Asset protection: malpractice and business insurance for the solo medical doctor

Asset protection for physicians is a emotional subject.  Many physicians are scared out of their mind they will lose it all in a malpractice lawsuit.  As practice owners we have other ways we can get sued- for the responsibilities of running a business such as discrimination against employee, wrongful termination, data breach, fraudulent insurance claims, etc. This post is a continuation of my personal insurance post and focuses on basics of retirement plans, malpractice and business insurance.

Before you form some complex offshore trust or put everything you own in whole life insurance, think of the simplest and easiest strategies.  The strongest form of asset protection is…. retirement plans.  I hope everyone on this thread is maxing out their $56,000 in 401K or SEP IRA contributions. There is also a huge tax advantage to this. In the future we will publish posts about the ins and outs of retirement plans for small or solo medical practices.

I also hope everyone is doing a backdoor Roth IRA– that’s another $6000 of asset protected money every year.  I’ve been doing the backdoor Roth since 2010- with growth in my investments this is about $60 grand that is not only asset protected but I will never have to pay capital gains taxes on it! Some of us that have lots of employees may find it too expensive to match them to max out their 401K to get this asset protection. I have given examples in our google group and will post them.

As an aside, IRA protections vary by state but 401Ks are ERISA and more bulletproof. So 401ks have advantage over IRAs.  But I don’t want to pay the higher fees associated with a 401k and can exclude matching my employee until 2021 so I use a SEP. But everyone’s situation is different.  If your company has a 401K, great.  If you have a SEP IRA like me I can move the money into my previous employer’s 401K, if the plan is written to allow incoming transfers from IRAs, not all are, and enjoy the higher asset protection.  You can’t move backdoor Roths into a 401K.  

A solo 401K is NOT ERISA so doesn’t have as high protection as a group 401K.  If you move money out of your previous employer’s 401K into a IRA it should (could?) still carry the same protection as long as you don’t comingle the funds with other IRAs.

If you have kids you should be maxing out their 529 accounts with post tax money.  Just like retirement plans this not only does this give you tax advantages but also asset protection depending on state. One shrewd strategy is to contribute 5 years upfront ($70,000) the year your kid is born for more years of tax free growth.

Everyone should have umbrella insurance. What umbrella insurance does is extend the limits of your auto and homeowner’s liability insurance.  You would purchase umbrella insurance through the same company that you bought your auto and homeowner or business insurance.  You would have to max out your auto and homeowner’s liability limits to $300,000 and then purchase umbrella insurance .  It’s not even $600 per year to increase your limits to 4 or 5 million. My business insurance has a liability limit of $2 million; I did not purchase any extra umbrella insurance as there is some protection from my LLC.

If you own real estate, be it a investment second property or your office building, or a boat or airplane it’s often wise to put it in its own LLC.  That way say if it’s a rental property and you get sued because your tenant held a party and someone fell off the second floor and died and the limits exceeded your landlord’s policy they could usually only go after the value of the house, not your personal assets.  Same for office building, if you own it and a construction beam hits someone in the head they can typically go after only the value of the building and not your assets if in a LLC.

Homestead (home equity) and life insurance vary state by state.  I am in the school of thought that crooked life insurance salesmen use emotions to scare doctors into buying expensive high commission whole life insurance products to line their own pockets under the guise of asset protection.  At some point, it isn’t worth giving up say 20% of your assets to protect the other 80%. It’s not like 20% of doctors are losing their shirt.

I think a living trust or family trust is very reasonable for most of us, but this is more for asset transfer to our families without probate rather than for asset protection.  So if anyone tries to tell you that you need a irrevocable trust or offshore trust and they haven’t asked you if you do a backdoor Roth IRA and max out your kids 529 accounts, they are surely fleecing you.

Also, student loans aren’t dischargeable in bankruptcy. If your student loans exceed your other net worth, you definitely don’t need asset protection. Anyone who is trying to sell something to you in the guise of asset protection is clearly ripping you off.

I’ve read that there is not a significant amount of case law both on the asset protection and tax advantages of some of the more complicated structures such as FLPs and asset protection trusts.  And a irrevocable trust means you have no control over the assets which is worrisome to me.  Foreign trusts aren’t for me, as I hear there are a lot of sharks out there.  If I am ever worth more than $10 million then I might start exploring these avenues. 

