Professional Indeminty Contracts - Best Practice News Alert 109

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT Current circulation:

6918

DATE: ISSUE NO:

28 June 2005 109

Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.

Writer in charge: Mr David Dahm CPA, BA Acc, FTIA, ASIA, FAAPM

***BEST PRACTICE UPDATE AND EVENTS***

Professional Indemnity Insurance Contracts – Are they worth the paper they are written on??

Problem – Professional Indemnity Insurance is not the panacea to malpractice claims Do your insurance and legal arrangements pass the “sleep test”?

These days you have to be a Philadelphia lawyer to complete your professional indemnity cover.

We have reviewed a number of the major medical indemnity insurers in recent advertised and reported claims. We have also assessed a doctors’ understanding as to what extent they believe their professional indemnity covers them. Typical claims and fallacies commonly believed by doctors that we are concerned with include: • • •

All medical claims are covered The practices employee/contractor doctors have insurance - I do not have to worry about being exposed to these malpractice claims Non-medical practice staff are covered e.g recalls and missed appointments etc.

Since the 1993 insurance reforms, to test these claims we have reviewed a number of the major medical professional indemnity insurance policies.

The Devil is ALWAYS in the detail!

1. If it is not in writing you are not covered!

We may be a bit cynical but no matter how warm and fuzzy your insurer makes you feel over the telephone never underestimate self interest this will always prevail. It is important to remain alert.

Verbal telephone assurances are not worth the cost of the telephone call. The new laws require a written contract if it is not in writing you are not covered.

For example, Implanon procedures require specific training and accreditation in order to be covered. A higher insurance premium usually applies.

How do you know every employee or contract doctor in your practice is covered or is not performing such procedures in the consulting room with adequate cover? Do you have proof?

Regardless of a $20 million cap, you are not covered unless your practice complies with the written terms and conditions of an insurance contract. This is a contract usually taken out by the treating doctor and not the practice. This is the problem.

Like car insurance if you do not comply with the terms and conditions of the policy you are not covered. It is very simple.

2. Are there loop holes in your insurance contracts?

After closer reading of some of the major insurance funds we have found the following common “Exclusion” clauses.

These insurance loop holes exist because many practitioners do not understand their existing legal and tax structure and/or do not adequately insure or asset protect.

Most insurance contracts exclude: •

• • • • • • • • • 3.

Partnerships or Associateships - for example doctors who have listed their names on the same letter head and tax invoices, unless all doctors are with the same insurer; Medical Practice Company Directors who are not doctors e.g. spouses or unnamed Directors; Overseas trained / Employee Doctors & Contractors including those paid a percentage; Employee doctors will not have insurance if they are to be indemnified by their employer; Agency relationships; Locums – after a certain period; Practice staff that provide services to specialists and allied health workers; Practice staff – if employed by a service entity (e.g. service trust or corporate) and not all doctors are directors or trustees of the service entity; Where there is a failure to check the doctor has malpractice insurance; and Internet advice, unless followed up by a face to face consult.

What are the implications?

It is next to impossible to secure 100% insurance coverage, here is why: 1 Employee doctors don’t have insurance Some policies state, if the employee doctor expects to be indemnified no cover applies. Employers are vicariously liable (responsible for someone else’s mistake), therefore by default, they expect to be indemnified. Therefore, neither the practice nor the employee doctor has insurance. Check your employment contracts.

2 Medical recruitment negative Practices know it is hard enough to find a doctor without putting any further recruitment barriers such as they must join your medical insurance fund.

3 Medical practice staff in a group practice are not covered It is not possible for all doctors working in the practice to be owners or directors of the entities employing medical and non-medical practice staff. Therefore, they will be in default of their staff medical practice insurance policy. These are usually a separate policy to the standard malpractice insurance policy where an additional premium is charged for this cover.

4 Spouse or partners are exposed to medical litigation The recent Tax Office Ruling on service entities encourages spouses to become directors and non-arm’s length owners of a service trust or trustee company. At the opposite end, most insurers require the directors to be doctors, not non-medical spouses. Practice staff insurance cover will not apply unless your doctors are appointed directors or trustees of the service entity. Another problem is non-medical spouses may also own the family home and other personal assets in their own name - so we now have a double whammy problem.

