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The New “Deep Pockets”

The New “Deep Pockets”
The new targets or the new Deep Pockets are those who have saved up some money for retirement, those who operate a successful business, and those who own a home or have some rental property with any equity. That describes a lot of people in our country. They are vulnerable because their savings are valuable to them. There are 100 million adults in the population, and 30 million have mutual funds, savings, or equity in their home. That’s 30 million people with something valuable to lose, and 1 million lawyers who are aggressive and motivated. They want to move some of that money to their side of the table. One million lawyers file 19 million lawsuits each year, picking out the easy targets and causing great personal suffering and hardship.

A lawyer’s job is to tie a party who has some money into a case so that he will get paid. A good lawyer is one who can create a clever new theory of liability so that someone with money or insurance will be found legally responsible. Even if our common sense tells us that this Deep Pocket had nothing whatsoever to do with the injury, a judge or jury or court of appeals will decide a case based upon their own view of what is fair and rational.

A doctor prescribed antihistamines for a patient with an allergy. The patient ignored the warning label about driving while taking the medication and caused a serious auto accident. The patient had little insurance and few assets, so the doctor was sued. The plaintiff’s lawyer successfully argued that the doctor should have known that the patient might drive his car while on the medication. The jury found the doctor liable for $6.2 million in compensatory damages. The doctor’s malpractice insurance didn’t pay a nickel of the claim since the policy only covered claims by a patient—not those injured by a patient.

Was the doctor really at fault here? He lost everything he owned, and he didn’t do anything wrong. The mistake he made was not realizing that as a physician, and as someone who had a home and some savings, he was an inviting and vulnerable target for a lawsuit.

Popular Deep Pocket Defendants

The Property Owner
Anyone who owns rental property is an excellent candidate for a lawsuit. In any measurement of potential liability, we would rank the property owner at the top of the list.

Let’s assume you own a small apartment building. One evening a female tenant returns home from work and parks her car in the enclosed parking garage. As she gets out of her car, she is robbed by an assailant. Under these circumstances, you can expect a lawsuit against you as the owner of the property, for negligently failing to provide the proper level of security.

Regardless of the actual safety measures which you employ, the plaintiff’s attorney will allege that you should have taken additional steps, such as installing video cameras, floodlights, or hiring security guards to protect the safety of the tenants. In essence, as a property owner and a Deep Pocket Defendant, you become a guarantor of the safety of your tenants, to the full extent of your available net worth.

A tenant was shot and killed in the alley behind the apartment building. It was found that the owner of the property should have provided better lighting for security in the alley. The jury awarded $27 million to the relatives of the tenant.
A fire in an apartment building killed one tenant and injured nine others. The owner had complied with all building code and safety requirements. He was sued for $5 million.

In these and similar cases, the owner of the property paid the claim or the judgment even though he had done nothing wrong. And that’s where the problem lies. Under our current legal system, it doesn’t matter whether you are really negligent or whether you do anything that is wrong. You can maintain your property in perfect physical condition, taking every imaginable safety precaution, and yet something can still go wrong. If a tenant is injured on the property—no matter the cause—it will still be your fault.

Having insurance on the property does not provide a guarantee that you will be free from personal exposure. Insurance is written with a long list of exclusions and exceptions and generally won’t cover a lawsuit for undisclosed defects. Furthermore, it will be difficult to obtain an amount of insurance which is adequate to cover the full amount of the potential liability associated with injuries to multiple tenants. Even $1 million in coverage will not be sufficient if someone is seriously injured on your property. If several people are hurt in a fire or earthquake or other disaster, there may be $5 million–$25 million or more in potential damages.

Whatever amount is not covered by insurance will be your personal obligation. A judgment against you will be satisfied from your personal assets including your home, savings, and retirement funds. If something goes wrong at the property, everything you own can be lost. Any real estate—whether or not you have any equity in the property—represents an enormous source of liability to you and poses a danger to all other assets that you have accumulated.

