LEGAL ASPECTS OF ORTHODONTIC PRACTICE: RISK MANAGEMENT CONCEPTS

By Donald E. Machen, DMD, MSD, JD Pittsburgh, Pa.

In this and succeeding issues of the AMERICAN JOURNAL OF ORTtlODONTICS AND DENTOFACtAL ORTHOPEDICS, factual risk management scenarios will be presented.

These scenarios are based on composites of actual court cases that have been tried to

verdict or decision. Vahtable risk management lessons may be learned from carefid

analysis of the course of the events described. Please be advised that the standard of

care determined in any case is specific for that jurisdiction and that set of facts as established by expert testimony for the prevailing party. Readers' comments may be addressed to Dr. DonaM E. Machen, 5801 Beacon St., Pittsburgh, PA 15217.

Protecting your personal assets

D u r i n g the past several regional risk man- agement seminars, an increasing number of orthodon- tists have requested information about protecting their assets from various sources of attack. Each orthodontist had either experienced or heard of another health care professional experiencing a near miss or, more unfor- tunately, a direct hit with regard to their personal assets. Although a substantial portion of current risk manage- ment seminars are devoted to this issue, many attendees assume that doctors' assets were exposed as a conse- quence of going bare, i.e., practicing without profes- sional negligence insurance. Others assumed the per- sonal assets were at risk because the doctors sustained verdicts in a single malpractice case that exceeded the level of coverage purchased.

Although both are examples of reasons for carefully planning protective measures to safeguard personal as- sets, they represent a small percentage of instances where personal assets have been lost. In fact the vast majority of personal asset loss has no relation to profes- sional negligence. The focus of this article is to raise the level of awareness regarding the potential sources of exposure to personal assets that may result in a failure to properly plan asset protection.

However, beware because not all protection plans, whether designed to protect against lawsuits or tax and estate matters, are equal. Not all professionals possess the same skill or knowledge in this complex and so- phisticated area. In fact a team approach will be sug- gested with your personal counsel as team leader co- ordinating the efforts of the various specialists.

A traditional example of personal asset at risk with

potentially catastrophic results may be of value before providing a background into safeguarding these assets:

Example 1. Several months ago an orthodontist con- fided that he was the defendant in several malpractice claims filed in one policy year. (Such occurrences are not as rare today as we might believe.) The first claim alleged resorption and periodontal disease negligence and factually included the loss of multiple permanent teeth and the need for extensive periodontal surgery and prosthetics.

The second case filed several months after the first alleged TMJ negligence and factually involved several years of additional splint therapy, orthodontics, pros- thetics, further splint therapy, orthodontic and TMJ sur- geries, more splint therapy, a final round of fixed pros- thetics, and around-the-clock splint therapy for life.

For illustration purposes only, the orthodon- tist's professional negligence insurance coverage was $500,00/$1 million, i.e., $500,000 per incident, $1 million total for all incidents in a policy year. With regard to each suit, the insurer advised the orthodontist that excess verdicts (jury verdicts that could exceed the maximum per incident coverage level) were possible, and that the aggregate coverage level might also be exceeded. Because these cases were treated during 1982 to 1983, the years' coverage level seemed reasonable to the orthodontist at the time. However, by today's standard it is low. Unfortunately, because the lawsuit is brought today, the coverage level is the same that was in effect then.

As orthodontists are aware, over the past 5 years, a significant number of large jury verdicts have been

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returned in different jurisdictions, and discussions with plaintiff's counsel indicate this trend is on the rise in other jurisdictions. This is a situation representing a real potential for risk to personal assets.

Several other large exposures exist that are rarely considered.

Example 2. Your son or daughter borrows the family car and is involved in an accident by failing to stop at a stop light and severely injuring or killing a pedestrian. Your coverage level is the typical $100,000/300,000 with a $1 million umbrella. Although the coverage seemed adequate when purchased, it is not adequate for the damages to be claimed in this case. Are personal assets at risk? It is likely that the plaintiff's lawyer will include both the mother and father in the lawsuit, ex- posing family assets. Discussions with plaintiffs' law- yers indicate that some will settle for insurance policy limits. However, the majority of lawyers will seek to include readily available assets if they can.

Example 3. Joint tenancy is not the panacea. In several instances, merely titling property in more than one party, such as husband and wife, may not serve as an effective shield. Specifically, if the spouse who is participating in the practice in any way may be an implied officer of the corporation and, as such, may also be named in any lawsuit. This would serve to expose jointly held property. Consider the common sug- gestion to have the spouse as corporate officer (secre- tary/treasurer of corporation), bookkeeper, or office manager.

In addition, transfers of property as between hus- band and wife, especially when a lawsuit is imminent, pending, or concluded, may be avoided by the court, either through the mechanism of the Uniform Fraudu- lent Conveyance Acts or by the equitable remedy of a constructive trust. In either event, the property would be available to satisfy a judgment. Such actions can be taken years after the transfer has occurred.

Example 4. Apartment building liability. Many orthodontists are involved in the ownership of rental property, including apartment buildings or office build- ings (including the building in which they practice). Depending on the form of ownership, enormous lia- bility, well in excess of traditional levels of coverage, may occur due to personal injury or death on the prem-

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ises from criminal or tortious activities resulting in per- sonal injury or death. Specifically, property owners have been liable for multimillion dollar awards in sexual attacks, battery, and death cases.

Example 5. Criminal charges against the doctor for alleged sexual assault are not covered by traditional professional negligence insurance. Defamation (libel and slander), sexual harassment, and sex discrimination can all lead to large verdicts, and none are covered by insurance. Similarly, any intentional torts or will acts are specifically excluded from coverage. Also, no legal fees will be paid nor will legal counsel be provided.

Example 6. Purchase of a lO0 acre farm. Unknown to the doctor, hazardous compounds had been improp- erly disposed of on the property. Subsequent to pur- chase, contamination of a nearby stream led environ- mental authorities to investigate and locate the source of the problem. Federal EPA and state agencies are empowered to levy fines and require landowners to bear the costs for the clean-up of the contaminated area. Insurance coverage is questionable, and the clean-up can be costly. Careful planning before purchase can significantly reduce exposure.

These examples represent a selection of the stories related by orthodontists. Although infrequent, these horrors can happen to you.

"Well-meaning" lawyers may attempt to allay fears by claiming that they do not proceed against the per- sonal assets of underinsured defendants. While it may be true that in general, before litigation lawyers evaluate the potential of the defendant to pay a verdict, most orthodontists have assets which may be liened and ex- ecuted on to satisfy the types of judgments resulting from the above examples. Therefore the orthodontist should not rely on such assurances.

In response sophisticated asset planning, which in- cludes the development of appropriate business and per- sonal asset entities, incorporating effective estate and tax planning vehicles must be implemented. Careful review with a competent business, estate and tax coun- sel or coordinated by your personal counsel can reduce the potential risk to a level where the personal family assets you have and the assets that you will require in the future are adequately protected.