Unfortunately insurers are not quick to identify the limitations of an insurance policy some may even claim to be unaware. Unless practices’ put in writing a request for further clarification this will always leave the insurer with the opportunity to openly interpret your policy.

4. Claims Experience Every practitioner may experience at least one claim in their professional career. With a medical shortage and high work loads this risk is likely to increase. From experience, 95% of medical malpractice cases go to a confidential settlement. By fear and intimidation this result can be achieved. It is in the interest of the insurer to mitigate risks as much as possible and push for an early settlement. The potential threat of co-joining liabilities is a cost effective and useful strategy to reducing the costs of defending a claim and early termination of a case whether a defendant is guilty or not.

Note that insurance companies appoint their own lawyers. If you are not happy with the settlement terms they will not cover or cap your legal or settlement costs. Remember it is a legal system (based on economics), not a justice system.

The more one’s assets are exposed the greater the need to make an early settlement, especially if you don’t have cover. How do lawyers find out how much you are at risk? They subpoena your personal financial statements from your accountant.

5. Practices are unaware they are vicariously liable (responsible for some-one else’s mistake)

If a patient contracts a HIV infection they will always sue the practice and/or treating practitioner first for any damages suffered. The party who is ultimately responsible is the party who contracted the service directly with the patient. If you use employees or contractors it is the practice that is ultimately responsible to the patient, not the treating doctor.

For example if the practice’s contract cleaner ABC Pty Ltd had contributed to a misadventure, such as spilling an infected substance over sterile instruments, the primary responsibility rests with the practice not ABC Pty Ltd. A patient is not to know who the practice has contracted for cleaning services.

If the practice is found negligent it is then the practices right to counter sue ABC Pty Ltd. This, as one can see, can become an expensive and time consuming process.

The same applies when one employs or contracts medical and non-medical staff. The only difference is the employee doctor or contractor has an insurer who is engaged to litigate against the practice. Your standard insurance policy usually does not cover any defence of such claims.

Regardless of whose name appears on the tax invoice, if it is an employee or contractor arrangement the employing entity, for example the partnership, practice company or service trust, is primarily liable.

6. Directors of Corporate Trustees are personally liable Should a malpractice claim arise, a common understanding is that Directors could hide behind a $2 corporate trustee of a service trust. This common understanding was overturned in a recent court case, Hanel vs O’Neil in October 2004.

It was decided that Directors of the corporate trustee are personally liable for the activities of a trust. So if spouses are holding assets such as the family home in their names, this asset is exposed to any malpractice claims.

We have been involved in cases, when acting as group and individual accountant the business and personal financial statements of all Directors, owners and trustees have been subpoenaed.

At the end of the day if a practitioner has either assets or malpractice insurance to cover legal and settlement costs there will always be a temptation to proceed against any or all parties that have the deepest pockets.

Solution The following solutions are suggested: 1. Check all doctors and specialists have professional indemnity cover. Ask for a copy of their certificate of currency.

2. Consider using a service trust and establish an associateship arrangement. Eliminate all formal and implied partnership, employment and contractor arrangements by having a written service agreement with appropriate cross indemnity clauses (see below for more information).

3. Go bare and asset strip the service trust. It should not hold real assets without secured debt. Do not hold the practice building in a service entity.

4. As a rule, practitioners should not own $1 in their name. All passive assets should be held in a family trust or superannuation fund. Consider the use of a corporate beneficiary.

5. If your house is in your name, consider gifting monies to your family trust and using your family home as first registered security, otherwise known as a “friendly creditor”.

This will avoid large stamp duty costs that normally occur when transferring assets and it will keep your home capital gains tax free.

6. Confirm in writing any concerns you have about your insurance policy with your insurer.

7. Seek professional advice before embarking on a legal and taxation restructure.

8. For more information about accessing template service agreements or our accounting services contact us on 1800 077 222.

SEMINAR EVENTS “The more you learn the more you earn” Many practitioners and practice managers are interested to know when and where the next Health and Life seminar event will be. Unfortunately many of these events are externally sponsored and are closed invitations, which are beyond our control.

However, the following is a national conference held by the not-for profit organisation called the Australian Association of Practice Managers. Their national practice management conference for Doctors, Dentists and Allied Health Practitioners will be held from 19 to 22 October in Adelaide.

David will be speaking at this event, which we can invite all of you to attend.

