The Mixed Blessing of Property and Casualty Insurance

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Property and Casualty Insurance

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. 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 More

Captive Insurance Companies- The Ultimate Practice Tools

Posted by & filed under Doctors, Insurance.

Captive Insurance Companies

Captive insurance Companies — The Ultimate Practice Tools
Many Doctors will build their wealth primarily through their professional practice. Typically, the practice is not only the vehicle that allows the client to use Leverage, but also the vehicle which creates the bulk of the client’s annual income and long-term wealth accumulation. Given this fundamental importance, it is essential that Doctors do everything possible to protect the practice and maximize its Leverage potential. The best tool for achieving such protection and Leverage is the one we will discuss in this chapter—the captive insurance company (CIC). In this chapter, we will discuss what a CIC is, what benefits it offers, and how Doctors can use it to maximize the benefits they get from their practice planning.

Early in the book, we stressed the importance of using tools that have multiple benefits. By using tools that offer multiple benefits, Doctors can compound their Leverage and achieve a number of planning goals more efficiently than if they tried to reach their goals one at a time. Of all the tools discussed in this book, the CIC can be the most efficient. For clients who own successful businesses or professional practices, the CIC often becomes the cornerstone of the ascent to a desired level of affluence. This is because the CIC affords the following benefits:
· Superior risk management for the practice.
· Reduction in the practice’s insurance expenses to third-party insurers.
· The ability to capture profits on insurance policies.
· Highest levels (+4 and +5) of asset protection for CIC assets.
· Superior income tax treatment for CIC income (when the CIC is properly structured and maintained).
· Significant estate planning benefits (when the CIC is properly integrated with estate planning tools).

· Creation of a potential buy-out mechanism for older owners of the practice upon retirement.
The CIC we will discuss here is a fully-licensed insurance company domiciled either in one of the states that has special legislation for small captive companies or in an offshore jurisdiction which has similar captive legislation. Whenever a CIC is established offshore, it is critical that the CIC be compliant with all US tax rules and must be handled by captive managers, tax attorneys, or CPAs experienced in these matters.

CIC As A Risk Management Toolpost 19
The CIC must always be established with a real insurance purpose—that is, as a facility for transferring risk and protecting assets. The transaction must make economic sense. Beyond this general rule, there is a great deal of flexibility in how the CIC can benefit its owner(s).
First, clients can use the CIC to supplement their existing insurance policies. Such “excess” protection gives the client the security of knowing that the company and its owners will not be wiped out by a lawsuit award in excess of traditional coverage limits. As Doctors, you should be concerned with all types of lawsuits—from medical malpractice to practice risks to employment liability—and this protection can be significant. Further, the CIC may even allow the client to reduce existing insurance, as the CIC policy will step in to provide additional coverage if needed. More