The biggest risk to your assets isn’t malpractice, or a auto accident, or a slip and fall at your business… it’s actually your spouse.  According to a recent study, 25% or so of physician marriages end in divorce, which is less than the general population.   So think twice before titling everything in your spouse’s name.  I don’t claim to understand every nuance about titling assets as JTWROS (joint tenants with right of survivorship), but I’ve heard that this serves as some level of protection.  I live in AZ which is a community property state anyway so all community property assets are at risk anyway.

Other things to do to minimize your risk:  if you ever serve on a board of directors (even as medical staff) you can be held personally liable for their actions- run it by your attorney and make sure there are as many indemnification clauses as possible, or there is officers’ liability insurance; don’t own any aggressive pets; don’t text and drive (personally I don’t even use the cell phone hands free when I drive); avoid serving alcohol at parties at your house; if you have teenagers definitely don’t let them touch the alcohol if they have parties at your house and consider delaying their drivers license.

Finally, just to show what the risks of malpractice actually are for ophthalmology, look at the following slides (below).  OMICs top payments were for pediatric patients, mostly ROP claims.  Only four of the claims from OMIC are above the $1 million limit that most of us carry; all of them are on pediatric patients.  The other slide shows some claims for lasik patients.  Median claims for cataract/ retina etc run under $150,000; for ROP the median is $575,000.  I’m not discounting that we should make every effort to practice good medicine, document carefully, have good rapport with our patients, etc, and I’m not minimizing the patients who were harmed by medical errors, but the reality is that a malpractice claim is extraordinarily unlikely to exceed our limits. Unless you are doing routinely lasik on patients with ectasia or running a telemedicine ROP clinic. If you’re really that worried, why don’t you just increase your malpractice limits rather than buy some complex financial product that you don’t understand with high commissions? I’m not sure but think some companies actually discourage higher limits as this means plaintiffs will go for more. On the other hand, if your spouse does neurosurgery or high risk OB you might have more to worry about or buy higher limits.

Several years ago I reviewed my business insurance coverage and found the following gaps. The first gap I found is a now- owned auto policy. Your employee is traveling from the main office to your satellite office for afternoon clinic, or picking up office supplies, and is on the cell phone with his/ her kid and T bones someone. Guess who is liable? Even if the employee has auto insurance, if they choose to have liability limits of $30,000 (the minimum in most states), and hit a pregnant woman with three kids in the car, guess who they’re going after with the $1,000,000 claim? I have read, and my insurance company told me when you as the owner is driving to or from a business meeting or from the surgical center to the office- say you are texting and rear end someone, if the case goes to discovery and they find you are traveling for business purposes- your business is held liable.

The solution to this: non- owned auto policy. I was quoted $117 per year to make the limits the same as my business liability insurance (the liability insurance itself doesn’t cover autos- yours might be different- ask your company). So my limits are $2mil/$4 mil (also note I feel these limits are high enough so I don’t need umbrella insurance). Also in you employee handbook you should write that “absolutely no texting, phone calls even when hands free while on company time or running business errands” to reduce the risk something may happen. This is personal to me- I’ve actually been rear ended twice since I went solo, once on loop 101 at 70 mph, fortunately I walked away unscathed.

The second gap I found was EPLI- employment practice liability insurance. Generally speaking, it covers discrimination, wrongful termination, and sexual harassment. Someone in our google group said he had to fire his office manager for hitting on his employees. Well, if they sued guess who would be liable? See this link for details.

My business liability insurance already covers up to $10,000 without a deductible. Hartford recommends you get coverage of $50,000 per employee, but that would have a deductible, and I still have one employee. My agent told me the price can vary. You should get a quote and decide what works best for your situation.

Obviously, good hiring practices with background checks, good documentation of employee behaviors and a strong employee handbook are helpful. The survey Hartford sent me to get a quote actually specifically asks if I have a written employment application, an employment at will statement, policies and procedures in place regarding sexual harassment and discrimination, regular performance evaluations.

The final gap is a cyber attack. Even if your practice management system is online, take note. Most of you probably don’t know that as part of your OMIC (Ophthalmology malpractice insurance) policy you have up to $100,000 of coverage- including notification, providing credit monitoring, regulatory fines and penalties. But, this $100,000 limit is included in regulatory defense claims (overfilling/ insurance audits like RAC, HIPPA/ EMTALA/ Stark). So don’t get a data breach and RAC audit the same year!

St. Joe’s health system recently settled a $7.5 million class action. So this can be expensive. Obviously, if you just started your practice three months ago and are seeing 3 patients a day, with less records there won’t be as much liability as a practice with five doctors that each see thirty patients a day and has used EHR for 10 years.