There are many excellent speakers and topics, some include: Prof. Kerryn Phelps Future of the Health Care Industry Neil Oakes Fee Setting – Controlling the Practice Profit Margin Duncan Wood CEO AMA SA Selecting the right Practice Manager - A Healthcare Practice Overview of a Manager for the Job Danny Haydon Writing a Realistic, Useable, Practice Business Plan (12-36 month plan) David Dahm Topic 1 Simplifying Your Legal and Financial Structures Reducing your legal risks and tax bill.

Better improve and understand your bottom line.

Topic 2 Practice Doctors and Health Provider Contracts Yes, there is an easier way that is medico-legally safer!

For full program and registration details go to http://www.aapm.org.au. Register and pay on-line before 30 June 2005 and get a full tax deduction.

HEALTH & LIFE is rapidly growing – changes are a foot!

As the financial year comes to an end we are pleased to report over a 300% growth rate in our accounting and consulting services. We would like to thank all our new clients and our old clients for supporting us over the years. We have been overwhelmed by the responses we have received at our national seminars and even from this news alert publication.

In order to meet demand we have increased our staff support over the last 12 months. This has meant we also have had to increase the size of our premises. We have decided to make Adelaide home as it is geographically central to Australia. We will continue to maintain our growing list of interstate consultants who have been trained by Health and Life in key areas of practice management.

From 1 August 2005 we will be moving our Head Office to a larger floor area adjacent to our existing offices. In the next four weeks new fax and telephone lines (the phone numbers and addresses will remain the same) will be installed and our computer systems will be upgraded including a new web site. We apologise in advance should this cause any interruption to services.

To confirm our contact details and key contact staff at Health and Life they include: Consulting Principal – David Dahm Head Office – Level 17, 33 King William Street, Adelaide SA 5000 Postal Address - PO Box 8145, Station Arcade, Adelaide SA 5001 - consulting or accounting new queries - direct doctor contact for on going work Phone: 1800 077 222 Mobile: 0407 620 120 Email: pa@healthandlife.com.au Personal Assistant – Kellie Higginson - appointments and bookings Phone: 1800 077 222 Direct: (08) 8415 5400 Email: pa@healthandlife.com.au Office Manager – April Myles - account enquiries Phone: 1800 077 222 Direct: (08) 8415 5401 Email: aprilm@healthandlife.com.au National Accounting Staff by State Accounting – John Kelidis

- annual accounting compliance and benchmarking for Victoria and Tasmania.

Direct: (08) 8415-5405 Email: johnk@healthandlife.com.au Accounting – Julian Kaesler - annual accounting compliance and benchmarking for Queensland and Western Australia.

Direct: (08) 8415 5403 Email: juliank@healthandlife.com.au Accounting – Lambros Manouras - annual accounting compliance and benchmarking for South Australia and New South Wales clients Direct: (08) 8415 5400 Email: lambrosm@healthandlife.com.au Accounting – Patrick Galicki - general accounting support - ASIC & Corporate compliance Direct: (08) 8415 5400 Email: patrickg@healthandlife.com.au IS HEALTH & LIFE COMING TO A PLACE NEAR YOU? Throughout the year, David and the other consultants will be traveling regularly intrastate and interstate. This section will keep you up to date with these movements so that it gives you the opportunity to arrange to see them if you have any issues to discuss. Please contact our office to arrange a possible appointment. Future places/dates are:

David Dahm Late July 2005 14 to 16th August 2005 September 2005

Melbourne Sydney & Brisbane Perth

Which topics would you like to be covered?

If there is a particular topic that you would like covered in one of our future News Alerts, please email pa@healthandlife.com.au and let us know what it is. We will then endeavor to cover your requested topic.

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Disclaimer Notice Health & Life Pty Ltd’s Best Practice News Alert is designed as a comprehensive and up-to-date Accounting and Practice Management news service to alert readers to the latest in practice and related developments affecting the medical and dental profession as they happen. It is published when there is news to report. No responsibility can be accepted for those who act on its content without first consulting us or obtaining specific advice.

*** End of Issue 109 *** Health and Life Pty Ltd (formerly acpm.com.au) Accounting, & Practice Management Services.

“Looking after your future” PO Box 8145 Station Arcade, ADELAIDE SA 5000 Telephone:

(08) 8415 5400

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(08) 8231 6767

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pa@healthandlife.com.au

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