Non-medical business exposures that threaten doctors’ financial solvency continue to grow in scope and number. This week we take a look a relatively new type of risk-management product: Personal Guarantee (PG) Insurance.
We’ve covered both exposure related to residential and commercial real estate debt and other non-medical liabilities that have been financially fatal to doctors in previous columns. These types of general business exposures, along with increased regulatory risks on issues like HIPAA, Medicare billing, and RAC audits, along with employment-related lawsuits, now pose a threat to your practice that must be given the gravity of a dreaded malpractice claim itself. In fact, in my personal experience working with physicians in every state over the last ten years, as statistically real as malpractice claims are, I’ve seen far more business- and risk-related crises than catastrophic medical malpractice claims.
What is PG Insurance?
It’s a form of fully underwritten insurance coverage that can cover 30 percent to 70 percent of your debt liability on a specific loan, depending on the policy and features you pay for.
What kinds of loans are covered?
The insurance is available for both individual loan/borrower scenarios and those related to a business you own in which you might have several partners or be subject to joint and several liability. It may also be available if you are a third-party guarantor on the debt of another, as in situations where you may have “co-signed” to help a family member get credit. Loan amounts run from around $750K to multiple millions of dollars.
What does it cost?
It depends. Like any other form of valid insurance it is underwritten specifically to you, the property, dollar amount, and so on. The premium you pay is based on these risk factors.
Does it last the entire term of the loan?
No. At this point it seems to be re-underwritten every year based on your income, property value and other factors relating to creditworthiness.
Can I get it if I’m already in trouble or worried?
Probably not. The insurance company only wins if they odds are heavily in their favor and they only insure people and loans unlikely to default and well collateralized by the property itself. The insurance company has credit, earnings, and other requirements including a required seven-figure (corporate) earnings history and wants you to have been producing at that level for several years. This requirement may sound very limited but most commercial credit, including loan underwriting itself, has similar standards.
Personal Guarantees (PGs) always need to be entered into carefully and with advance legal counsel. While my preference would be always be for non-collateralized, non-recourse loans that don’t subject your other assets to any legal risk, those types of loans are a rarity and are growing increasingly so. In most cases the loan is guaranteed by both the property itself and your personal guarantee, backed by your other available assets, to make up any shortfall between the liquidation value of the property and what you borrowed to begin with. In this column on several previous occasions we have addressed the issue of this liability and have always advised that physicians carefully limit the guarantees as much as possible to very specific dollar limits or specific assets used as collateral and to avoid the dreaded “joint and several liability” scenario. If possible limit your debt liability in the loan contract itself to a dollar amount that is equivalent to the percentage of what you actually own, not the entire loan. More specifically, for instance, don’t sign a loan that makes you liability for an entire $3MM dollar loan when your 20 percent is worth only $600K.
As we’ve seen over the last six years in particular, what seems like a “sure thing” on residential or commercial property can quickly become a bottomless pit of liability if the market changes and values drop. In situations like this and several others being able to transfer some of that risk to a third party for a finite cost becomes an intelligent way to limit your risks.
I must point out that this coverage is new so there is not any credible history of claims payment to point to and that at present it is offered by only one carrier but re-sold by many insurance agencies including some very reputable national agencies. I rely on their due diligence and the assumption that claims will actually be paid for purposes of this discussion. We will continue to watch as this new category of risk management evolves and becomes an important part of any doctor’s asset protection plan.