Edward D. Brown, Esq., CPA, LL.M
We hear time and again that asset protection planning is unnecessary if you have a good insurance policy that covers your risks. If you think the insurance is your safety net, read your entire policy carefully. You may be surprised by what exclusions from coverage may appear. For example, an umbrella insurance policy generally excludes liability resulting from any dangerous equipment, such as guns, trampolines, swimming pools, and sometimes lawn mowers, chain saws, and power tools.
In the professional practice setting, under many malpractice policies, your own gross negligence, or that of your employee (in a jury’s opinion) and punitive damages or anything related to an employee not named in the policy, may not be covered. In fact, complaints commonly filed include allegations of gross negligence, knowing that your policy will not cover that situation, thereby making you feel more personally exposed and more willing to settle. Also, the policy may be a “claims made” policy, meaning that if you leave a firm and that firm does not keep the policy in place, you can be personally liable for later filed claims, even if they relate to the period you were employed at that firm. If you become exposed in such a scenario, your only recourse may be to seek compensation from the prior employer who had a fiduciary obligation to give you an opportunity to keep such coverage. Some employees buy “tail insurance” to cover this situation, but the cost can be prohibitive.
We have learned over the years that some of the malpractice policies for professional advisers will not cover the professional if the claim results in the professional having his/her license revoked or even temporarily suspended! Also, the policy may cover only certain practice areas in limited geographic locations. Exclusion of coverage could also occur if you did not notify the carrier at the earliest possible point in time. All are traps for the unwary.
Umbrella insurance is purchased many times for added peace of mind. Such policies however may also exclude certain risks that you would not expect, such as pet-related incidents (like dog bites) and may also exclude any intentional acts. Furthermore, in your personal home policies, any business activities operated out of your home may not be covered (e.g., the UPS driver slips on your icy driveway while delivering an item you use in your business). In other events, claims may exceed the coverage caps in the policy.
The insurance company also may decide that it is less expensive to deny paying a claim (as likely mentioned it is “reservation of rights” letter) and anticipate settling with the insured for a lesser amount. Remember, the insurance companies are “for profit” businesses, with the goal of collecting more in premiums than they pay out in claims.
Insurance can even serve as a further magnet for lawsuits. Plaintiffs and their attorneys find ways to determine if you have insurance and know that insurance companies may pay a threatening claimant significant funds just to “go away.” The insurance companies will consider the benefits of paying an early compromise or settlement amount (some refer to this as a nuisance fee) as a good monetary alternative to paying the less predictable costs of litigation and possible judgments. In essence, the simple fact that you have insurance can make you a more attractive candidate to be named in a lawsuit. Asset protection trusts have the opposite effect.
Other insurance (such as directors’ and officers’ insurance, or “D&O” coverage), however, is still advisable, since it can be very helpful in paying for the legal defense. In fact, everyone should consider at least purchasing a “cost of defense” policy to help defray legal costs in any unwanted legal action. Other examples of advisable insurance include casualty insurance and title insurance, since these can pay for actual damages that may be unrelated to any exploiting creditor.
*The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Greenspoon Marder LLP or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.