Doesn't liability insurance actually encourage lawsuits?

Absolutely. That’s the downside with insurance. Liability insurance is the major impetus behind many costly and frivolous lawsuits. When you are well-insured, you have deep pockets. This can only attract lawsuits. Whether you are rich or poor, a prospective litigant knows that your insurance company has tons of money. Plaintiffs’ lawyers know that insurers will settle even a frivolous lawsuit rather than fight, because it is less costly. It is insurance that has greatly contributed to our transformation into a nation of litigants.

Because insurance attracts lawsuits, and because of fast-rising insurance costs, more and more professionals and businesspeople now ‘go bare’ without insurance. Going bare is particularly common with physicians who have been hardest hit by malpractice suits and exorbitant malpractice premiums. High-risk specialists, obstetricians, orthopedic surgeons, and others pay $100,000 or more annually for their malpractice coverage. Physicians in the litigious states of California, New York, and Florida pay two or three times that for the same coverage. A general practitioner in a low litigation state still pays $20,000 or more annually for insurance. And this won’t buy much coverage.

Insurance costs dig deeply into every medical professional’s earnings already hammered by reimbursement cutbacks and managed care programs. Nor are unaffordable premiums only a doctor’s problem. The litigation explosion has impacted every profession and business. Going bare is gaining traction in even such lower risk occupations as law, financial services, and architecture.

Premium costs are only one reason so many professional and business owners are abandoning insurance. Doctors, other high-risk professionals, and business owners understand that they greatly increase their chances of getting sued only because they are insured. Without liability insurance they wouldn’t be deep pocket defendants, particularly if their assets were well-protected.

We have scores of doctor clients who now practice without liability insurance. However, you can’t always avoid insurance. Physicians, by state regulation, often must carry malpractice insurance. HMOs and hospitals frequently require their affiliated doctors to carry liability insurance. Most other professionals consider insurance an option. However, going bare can only make sense if you have few assets or if your assets are well-protected.

Going bare discourages lawsuits. We can illustrate this with the case of a cosmetic surgeon who was threatened with five malpractice suits in three years (not one case had apparent merit). In each case we pointed out to the patient’s attorney that our doctor client had no insurance and that his assets were protected. Not one patient sued. If this doctor had insurance, he would undoubtedly have been sued several times.

One dilemma of going bare is that you must pay your own defense costs or face a default judgment if you don’t defend the case. This quandary is particularly undesirable when you know that you have done nothing wrong. Nor do defense costs come cheap. It can cost $100,000 or more to defend against even a routine liability or malpractice suit.

One compromise solution is to retain a law firm to defend you if you are sued. Your annual retainer would cover the litigation costs. A number of professional and business clients retain us to keep them completely judgment-proof (we continuously monitor their finances to make certain they stay fully protected). These professionals have their defense costs covered through a malpractice defense firm whose fee is paid through a separate defense-only policy. These professionals practice with confidence that they won’t lose their assets even if they are sued and lose. Of course, the uninsured professional or business owner should let their clients know that they have no coverage so their client or patient will have dampened enthusiasm to sue.

More legal defense fund insurers are popping up. They insure only the defense costs. But when you couple good legal defense coverage with a good asset protection plan, you may have a smart alternative to huge insurance premiums and an insurance policy that will only magnetize lawsuits.

Still, self-insurance isn’t for everybody. Your insurance premiums may be a bargain, considering your risks. Or you may prefer insurance − if only for your own peace of mind. Some people aren’t comfortable unless they are insured against every possible lawsuit, no matter how remote the odds. You must assess your own comfort level to decide your best alternative.