Bare Doctor Blog: Lubell & Rosen Law Firm

Let’s begin with collectors themselves.  Collecting a judgment can be a difficult, time-consuming, and sleazy process. That’s why attorneys turn the job over either to their collections departments (if they have one) or to third-party collection agencies. Most physicians and hospitals are familiar with such agencies because they use them regularly to recover unpaid receivables.

Collection agencies work on commission. The more they recover, the more they earn. It’s in an agency’s best interests, therefore, to use any and all tactics to intimidate you into voluntarily parting with your money (or to annoy or intimidate you into submission). Threatening letters, emergency faxes, persistent phone calls—these are just some of a collector’s old standbys.

Your case is just one of many any given agency handles. It’s also one they find attractive. That’s because the court has already rendered its judgment, and the “lawyering” is done. They don’t first have to hire their own attorneys or accumulate attorney fees on behalf of their clients. The court has ruled you owe money; theoretically, all they have to do is collect.

In reality, however, not all court-rendered debts are attractive to them. Some, in fact, are unattractive because they represent “old” debt. Collection agencies, you see, make their largest profits from “new” debt, namely, that which debtors fully intend to pay off even if they have not yet done so for whatever reasons. Debts that have gone unpaid for several years, however, are considered low-value debts and are less attractive.

Debts themselves have different values. They increase in value when they turn from unsecured debts into secured debts. Judgments rendered in court are unsecured debts, namely, debts without collateral. Debts with collateral are, obviously, more desirable. For example, the mortgage on your office building is a secured debt; the mortgage is secured by the property itself. Should you default on your mortgage, the bank may foreclose on the secured real estate. No matter how large an unsecured court judgment, the bank with the secured interest will always be first in line to get paid upon the property’s liquidation. If there is any money remaining, other judgment holders can try to collect on it.

Forming a captive insurance company (CIC) is at the highest level of financial planning and asset protection. Most simply, a CIC is an entity formed to insure the risks of its parent company. In the past, CICs were a last resort for businesses that could not purchase standard insurance policies. CICs also were a sensible option for companies large enough to justify the expense (e.g., Fortune 500 companies, international groups, etc.). Today, a CIC may well be your first resort. While at first glance it may seem like an enormous undertaking to form one, it is one of the most promising opportunities available for practice protection.

Basically, you open your own insurance company and sell yourself a policy to insure whatever risks you have. A CIC provides specific coverage based on the needs of the particular group—an advantage over standard policies offered by larger carriers.

In the case of physicians, it is common to issue malpractice policies to a practice with common ownership and/or for several medical practices and, thereby, combine efforts to form a captive insurance company. Because it’s your insurance company, policies can be issued at any limits you desire; however, the CIC must have sufficient assets in reserve in the event of liability. The “owners” of the CIC need to front the start-up capital to establish the reserves, which must comply with insurance regulations of the individual jurisdictions (e.g., some U.S. states and countries like Bermuda) that allow CICs.

By creating your own insurance company, you provide asset protection for your business while reaping the tax benefits associated with the business of insurance. Unlike a self-insurance program in which one places money aside in the case of liability, premiums paid to a CIC are deductible for tax purposes as a business expense. Moreover, if there are no claims, the reserves grow potentially tax-free, all within the insurance structure. With a CIC, returns are realized from the capital invested by the entity. When you retire and therefore no longer need malpractice insurance, you can close the CIC and withdraw the remaining reserves at a more favorable tax rate.

In all respects, owning your own home is a sound financial decision. Between building equity and taking advantage of mortgage interest tax deductions, there is probably no better purchase you can make as part of your overall financial strategy.

One of the best things about being a Florida homeowner is Florida’s Homestead Exemption, which is written into the state’s constitution. Under this protection, unsecured judgment creditors cannot seize your primary residence, provided the home is less than one-half an acre within a municipality or less than 160 acres outside of a municipality, regardless of your home’s fair market value. The exemption has been around for a long time and may not work perfectly for modern times. But that shouldn’t be the cause of too much concern as many, if not most, of us live in cities, in condos, and in one-third-acre communities that do not exceed the half-acre rule.

It is important to note, however, that the exemption itself has exemptions. It does not provide protection from a mortgage holder (e.g., a bank) who has used the property as security for a loan. Nor does it provide protection from federal, state, and local governments to collect unpaid property and other taxes. Finally, it cannot provide protection against mechanics’ liens recorded on the property for improvements that increase the property’s worth (e.g., electrical work, roof repairs, etc.). In each of these three cases, foreclosure on the property is possible.

In a lawsuit involving serious injuries, a plaintiff attorney may try to hit the jackpot by attempting to go beyond the limits of a doctor’s malpractice insurance policy. For example, most doctors with malpractice insurance have relatively low limits of $250,000/$750,000 because it is the most affordable to them. In a case involving a death, which can be worth several millions in front of a jury, these low limits may not be enough to satisfy the plaintiff. The plaintiff’s strategy, therefore, is to get the additional money in one of two ways: (1) by creating a bad faith claim—in other words, a paper trail that will make the insurance company, in hindsight, look sloppy or irresponsible for not settling the claim within the limits of the policy—or (2) by collecting directly from the physician.

The term bad faith refers to an incident in which an insurance company places its own financial interests over the interests of its policyholders—in this case, the defendant-physicians. In cases with potentially large awards but low policy limits, plaintiffs usually try to “set up” insurance companies for bad faith. This is how it works:

The plaintiff demands the entire policy limits from the physician’s insurance company prior to filing a lawsuit. If the insurance company does not tender the limits within a reasonable time, the plaintiff proceeds to trial, seeking a judgment above and beyond the original policy limits. This is referred to as an excess judgment.

Under the terms of the physician’s policy, the insurance company is, technically, liable only for the original limits of the malpractice insurance policy; the physician is personally liable for the remainder. This complicates matters for the plaintiff because collectibility becomes an issue. And so the plaintiff and the defendant join forces and bring a bad-faith lawsuit against the insurance company. The plaintiff’s position is that the insurance company should be forced to pay the entire judgment because it passed up the opportunity to rightly settle the case within the limits of the policy. By not seizing that settlement opportunity, the insurance company placed its own interests above the interests of its insured, the physician. Accordingly, the defendant-physician should be indemnified for the damages caused by this lost opportunity.