels of protection they offer (contact us for more information on the protections offered in your state).
4. Protect assets through the use of legal entities. These include options such as family limited partnerships (FLPs), trusts and “debt shields.”
Once your practice and personal assets are properly shielded, you gain a tremendous level of flexibility. No longer financially exposed to a malpractice claim, you’ll now have the ability to lower coverage limits (and the resulting premiums). Further, there’s evidence that by protecting yourself and having lower coverage you become less of a lawsuit target in the first place. Simply put, you no longer have a “pot of gold” for the plaintiff at the end of their lawsuit rainbow.
Opt for a Captive Insurance Company
A captive insurance company is one created by the physician owner(s) to insure their medical practice. Often, this company may use a third-party “fronting company” to write the initial malpractice policies, which then are reinsured to the physicians’ captive. In this way, the profit on the insurance business, as well as the investment on the reserves, are held by a company ultimately owned the physicians.
This tactic can be extremely profitable, if the physicians can avoid claims. In that case, they enjoy a tremendous windfall by re-capturing a significant portion of their premium payments (plus compounded investment gains). This is especially so if the captive is created under one of the tax provisions that give extremely beneficial tax treatment to small insurance companies — particularly those created under tax §501(c)(15). In fact, the tax benefits are so significant for physicians that we’ve often written articles and spoken on this topic for the tax benefits alone.
Consider Closely Held Insurance Companies
A close cousin of the captive, the closely-held insurance company isn’t owned by one group of physicians (who own the insured medical practice), but rather by a group of physicians -— perhaps in the same practice area or geographic area.
Essentially, in this scenario, a large number of doctors who are fed up with the present malpractice insurance situation band together to create their own risk pool and insurance company.
Personally, we’ve consulted on projects like these for large groups of anesthesiologists in New York, as well as a large group involving multi-specialties in a number of areas of the South. As the malpractice crisis continues, and perhaps worsens, we see the large closely held insurance company as a real alternative for large physician groups.
Take Action
Certainly, all physicians agree that the present situation requires some action. Most doctors with whom we speak or consult are frustrated because they don’t know what that action should be.
This article provides a couple of brief ideas on what that type of action might be. We encourage you to contact us if you would like more information on this topic.
For a free copy of a special report, “What to Do About the Medical Malpractice Crisis,” call (800) 554-7233.
Christopher Jarvis, M.B.A., and David Mandell, J.D., M.B.A., are co-authors of The Doctor’s Wealth Protection Guide, and co-founders of Jarvis & Mandell, LLC with offices in Los Angeles and New York (see www.jarvisandmandell.com). You can reach Chris Jarvis in California at (888) 317-9895 or David Mandell in New York at (800) 554-7233.
W e’re routinely asked by physicians throughout the country to answer questions on a variety of topics. However, in our combined experiences, we’ve never been as inundated with calls as we have in the last year regarding the malpractice insurance situation. Doctors from all specialties and from all regions of the country have called us looking for ways to reduce their malpractice premiums or to find alternatives to their traditional carriers.
From these consultations, some common situations that you can probably identify with have emerged. Consider the following:
• A dermatologist considers paying mid-five figures for tail coverage as he goes to part-time status, while the insurer has just been downgraded from an “A” to a “C” rating. This physician wonders whether spending this kind of money is worth it, and wonders what the chances are that the insurance company will even still exist if he needs it.
• A single specialty group in Virginia struggles to find any type of malpractice coverage. The members are looking at an alternative to completely forego malpractice coverage.
These situations aren’t isolated. But what can be done? What can you as a physician do in response to this malpractice insurance crisis? In this article, we outline a number of alternatives.
Make Asset Protection a Priority
We recommend to physicians that they shield their wealth from potential lawsuits, including malpractice claims. While this has certainly been a priority over the last decade, at no time has it been more important than in this malpractice insurance crisis. Take, for example, the first physician mentioned above, who’s considering tail coverage. If he decides to forego the tail coverage, he absolutely must protect all assets from potential lawsuits -— so he can’t lose them in a malpractice claim. However, even if he does pay that exorbitant tail coverage premium because the financial health of the insurance company is so shaky, he would be very wise to implement an asset protection plan, rather than solely rely on the insurance company.
Because premiums have become so expensive many physicians are considering reducing their coverage from traditional limits to lesser limits. While this may make sense, it’s only part of the equation. If you decide to reduce your malpractice insurance coverage, this goes hand in hand with implementing an asset protection plan -— to protect all of your family wealth. An ideal solution is one that not only reduces your cost of malpractice insurance but also provides the same level of protection for your family. It makes no sense to reduce coverage limits and then leave your personal assets exposed to lawsuits and creditors. That’s why asset protection is so important.
