PROFESSIONAL EXPOSURE AND UNFORSEEN LIABILITY – HOW DO WE PLAN FOR THE UNIMAGINABLE?
The two stories below really hit home for us since our clients are primarily successful medical professionals and private business owners.
In the first one the tragic loss of a family member in a car accident illustrates the liability that a business can be imputed with for the actions of its owners and employees. We have talked about this issue for years with our clients and have explained time and time again that they are liable not just for their own actions but also the actions of their employees, no matter how unpredictable or egregious those actions may have been.
WHY? Because in almost every case the corporate entity is a more profitable Defendant (and hence more exciting to the attorneys who are partners in the lawsuit) than the employee themselves. In this case the person involved in the accident was the owner of the business, but liability is being assigned to the business because of his status as an employee. The plaintiff’s argument – he should not have been trusted with a high powered Mercedes since he liked to drive fast. It seems the defendant’s company makes electronic connectors for commercial and military applications, not a Mercedes tuning shop, not an auto repair shop, nothing even remotely related from what I can tell.
So basically they are saying that because he was driving HIS PERSONAL vehicle the company (that he owns) should have taken steps to take the car away from him?
Family of ex-legislator killed in crash suing other drivers
Carol Sowers The Arizona Republic Mar. 5, 2008 11:49 AM
SCOTTSDALE- The family of a former state legislator killed in a three-car crash is suing the two drivers suspected of slamming him into his car at speeds of up to 100 mph. Cal Holman, a Paradise Valley state representative from 1975 to 1985 was killed Dec. 28 when the two cars crashed into his Camaro near Scottsdale Road and Eastwood Lane.
The lawsuit was filed recently in Maricopa County Superior Court by: Holman’s wife, Margaret Elizabeth Holman; his son, Calvin Mark Holman; and daughter, Mary Morns Holman. The suit says witnesses reported that Robert Hank Van Brakel, 42, of Phoenix, and Travis Jordan Aronica, 25, of Canton, Mich., were driving north on Scottsdale Road at speeds in excess of 80 mph and 100 mph.
Van Brakel and Aronica were arrested on suspicion of one count each of second-degree murder. They posted $25,000 bail and were released from a Maricopa County jail. They pleaded not guilty. The claim, filed by Harding Cure, a Phoenix lawyer, says both men have been convicted of “multiple offenses” for racing on city streets in various states.
Harry Howe, Van Brakel’s attorney in the civil case, did not return calls for comment. Aronica also could not be reached. The suit says Margaret Holman has suffered “terrible grief, anguish and mental distress” at the loss of her husband .Her grief was deepened by the manner in which she learned of the accident, the suit says.
Margaret Holman heard the “horrendous explosion” from the crash and suspected that her husband may have been involved because he was due home. Cure also claims Robert Van Brakel’s company, Van Brakel Electronics Inc., is liable for Holman’s death.
The suit says Van Brakel was working for his company when the crash occurred. Because the company knew of Van Brakel’s “propensity for reckless and illegal driving,” he should not have been entrusted with the “high-powered Mercedes” involved in the crash.
In the second case, the John Ritter case, the actor’s family sued for $67 Million. The parties in the suit include the emergency room physicianwho treated Ritter the night he died and a radiologist that by some accounts had not seen Ritter for TWO YEARS, when he performed some type of body scan. This suit follows on the heels of an earlier settlement by the family and 8 other doctors for $14 Million. This is in spite of the $250K “cap” that many medical professionals in California mistakenly rely on to protect them. In most cases the litigators are smart enough to work elements of the claim that are not capped in the same way such as economic losses, battery (now an elements of many personal injury claims) loss of consortium and etc.
Question: Just how many people were responsible for Ritter’s death?
Answer: As many as we can get to pay for it, either through a judgment or by scaring businesses, insurers and individuals into settlement because they want to limit exposure. By my count the family and their counsel dragged at least 10 people into the mess, plus the hospital and other corporate defendants.
Regardless of the outcome of the case – the exposure is clear and devastating – are you willing to risk everything on the toss of a coin?
WHAT’S THE SOLUTION FOR THE UNFORESEEN?
Ok, so we’ve read the scary, sad stories. Now what?
The rules are the same; we need to take steps to protect ourselves from known, obvious risks and to mitigate exposure to the ridiculous things we can’t even imagine:
- Have a plan in place and do something now while the option is available;
- Be a hard target.This means to the greatest extent possible, be uncollectible beyond the limits of your liability policies. This makes it clear to the “bad guys” that we have insurance in place for this kind of event, and that the policy limits is all that is available here;
- Look at all your sources of exposure including INCOME – even if your house, investment real estate and investments and other hard assets are locked down in a professionally implemented Asset Protection plan, remember that the life blood of most people’s financial plan is their ongoing income and cash flow. There are solutions that can leverage and securitize this important Asset in place for many people – make sure you have put adequate time into assessing your plan in this area and what the loss of the cash flow would mean;
- Make sure you have all the liability coverage you can afford with a good carrier, and then have a back up plan in case it does not work. It may not be enough, or the carrier may find that the event falls within a list of exclusions or that the facts attribute some fault to you that reduces your coverage;
- Examine your corporate structureso you are sure that it protects your “golden goose”, your business or livelihood, from your unrelated personal liability, and vice versa. This means more than just having an LLC or S-Corp in place, especially if there are few or only one owners. Remember that most businesses and individuals have too many eggs in one basket, i.e. the company itself, the equipment, the real estate that is the site of the business operations, and other items of significant value can all be removed from the base corporation, put into separate “boxes” of ownership and thus shielded from the corporation’s liability;
- Look at how you are holding assets that can generate liability themselves,like cars, boats planes, etc. Many CPAs like the tax deductions they can get for their clients by leasing or buying vehicles in the name of the business. The problem with structures like that is that they take a repeated dangerous activity, like driving to work every day, and tie that liability to the most valuable thing you own, your business. In the case below, if the vehicle in question, the “dangerous Mercedes” is titled to the vehicle, the plaintiff has a pretty good shot at nailing the business. There are simple options that provide more distance, like paying yourself a car allowance and letting the business deduct that. Consult your CPA on this issue. Either way, I don’t think it’s worth risking the farm to deduct the interest on your Escalade lease.
These tips are a good start but are no where near to being comprehensive. Contact us for more specific appraisal of your individual risk picture. This is a benefit available to all CFO clients with no cost or obligation.
Yours, Ike Devji
