Should You 'Go Bare?'

When physicians drop or reduce malpractice coverage, they must take steps to protect their assets from lawsuits.

By James Armstrong

As the cost of malpractice insurance has skyrocketed in many states, some physicians have reduced the amount of coverage they carry or even dropped coverage entirely. Dr. Donald Palmisano, president of the American Medical Association, says that certain states, such as Florida, allow doctors to post a bond to cover malpractice claims up to a certain amount and place a sign in their waiting room if they intend to practice without insurance.

While the AMA does not keep track of the number of these "bare" physicians, Dr. Palmisano says that he has heard anecdotally of a number of doctors doing this. "Physicians are going to try to be very creative to stay in the practice of medicine," he says. "If a physician wants to stay in his community and the rates are too high, then the physician doesn't have any choice."

The problem is that without insurance, a doctor who loses one malpractice case could lose all of his or her financial assets. Louis Stanasolovich, president and CEO of Legend Financial Advisors in Pittsburgh, suggests that a better strategy is taking a higher deductible. If small or frivolous lawsuits arise, physicians can elect to settle them out-of-pocket. Should a patient file a larger claim, insurance will kick in. In the meantime, though, a larger deductible will reduce premiums.

A more daunting challenge arises when patients make claims in excess of a doctor's coverage. When physicians read headlines about enormous jury awards in malpractice cases, many may well wonder if they're prepared to be hit by such large verdicts.

Get the Facts

But Mr. Stanasolovich says that doctors should do more than just read headlines to get an idea of what a typical malpractice award might be. Asking one or two colleagues about cases they've been involved with will hardly give a good sample size, either. Instead, he recommends, go to your insurance carrier or to your state medical society and ask about average and median awards in the region for your specialty. A jury is likely to make a neurosurgeon or ob/gyn pay more than a primary-care doctor, and some states have records of much larger awards than others.

What some physicians may discover is that their current malpractice coverage is inadequate for a large jury verdict. With insurance rates so high, though, doctors may be unable to increase coverage. While not completely bare, these physicians leave themselves open to lawsuits in excess of their coverage. Many plaintiffs will settle for what an insurance company will pay, but in some cases they will go after the doctor's own assets.

"To the extent that you have a good asset-protection plan in place, and you appear to be judgment-proof, you're less likely to have actions brought against you to begin with," says Thomas Langdon, an attorney and professor of taxation at The American College in Bryn Mawr, Pa. He explains that most personal-injury lawyers take cases on a contingency basis, so they don't get paid unless they can win and collect. The first thing they do when they get a prospective client is look at the defendant's assets. If they don't think they can seize enough in assets, they won't bring the case.

The same can be said for a partially bare doctor with minimal coverage. If attorneys cannot get at the physician's assets, they're more likely to settle for what the insurance company pays or a small amount more. That's why asset protection is crucial for physicians who reduce their malpractice coverage.

Once there is a case against you, any move you make to protect your assets will be deemed a fraudulent conveyance and nullified by the court. To avoid this, doctors need to make arrangements long in advance and protect their assets before any malpractice case arises.

The first step, Mr. Langdon says, is to make sure that existing property is titled appropriately. A physician could transfer ownership to a spouse and protect assets that way. Of course, the spouse could always get sued or divorce the physician, causing additional problems.

Some states offer tenancy by the entirety, says I. Richard Ploss, a lawyer and certified financial planner (CFP) in Bedminster, N.J. In those states, a couple can hold property as an entirety and enjoy some protection from creditors. Currently, this provides no protection from the Internal Revenue Service in the event of tax problems, and the protection granted against lawsuits is gradually eroding.

Certain states, such as Florida and Texas, have an unlimited homestead exemption. That means that even if you own a million-dollar house, it will always be free of creditors so long as it's your primary residence. Kansas, Iowa and South Dakota offer generous homestead exemptions as well.

ERISA-qualified plans such as 401(k)s are protected under Federal law and by most states, so long as there are employees other than the physician who participate in the plan. (If your spouse is an employee of the practice, the spouse doesn't count.) Should you have a verdict against you or even have to declare bankruptcy, that money is safe. If you're not already contributing the maximum allowable amount to your retirement plan, that's one more reason to do so.

Just remember that not all retirement plans are covered by ERISA. SEP plans, SIMPLE plans and IRAs are all non-ERISA vehicles and don't enjoy Federal protection. Some states protect these plans from creditors, so you'll have to contact a local financial professional to find out if they're shielded from lawsuits in your state.

Interestingly enough, the defined-benefit plans covered by ERISA are coming back into vogue, according to Peter Calfee, a CFP and CPA in Cleveland. These plans were powerful investment tools in the 1970s and early 1980s when they were uncapped, but then the Government put restrictions on contributions. Now that Uncle Sam has eased restrictions again, wealthy individuals are turning to these plans, since they allow much larger contributions than are permissible to a traditional 401(k).

Another option Mr. Calfee suggests is to create an irrevocable trust for someone else's benefit, such as a child. Since you don't own the money, a creditor cannot attach it. You won't be able to use the money for your own benefit, but you can ensure that there are funds available for your child's education. Again, the trust would have to be set up well in advance of any potential lawsuits.

It might seem nice if you could create a trust for your own benefit and keep money for yourself that's free from creditors. Traditionally, common law forbids this practice, but in the past couple of years, five states-Alaska, Delaware, Nevada, Rhode Island and Utah-have passed laws overriding common law.

"If a doctor lives in one of those states, frankly, that's a no-brainer," says Gideon Rothschild, co-chair of the Trusts, Estates and Wealth Preservation group at the New York law firm Moses and Singer. Often called domestic trusts, these vehicles provide tremendous asset protection to state residents.

What is unknown is whether or not these trusts provide protection for out-of-state residents. A doctor in New York could set up a trust in Delaware, but a New York court could declare the trust invalid. At the very least, the legal uncertainty could convince a plaintiff to settle.

While Mr. Rothschild says that domestic trusts could provide significant protection to out-of-state residents, a safer approach would be to set up a trust outside the United States entirely. If assets are held in a jurisdiction outside the country, it will be even more difficult to recover the assets and even more of an incentive for a plaintiff to settle a case.

Offshore trusts are more expensive to set up, often running in excess of $25,000, whereas domestic trusts are more likely to cost $10,000 to $15,000. "That's a one-time fee," Mr. Rothschild points out. "Then your annual trustee fee is going to be an ongoing cost." Trustee fees generally run around $2,000 to $3,000 a year, regardless of whether the trust is off-shore or domestic.

Do physicians really need to pay that much for asset protection? That depends on the risk. Mr. Rothschild points out that an ob/gyn is likely to be sued several times over the course of his or her career, while a family physician runs a much smaller risk.

But compare those fees to what it might cost to take out an extra $1 million of insurance.

Mr. Rothschild admits that no asset-protection plan is fool-proof, but says that doctors would be wise to consider protecting their assets even if they have malpractice coverage. "If you have a $1 million policy, and the jury awards $20 million," he asks, "what good is the $1 million policy?"

James Armstrong is a New York-based writer who reports on health and business.