Risk Management

LLCs and Entity Liability

Paul Weber, JD, OMIC Risk Manager

Digest, Summer 1998

Lately, a significant number of OMIC insureds have been forming Limited Liability Corporations (LLCs). An LLC is a relatively new form of business entity offering certain income distribution and tax advantages. Some insureds assume that after forming an LLC there is no need to purchase entity coverage for the LLC (entity) since there is “”limited liability.” The following questions address the professional liability exposures and coverage issues of LLCs and why it is still advisable to purchase entity coverage for them.

Q  What is the difference between practicing in a limited liability corporation and practicing in a partnership as it relates to malpractice claims?

A  Physicians practicing in any form of corporation (LLC, S-corporation, etc.), unlike those in partnerships, have limited liability. Like partnerships, the assets of the corporation are subject to all corporate obligations; however, unlike partnerships, physicians in corporations generally cannot be held personally liable for the malpractice of their fellow shareholders. Please note that physicians cannot insulate themselves from personal liability for their own negligence by incorporating.

Q  Are there any “loopholes” (exceptions) to the general rule of limited liability of corporations?

A  Yes. There are at least two exceptions. First, a physician supervising the work of another may be at personal risk if the person being supervised commits malpractice as a result of the physician’s failure to provide adequate supervision. In this scenario, the supervising physician could be held jointly and severally liable along with the physician being supervised. Second, based on a number of considerations, a court can disregard the corporate entity (in legal terms, “pierce the corporate veil”) where recognizing the corporate form would open the door to fraud or promote injustice. The courts have developed a long list of relevant factors to look for in such cases. For instance, are corporate assets treated as if they were individually owned by shareholders? Is there commingling of assets or records of purportedly separate entities?

Q  Do I need entity coverage for my limited liability corporation?

A  Regardless of the form of the business organization, physicians would be well advised to maintain adequate professional and general liability insurance. A corporation (LLC or other) is not a substitute for purchasing a good insurance policy. Entities can be, and frequently are, named in medical malpractice lawsuits. Even though the entity may be ultimately dismissed from a claim, legal expenses can be costly. In addition, entity coverage offers protection to the corporation for its vicarious liability exposure arising from services rendered by physicians and non-physician employees for their direct liability exposure. As with partnerships, the assets of a corporation are subject to all corporate obligations. If there is a serious medical incident resulting in a large judgment against the corporation, it is possible that all assets, including medical equipment and other tangible items, may be attached to pay off or satisfy the judgment.

Q  What legal questions might arise when a business entity is sued?

A  Legal issues surrounding settlement may arise when a business entity (corporation, partnership, etc.) is sued along with an individual insured. When it is concluded that a case should be settled with a payment to the plaintiff, it may be appropriate that the settlement be made solely on behalf of the corporation and not against the individual insured. Under certain circumstances, a settlement made solely on behalf of the corporation may not need to be reported to the National Practitioner Data Bank (NPDB). A closed OMIC case may serve to illustrate how this works:

A patient sued an insured and his business entity. The individual insured was dismissed from the lawsuit on a motion for summary judgment on the grounds that he had not seen the patient and therefore had no duty to this patient. However, the physician’s business entity (a corporation) was still a defendant in the case because there was evidence that his staff had taken a call from the patient and had delayed scheduling an appointment, which resulted in a loss of vision for the patient. Because a payment was made solely on behalf of the corporation and the doctor was not named in the settlement release, it was not reportable to the NPDB.