Starting a practice? Here are some pointers on risk management.
Contributed by Shawn M. Johnson
ChFC, CLU, CLTC
Vice President, Sales
Buying or starting a practice can seem like a daunting task fraught with countless details. In our work with specialists and dentists, we frequently come across doctors who particularly need help navigating the insurance landscape. Here are some of the most common issues we run across.
If you’re borrowing money, the bank will want protection
In order to secure a practice loan, many banks require various insurance policies to protect their exposure should something happen to you or the physical practice itself. Traditionally, one of those requirements is disability insurance to cover the monthly payment. While it’s tempting to want to use your personal disability income insurance for this purpose, resist the urge.
Instead, you should consider one or both of the disability policies designed to protect this risk: business overhead expense insurance and/or business loan protection (also referred to as reducing term disability insurance). Business overhead expense insurance is a policy that helps pay the fixed costs of running the business in the event you are unable to work due to an injury or illness and typically pays for 12-24 months. Business loan protection disability insurance is designed to pay your monthly practice loan payment in the event of a total disability.
Not only are both policies more cost effective solutions when compared to using your personal coverage, but they’re also more suitable. Consider a hypothetical scenario where you borrow $400,000 to start a practice, but a few months after opening the doors, you’re injured and can’t work.
While you were wise to buy personal disability coverage at the conclusion of your training, that benefit amount is barely enough to cover your practice loan and rent payments. You’re still left worrying about how to pay the other costs of the office, as well as your own personal expenses.
In this situation, a business overhead disability policy would alleviate the pressure of the fixed office expenses such as rent and staff salaries while you’re assessing whether or not you can return. If you can return, you’ll come back to a more intact operation. If not, the business loan disability policy will pick up the monthly loan payments. This is especially critical with new practices as their initial value may not exceed the amount of outstanding debt. All the while, though, your personal disability coverage is helping you meet your expenses outside of the practice.
Why the bank should not be the beneficiary of your life insurance policy
Banks typically ask that you obtain and pay for life insurance to cover the amount of the loan. Every situation is different, but usually the type of insurance you will purchase to cover a bank loan will be inexpensive term insurance - named “term” because it simply provides protection for a fixed period of time. It makes good sense not to make the bank the beneficiary of your policy. Instead you will want to use what’s called a ‘collateral assignment.’ This ensures that in the event of your death, only the outstanding loan amount is repaid to the bank, and any balance of the death benefit goes to your loved ones.
Obtain the right kind of property insurance
Another area of great importance when you open a practice is obtaining the right kinds and amounts of property insurance. Property insurance actually encompasses several different types of insurance, which are packaged into what’s known as a Business Owner’s Policy (BOP). The key components of this policy are:
- Contents coverage, which provides money to replace all of your “stuff” inside the practice such as computers, chairs, supplies etc.
- Build-out coverage, which provides funding to rebuild the interior of the practice in the event of damage.
- Business Income Interruption, which reimburses the practice for loss of revenue in the event the space is totally or partially unusable and you’re unable to see patients.
- General liability to protect the practice’s liability (i.e. slip & fall)
Both the bank and landlord will typically require evidence of sufficient coverage prior to closing and/or occupying the space.
Other Liability Concerns
In addition to property coverage, there are a few other liability concerns a practice owner should address. Employment Practices Liability Insurance (EPLI) protects your liability in the event an employee sues you for wrongful termination, harassment or discrimination. Although a traditional property policy has a very small amount of coverage allotted for this risk, an enhanced limit or separate policy needs to be considered.
Another addition to the property policy is coverage for “Data Breach.” It too goes by different monikers (i.e. Cyber Liability), but protects the practice in the event confidential patient data is compromised. Not only will it help offset expenses associated with notifying patients of a breach and providing the appropriate identity monitoring, it also offers liability protection in the event of a patient lawsuit.
Last, but not least, many states require employers to carry worker’s compensation insurance for their employees. This is a form of insurance that provides wage replacement and medical benefits to employees injured in the course of employment. It is a separate policy from your BOP.
If you’re starting a practice with a partner
All multi-professional practices should have a buy-sell agreement that addresses both death and disability.
Buy-Sell agreements are contracts between business owners for the purchase and sale of a practice in the event of death, disability or retirement. The buy-sell agreement will establish a pricing formula for the practice, serve to have a ready buyer for the practice and may be used to value the business interest for federal estate tax purposes. It’s strongly recommended that both partners insure their agreement with life and disability insurance.
In the event of a death, the practice should have life insurance on both or all partners in order to provide an immediate funding source for the deceased partner’s share of the practice. Ensuring the policies have the correct owner and beneficiaries is critical to avoiding potential tax and legal hurdles.
The situation can be more complicated in the event of a disability as most partnership agreements don’t require a disabled partner to sell their portion of the practice unless they’ve been disabled for 12 months. During that time, however, determining how the disabled partner’s share of the expenses get paid can be a concern. This is why each owner should carry business overhead disability coverage.
At the end of 12 months, the non-disabled partner has a contractual right to purchase the other half of the practice. In this instance, disability buy-out insurance provides two essential functions. First, the insurance company’s determination that a partner is disabled relieves the non-disabled partner from having to prove it themselves. And second, the policy can help fund the buy-out.
Now’s the time to do other ‘insurance housekeeping’
While you are launching your practice, it’s not a bad idea to also do some risk management housekeeping. By this we mean, taking another look at your professional liability insurance. Make sure to update your location with your carrier. If there is another doctor working in your practice as an employee, independent contractor, or partner, make sure that your professional entity (i.e. corporation or partnership) is also covered in the event of a malpractice suit.
There are indeed many details to consider when you are starting out. You are no longer “just” the doctor; you are also the human resources department, marketing department, and everything in between. Although the insurance concerns can seem overwhelming, soliciting the guidance of an experienced and competent advisor is a critical step in protecting one of your biggest investments.