While an in-depth discussion of the tools and strategies that asset protection professionals use is beyond the scope of this article, we’ll list a number of tactics here. However, as with insurance planning, you must implement these strategies and tools before there’s a problem.
Consider the following four strategies for protecting your assets:
1. Shield the practice’s most valuable asset –— its accounts receivable (AR) — through a leveraging or enhanced factoring strategy. Often, this can create significantly more after-tax retirement wealth, in addition to protecting the AR from medical malpractice claims.
2. Shield the practice’s equipment and/or real estate. Do this by implementing limited liability companies (LLCs) to own the real estate or equipment, leasing back the assets to the operating practice.
3. Protect personal assets through the use of state and federal exemptions. States vary greatly on the types and levels of protection they offer (contact us for more information on the protections offered in your state).
4. Protect assets through the use of legal entities. These include options such as family limited partnerships (FLPs), trusts and “debt shields.”
Once your practice and personal assets are properly shielded, you gain a tremendous level of flexibility. No longer financially exposed to a malpractice claim, you’ll now have the ability to lower coverage limits (and the resulting premiums). Further, there’s evidence that by protecting yourself and having lower coverage you become less of a lawsuit target in the first place. Simply put, you no longer have a “pot of gold” for the plaintiff at the end of their lawsuit rainbow.
Opt for a Captive Insurance Company
A captive insurance company is one created by the physician owner(s) to insure their medical practice. Often, this company may use a third-party “fronting company” to write the initial malpractice policies, which then are reinsured to the physicians’ captive. In this way, the profit on the insurance business, as well as the investment on the reserves, are held by a company ultimately owned the physicians.
This tactic can be extremely profitable, if the physicians can avoid claims. In that case, they enjoy a tremendous windfall by re-capturing a significant portion of their premium payments (plus compounded investment gains). This is especially so if the captive is created under one of the tax provisions that give extremely beneficial tax treatment to small insurance companies — particularly those created under tax §501(c)(15). In fact, the tax benefits are so significant for physicians that we’ve often written articles and spoken on this topic for the tax benefits alone.
Consider Closely Held Insurance Companies
A close cousin of the captive, the closely-held insurance company isn’t owned by one group of physicians (who own the insured medical practice), but rather by a group of physicians -— perhaps in the same practice area or geographic area.
Essentially, in this scenario, a large number of doctors who are fed up with the present malpractice insurance situation band together to create their own risk pool and insurance company.
Personally, we’ve consulted on projects like these for large groups of anesthesiologists in New York, as well as a large group involving multi-specialties in a number of areas of the South. As the malpractice crisis continues, and perhaps worsens, we see the large closely held insurance company as a real alternative for large physician groups.
Take Action
Certainly, all physicians agree that the present situation requires some action. Most doctors with whom we speak or consult are frustrated because they don’t know what that action should be.
This article provides a couple of brief ideas on what that type of action might be. We encourage you to contact us if you would like more information on this topic.
For a free copy of a special report, “What to Do About the Medical Malpractice Crisis,” call (800) 554-7233.
Christopher Jarvis, M.B.A., and David Mandell, J.D., M.B.A., are co-authors of The Doctor’s Wealth Protection Guide, and co-founders of Jarvis & Mandell, LLC with offices in Los Angeles and New York (see www.jarvisandmandell.com). You can reach Chris Jarvis in California at (888) 317-9895 or David Mandell in New York at (800) 554-7233.
W e’re routinely asked by physicians throughout the country to answer questions on a variety of topics. However, in our combined experiences, we’ve never been as inundated with calls as we have in the last year regarding the malpractice insurance situation. Doctors from all specialties and from all regions of the country have called us looking for ways to reduce their malpractice premiums or to find alternatives to their traditional carriers.
From these consultations, some common situations that you can probably identify with have emerged. Consider the following:
• A dermatologist considers paying mid-five figures for tail coverage as he goes to part-time status, while the insurer has just been downgraded from an “A” to a “C” rating. This physician wonders whether spending this kind of money is worth it, and wonders what the chances are that the insurance company will even still exist if he needs it.
• A single specialty group in Virginia struggles to find any type of malpractice coverage. The members are looking at an alternative to completely forego malpractice coverage.
These situations aren’t isolated. But what can be done? What can you as a physician do in response to this malpractice insurance crisis? In this article, we outline a number of alternatives.
