The Professional Entity: How to Limit Your Liability Exposure

This article is from April 2012 and may contain outdated material.

When setting up your practice, you have a number of entity types to choose from. These vary from state to state, but examples include the limited liability company (LLC), the limited liability partnership (LLP) and the professional corporation. Each has its own pros and cons in terms of taxation, liability exposure and the administrative formalities that must be observed. But, from the perspective of a plaintiff’s attorney, they all have one thing in common: deep pockets!

Attorneys acting on behalf of an unhappy patient will try to find ways in which the practice was legally liable—either vicariously or directly—for their client’s distress.

Vicarious liability. Whether an error or omission is attributable to you or someone on your staff, the practice may be held liable. “It’s the legal doctrine of vicarious liability. You are responsible for those who are acting on your behalf,” explained Paul Weber, JD, ARM, vice president of risk management (legal) at Ophthalmic Mutual Insurance Company (OMIC).

Direct liability. The practice is expected to provide administrative services, such as credentialing providers, promulgating and enforcing procedures, and maintaining an adequate and safe facility. Plaintiffs’ attorneys will attempt to show that a failure to fulfill such duties resulted in their client’s injury. This is direct liability.

Reduce Your Risks

Your practice’s liability risks can be mitigated if it is structured and managed correctly from inception.

Entity formation—review all your options. How your practice is structured ultimately affects the extent of its liability exposure, as well as how it must be managed and insured. You should conduct a comprehensive risk assessment to evaluate your specific needs. “It is a complicated process,” said the chairman of OMIC’s board, John W. Shore, MD, who practices in Texas. “Finding an attorney who is experienced with setting up legal entities for medical practices is essential in order to assess all of your potential liabilities. For instance, when we were setting up our surgery center, we had to decide whether we were going to hire a nurse anesthetist as an independent contractor or an employee or use a physician anesthesiologist. We selected a physician simply because the professional liability risk is lower when compared to the other options.”

OMIC committee member Robert E. Wiggins Jr., MD, MHA, who practices in North Carolina, recommends consulting with a tax advisor and attorney to help determine which entity type is most appropriate for each of your endeavors. In his case, he said, “Our clinical practice is organized as an LLC, whereas the surgery center is organized as an S corporation. The buildings in which we practice are real estate investments and are organized as separate entities. It is important to get the details of the entity right from the outset. While changing types of entities later is possible, it can be time consuming and expensive.”

Establish written procedures. Create written office policies and procedures for your practice and follow them. Make sure the regulations governing your entity clearly describe how it will be managed—from taxation scheduling and requirements to profit distribution to rules that govern how current owners leave the practice and how future owners can invest. These documents should also delineate third-party relationships with physician partners as well as employees and independent contractors who may not be protected under the entity.

Purchase insurance. Rules vary between insurers, so it is important to understand what your insurance provider will and won’t cover. “Discuss your organization with your malpractice carrier to pinpoint areas of liability exposure and determine what type of coverage you need for each of your specific endeavors,” Dr. Shore advised.

Determine the coverage needed for employees. “Most claims that we handle are related to concerns about employees who have committed an error or omission while working on an entity’s behalf,” said Mr. Weber. “For example, perhaps a technician failed to follow up on a phone call or report an incident to a physician. Or an A-scan measurement was incorrectly recorded, and the information was then passed on to the physician who implanted the wrong-powered IOL.” Administrative staff and other practice personnel such as nurses and technicians generally are automatically insured under your entity’s coverage for services they render on its behalf and may not need to maintain individual professional liability policies. Conversely, physicians, optometrists and nurse anesthetists who are employed by your entity are not automatically covered and must be underwritten independently.

Create a solid team. One of the easiest ways to limit liability is by hiring the right people and training them to follow your entity’s procedures. “This includes maintaining everyone’s skills, as with professional continuing education,” said Dr. Wiggins, whose practice also provides “training for all the physicians and managers about nonprofessional liability issues such as wrongful termination, what questions can be asked during an employment interview, discrimination and sexual harassment, among others. And we document that those individuals received the training. Practice owners also review the charts and surgical records of associate physician employees. Our staff stresses a positive working relationship with patients, which is a proven risk-mitigating factor when it comes to a patient suing a physician because of an unfavorable outcome.”

Problems to Watch For

Risky behavior. “If there is evidence that a physician’s partners or co-owners knew or should have known that a physician posed a risk to patient care (e.g., intoxicated on the job, repeated incompetence in the OR, etc.), the entity can be held liable for not stepping in,” said Chip Holmes, JD, an OMIC defense attorney. Thus, it is essential to follow any mandates for reporting or corrective action procedures as soon as you are made aware of a situation in which liability could ensue.

Changes to your practice structure. “Any time there is a substantial change in the way that you conduct business, you should discuss the change with your attorney and your insurance carrier,” Dr. Shore said. Suppose, for example, a physician leaves your practice and cancels his or her insurance policy. The issue of “tail” coverage becomes important. Such coverage applies to claims for events that took place while the policy was in effect but were filed after it was terminated. In his practice, Dr. Shore said, “If someone leaves without tail coverage, we would make sure that the premium was paid so our entity is protected.” Insurance carriers should be notified promptly to prevent lapses in or problems with coverage and to identify any policy changes that should be made.

Apparent partnership. If your practice appears to have a partnership with other physicians or entities where no professional relationship really exists, this can leave you exposed to liability and an uninsured risk, whether you intended to represent yourself as partners or not. “The court may decide that an ‘agency’ or apparent relationship exists between physicians who appear to be practicing with each other. If a ‘reasonable person’ is led to believe that physicians are practicing together as partners, lack of actual partnership may not be a defense for a claim of vicarious liability for negligence of the apparent partner,” said Mr. Weber. This situation has become increasingly common as physicians practice from satellite offices. “A physician goes to an optometrist’s or ophthalmologist’s office and rents space to expand their practice or get more referrals, but patients may not necessarily know that your practices are not connected,” said Dr. Shore. “If there is a suit for medical malpractice, many insurance companies consider this an exclusion and may not cover your defense or judgment costs, leaving you responsible for any legal fees or payments awarded to a plaintiff in a settlement.”