I got a quote from NAS, the company that extends OMICs $100K limits to $1 million, it was about $450 annually- and I decided at the time that since I am just three years in and have about 5000 unique charts, some of them no shows with just a name and address, I don’t have enough patients to make a class action against me worth it so will hold off for now. But I know many of you purchased another practice and/ or have multiple doctors in the practice- in this case $450 a year isn’t a lot.

In addition to OMIC, Hartford provides me an additional $10k in response expenses and $50K of defense and liability (with a $1000 deductible), costing me $204 per year. Thinking about it, maybe I should just cancel this because it’s redundant to OMIC. Obviously, using strong passwords, addressing privacy and computer security in your employee handbook, keeping your server in a locked room. My Hartford agent highly recommends you go with a IT company instead of DIY. My Hartford agent frankly told me a small practice isn’t as attractive for a Plaintiff’s attorney as a larger corporation that they know will have high insurance limits and deep pockets.

The most common hacks are from your employees or from someone using a third party to hack into your server/ computers. Fortunately, I’ve minimized the number of employees I have and only my IT company can access my server. Even if you use a cloud EHR/ PM system you still need to secure devices and passwords.

Finally, especially for those of you in training or fresh out of training, the best asset protection is to preserve our future income- and it is being imminently and directly threatened by federal policy as well as legislation at the state and federal levels! By donating to the SSF (surgical scope fund) and Ophthpac, contacting your reps and being politically active- this is the best and most important asset protection we can achieve!

Not only preserving our future income is important, even if you’re independently wealthy, being involved in advocacy for our profession is simply the right thing to do for our patients. When I’m old and sick, I want doctors that are experts at what they do with extensive training to be doing my surgeries and treating me. I only hope that the decision makers (politicians) and general public insist on the same.

12 thoughts on “Asset protection: malpractice and business insurance for the solo medical doctor

  1. Excellent review about asset protection. I did not know that 401k provide better protection than IRA.

    • That’s why you should keep your previous 401ks open rather than roll them over, assuming expense ratios and investment choices are the least bit reasonable. IRA asset protection depends on state and you never know where you might move to.

  2. Right, my employer-based 401k has very low expense ratios, but I have been considering to roll it over to a solo 401k (I am becoming independent) to continue contributions as this would likely increase long-term gains and because I will not be able to contribute to the employer-based 401k once I leave the job. The drawback will be inferior asset protection if I do this.

    • You might want to consider the opposite- if the employer plan allows for incoming transfers move your solo 401k money to the employee 401k for higher asset protection.

      Does your employer 401k and/ or solo 401k allow for in plan 401k Roth conversions? If you retire early and are in a relatively low marginal tax brackets, you can consider Roth 401k conversions before you are required to take RMDs at age 70.5.

      Roth 401ks: to me, the holy grail of tax advantaged asset protected accounts, but very expensive when you’re in a high marginal bracket.

  3. I look forward to your small business retirement plan article. You mentioned you have a SEP IRA, but also talk about Backdoor Roth IRA. I assume you no longer due backdoor roth IRA as you would violate the pro-rata rule with an active SEP IRA, or is there some nuance that I am missing?

    • If you have a old 401k from group practice that has rules written to accept incoming transfers from outside IRAs you can move your SEP into it to get around the pro rata rule for backdoor Roth IRAs. Unfortunately two years ago my old 401k’s rules changed so I can no longer do this. So I can no longer do backdoor Roth IRA until I start my practice 401k.

      For simple IRAs you need to wait two years to move the money or the IRS will slap a 25% excise tax on you.

      I’ve been lazy about getting that post up. It’s in the archives of the google group. Keep on reminding me and it will happen.

      • Thanks, I’ll keep bothering you 🙂
        Interesting about the SEP IRA, I will have to check my current 401k to see if it accepts incoming transfers. I have a non prototype solo 401k (which allowed mega back door roth conversions) which I used for 1099 income from call as I am a W2 employee. As I transition to solo practice, the income generated from call will go to practice revenue as it will be considered a controlled group. you have given me alot to think about, Thanks again

      • This is why I advocate keeping 401ks from previous jobs open as long as fees are reasonable and they accept incoming transfers.

        If your solo 401k doesn’t accept incoming transfers open one up with a different company or I guess eventually you can have a practice 401k. But more flexibility is better so you can move a potential SEP IRA into a solo 401k to make IRA basis zero for backdoor Roth.

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