Make Asset Protection a Priority
We recommend to physicians that they shield their wealth from potential lawsuits, including malpractice claims. While this has certainly been a priority over the last decade, at no time has it been more important than in this malpractice insurance crisis. Take, for example, the first physician mentioned above, who’s considering tail coverage. If he decides to forego the tail coverage, he absolutely must protect all assets from potential lawsuits -— so he can’t lose them in a malpractice claim. However, even if he does pay that exorbitant tail coverage premium because the financial health of the insurance company is so shaky, he would be very wise to implement an asset protection plan, rather than solely rely on the insurance company.
Because premiums have become so expensive many physicians are considering reducing their coverage from traditional limits to lesser limits. While this may make sense, it’s only part of the equation. If you decide to reduce your malpractice insurance coverage, this goes hand in hand with implementing an asset protection plan -— to protect all of your family wealth. An ideal solution is one that not only reduces your cost of malpractice insurance but also provides the same level of protection for your family. It makes no sense to reduce coverage limits and then leave your personal assets exposed to lawsuits and creditors. That’s why asset protection is so important.
While an in-depth discussion of the tools and strategies that asset protection professionals use is beyond the scope of this article, we’ll list a number of tactics here. However, as with insurance planning, you must implement these strategies and tools before there’s a problem.
Consider the following four strategies for protecting your assets:
1. Shield the practice’s most valuable asset –— its accounts receivable (AR) — through a leveraging or enhanced factoring strategy. Often, this can create significantly more after-tax retirement wealth, in addition to protecting the AR from medical malpractice claims.
2. Shield the practice’s equipment and/or real estate. Do this by implementing limited liability companies (LLCs) to own the real estate or equipment, leasing back the assets to the operating practice.
3. Protect personal assets through the use of state and federal exemptions. States vary greatly on the types and levels of protection they offer (contact us for more information on the protections offered in your state).
4. Protect assets through the use of legal entities. These include options such as family limited partnerships (FLPs), trusts and “debt shields.”
Once your practice and personal assets are properly shielded, you gain a tremendous level of flexibility. No longer financially exposed to a malpractice claim, you’ll now have the ability to lower coverage limits (and the resulting premiums). Further, there’s evidence that by protecting yourself and having lower coverage you become less of a lawsuit target in the first place. Simply put, you no longer have a “pot of gold” for the plaintiff at the end of their lawsuit rainbow.
Opt for a Captive Insurance Company
A captive insurance company is one created by the physician owner(s) to insure their medical practice. Often, this company may use a third-party “fronting company” to write the initial malpractice policies, which then are reinsured to the physicians’ captive. In this way, the profit on the insurance business, as well as the investment on the reserves, are held by a company ultimately owned the physicians.
This tactic can be extremely profitable, if the physicians can avoid claims. In that case, they enjoy a tremendous windfall by re-capturing a significant portion of their premium payments (plus compounded investment gains). This is especially so if the captive is created under one of the tax provisions that give extremely beneficial tax treatment to small insurance companies — particularly those created under tax §501(c)(15). In fact, the tax benefits are so significant for physicians that we’ve often written articles and spoken on this topic for the tax benefits alone.
Consider Closely Held Insurance Companies
A close cousin of the captive, the closely-held insurance company isn’t owned by one group of physicians (who own the insured medical practice), but rather by a group of physicians -— perhaps in the same practice area or geographic area.
Essentially, in this scenario, a large number of doctors who are fed up with the present malpractice insurance situation band together to create their own risk pool and insurance company.
Personally, we’ve consulted on projects like these for large groups of anesthesiologists in New York, as well as a large group involving multi-specialties in a number of areas of the South. As the malpractice crisis continues, and perhaps worsens, we see the large closely held insurance company as a real alternative for large physician groups.
Take Action
Certainly, all physicians agree that the present situation requires some action. Most doctors with whom we speak or consult are frustrated because they don’t know what that action should be.
This article provides a couple of brief ideas on what that type of action might be. We encourage you to contact us if you would like more information on this topic.
For a free copy of a special report, “What to Do About the Medical Malpractice Crisis,” call (800) 554-7233.
Christopher Jarvis, M.B.A., and David Mandell, J.D., M.B.A., are co-authors of The Doctor’s Wealth Protection Guide, and co-founders of Jarvis & Mandell, LLC with offices in Los Angeles and New York (see www.jarvisandmandell.com). You can reach Chris Jarvis in California at (888) 317-9895 or David Mandell in New York at (800) 554-7233.
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