Officers and Directors
Officers and directors of publicly traded companies are also popular Deep Pocket Defendants. All companies whose shares are publicly traded must file quarterly and annual reports with the Securities and Exchange Commission. These reports are known respectively as the 10–Q and 10–K filings. The purpose of these filings is to make information concerning the business and finances of the company publicly available. The law requires that public companies provide full disclosure of all material information which may influence the price of its stock.

A number of law firms employ young MBAs and attorneys to scrutinize each of the required filings made by these companies. If the stock of a company rises or falls sharply in response to some news item affecting the company, a law firm may attempt to show that the company’s filings failed to adequately disclose certain material information. If any possible claim can be made, a class action lawsuit will be filed on behalf of current or former shareholders. The company, its officers, and its directors will be named in the suit. The defendants will fight the lawsuit or settle it, but in either event, the cost will be substantial and the only likely winners will be the lawyers who filed the action.

Physicians
All physicians are acutely sensitive to the risk of lawsuits. A recent study found that between 70 and 80 percent of all obstetricians had been sued, and the percentage of neurosurgeons and other medical specialists is equally as high. It seems that the public now perceives doctors, like auto mechanics, as capable of fixing any problem with the right tools and a good supply of parts. When these unreasonable expectations are not met—when a surgery or procedure is not successful—the patient and his family conclude that the only explanation is that the doctor must have been at fault. It is not fate, nature, or an act of God that is blamed for the misfortune. (It is much too difficult to collect a judgment from these parties.) As a result, many doctors have been forced to significantly narrow the scope of their practice to eliminate even modestly risky procedures. This type of defensive medicine inevitably drives up healthcare costs for everyone.

Real Estate Developers
Real estate developers and construction companies are another group with potentially significant personal liability. When a project is developed and sold, there may be liability to purchasers and subsequent purchasers for many years to come. Damages caused by latent (unseen) construction defects may be either uninsurable or may surface only after a policy has expired. As an example, California law states that a builder remains legally responsible for latent defects for up to ten years after the completion of the building. With potential liability having a “tail” of up to ten years, no builder is immune from a crippling lawsuit which may have been caused by the faulty workmanship of a subcontractor who has long since disappeared.

During periods when real estate prices are declining, lawsuits against developers and general contractors will be inevitable. Homeowners who lose a significant amount of equity due to depressed market conditions often attempt to recover their investment by filing lawsuits, alleging construction defects against everyone involved in the project. That includes the geologists, engineers, architects, and the building tradespeople as well as the developer. These types of cases are enormously costly and time consuming to defend, and unless there is an insurance company involved to pay the costs, it is difficult for all but the largest companies to survive such lawsuits.

Another problem faced by developers is that each project requires a significant amount of cash, most of which is borrowed from a lending institution. The developer puts up the land as security and must also sign a personal guarantee for the entire amount. If the project is not successful, the developer must repay the loan out of his own pocket. As a result, one bad deal can wipe out many years of hard work.

Because of the high degree of lawsuit risk from these activities, the owners of these businesses are placing their entire net worth in jeopardy every single day. Each time a doctor performs surgery, he is literally betting the house on a successful outcome. Anytime something goes wrong, someone will sue. Every patient, client, or customer is a potential legal adversary.

In addition to risks faced by professionals and business owners, it is important to understand the particular types of liabilities that arise out of various commercial and personal relationships.

Removing Incentive to Sue You
The first goal of a sound financial plan is to protect your personal and business assets from potential lawsuits and claims. We will discuss this in great in the following topics. For now, keep in mind that assets such as your home, your bank accounts, and your brokerage accounts can be moved into a properly designed plan. Someone wanting to see what you have will not find assets reachable and available. Since the lawyer for a potential plaintiff will usually only sue you if he knows there are assets and he knows he will get paid, it is extremely unlikely that any lawyer would be willing to file a case against you. You can successfully discourage lawsuits by holding your property in a protected manner, without revealing to the world what you own and how much you have. That’s the first important objective that you can accomplish. The importance of these asset protection strategies will be emphasized as we present this material.

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