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.
Best 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 may not want to admit liability and settle, while your insurance company does.
On the other hand, if the claim involves your professional reputation, you may want to settle the case out of court and away from the public view. There is no guarantee that your insurer will see things the same way. In these situations, if you rely solely on insurance, you lose all ability to negotiate effectively.
4. Claims bring ever-higher premiums
An additional consequence of relying solely on insurance to protect you from law-suits is that, once you make claims on the policy, your premiums rise. Given the dismal statistics, you will probably endure a number of lawsuits over your life—and your cost of insurance will rise with every claim, even if you are not at fault.
Recommendations To Manage Limitations
To manage the four limitations of P&C insurance as outlined above, we recommend the following preventive measures:
1. Know your policy
2. Don’t skimp on coverage
3. Consider an umbrella policy
4. Utilize other asset protection tools
5. Own your own insurance company if you have significant risks in your practice or business (read Chapter 5-6 for more information).
Like every tool discussed in this article, Property & Casualty insurance has its place in a Doctor’s comprehensive financial plan. Certain types of coverage, such as homeowner, auto, umbrella and medical malpractice for physicians, are compulsory. However, we caution Doctors not to rely on insurance for all of their protection. Much more must be done if you want to adequately shield assets and discourage claims from the outset. There are various exclusions within every policy and many risks (like employment liability) that are not covered in traditional insurance policies. You want to integrate insurance into your plan, but this is only one piece of the puzzle. In the next chapters you’ll learn about powerful tools that you can use to protect all assets and potentially enjoy significant tax benefits at the same time. Continue Reading
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