Professional Liability - Personal Assets in a Trust? 3

[sundale]

Have any of you consulting engineering firm principals/owners placed your personal assets (home, investments, IRA, etc.) in a revocable trust as a mechanism to better shield them in the event of a potential lawsuit judgment exceeding your E&O liability insurance policy limits?

I know I am posing a legal question to non-lawyers, but I am curious if any of you engineers had done this.

 

[jayrod12]

Both firms I've ever worked for are registered as Corporations, and therefore the principal's personal assets are shielded from lawsuits. That's obviously provided you haven't committed any sort of criminal issues.

 

[appot]

If you are not shielded by a corporation, then you really need to work with a financial advisor or an estate attorney. Everybody's financial situation is different. Also, everybody has different levels of acceptable risk. Work with a professional to help you define your risk level.

 

[Ron]

jayrod12....I'm not sure what state you practice in, but in many states, the engineer can be sued individually without regard to the "corporate vail". My state is one of those. Remember that engineers are individually licensed and even when they practice within a corporation, they take personal responsibility when they sign and seal something. For that reason, you need to make sure that the corporation you work for indemnifies you for your actions, including errors and omissions.

I have not tried to shield my personal assets from my corporate liability. Most often, attorneys will chase individual engineers only if they have significant assets (LOL...we're engineers) or to have them tagged at the state licensing board for negligent practice. They go after the insurance because that's an easier "kill"!

 

[zdas04]

Once again Ron provided the answer that was building up in my head as I read this thread--you stamped that drawing, not your company.

I was working for an Oil & Gas integrated Major when I got my P.E. and the company gave me an all-expense paid trip to sunny Houston, TX to spend a day with the in-house lawyers. To boil it down, they told me that not only was the company prohibited from covering my liability if I was sued for something I stamped, they couldn't even provide informal legal advice let alone pay for attorney's fees. The liability goes with the stamp, not with the company. This is true in more than a few states (the lawyers said it was part of the NCEES language that most states have adopted). The in-house lawyers strongly suggested that I rent a safety deposit box and put my stamp in it until after I retired and acquired insurance.

For someone working for an actual engineering company (with a P.E. in the position of corporate officer and attorney in fact), then the rules are different to some extent and the company can (but doesn't have to) provide insurance and participate in the lawsuit. They can also hang you out to dry.

[bold]David Simpson, PE[/bold]
MuleShoe Engineering

In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual. Galileo Galilei, Italian Physicist

 

[cvg]

creditors apparently can go after assets in a revocable trust, so not sure it will protect you

http://www.investopedia.com/terms/r/revocabletrust.asp

an irrevocable trust might be more secure

unfortunately - ZDAS is correct

you and your spouse can both be served, personally, at home, regardless of any involvement or guilt in a case. your employer can choose to defend or not defend you. if not, they may give you the name of a good attorney and wish you luck

 

[jayrod12]

I practice in the great white north, where unless it is truly criminal the e&o insurance protects the individual.

 

[Canuck65]

What I have been told by my lawyer (I am also located up in the Great White North) is that it is now one 5 minute motion in court to get past the Corporation. Typically not done unless absolutely necessary, i.e. something criminal, grossly negligent or exceeds E&O. Another thing I found interesting is that E&O policies do not cover losses due to 'missed deadlines'. If you get way behind and it negatively affects a project, your insurance may not cover you.

I have known principals/partners to create holding companies that then own their shares in the companies. Many are multi layered, and then they still transfer assets to their spouses.

 

[moltenmetal]

Not a lawyer, but in most jurisdictions it takes more than mere assessment of liability to cut through the corporate veil and get at personal assets. It would take a fundamental breach of contract or something criminal.

 

[Ron]

MoltenMetal...you are correct...there has to be an impetus for the piercing of the corporate veil; however, that is usually the same impetus that leads to the claim anyway. There are usually a lot of factors that lead to an attempt to pierce a corporate veil, but as Canuck notes, it is usually a short hearing in front of a judge to make that decision. Depending on the complexity of the case, that hearing can be a few minutes or days. In either case, it will cost you money for the defense of the claim, so the better option is to be pro-active and cover your a$$ on the front end, not the back end.

 

[moltenmetal]

In the event of criminal activity or fundamental breach, there is likely no hole deep enough or well enough disguised to hide that money from those who have a legal claim to it.

Best to avoid being in fundamental breach and to stay on the correct side of the law.

Honest mistakes are what insurance is for, and insurance plus the corporate veil are usually sufficient to be protective in those cases.

 

[kmart30]

I believe Florida passed a law back in 2013 saying no engineer will be held personally liable as long as certain language is in all your contracts. The language has to be exact to the law including the text height and everything. I don't know which states are similar to Florida or not but even with this specific language in my contracts I am incorporated and pay a very heavy fee for E&o insurance.

If you are not in one of these states then having a corporation with a good E&O insurance should be all you need. I would think only gross negligence on your part as the EOR would make it easier for the lawyers to pierce the veil. If not then why would a lawyer even try to pierce this veil after he has dried up the well with your E&O? I would only assume if this lawyer knew you had enough assets to cover the extras? When the lawyer calls are you suppose to open up your piggy bank and let him have a peak? I would think he would need a court order or something along those lines. Do judges give those out like hot cakes?

I would hope if you are an engineer and actually have "assets" you would approach asset protection like you do with safe engineering practices. Incoporating, insurance, real estate, shell companies(not to hide money but to limit liability), trusts, etc. not a lawyer but if I did have assets to protect I would be educating myself and seeking professional help to protect them as much as possible.

 

[WARose]

jayrod12....I'm not sure what state you practice in, but in many states, the engineer can be sued individually without regard to the "corporate vail". My state is one of those. Remember that engineers are individually licensed and even when they practice within a corporation, they take personal responsibility when they sign and seal something. For that reason, you need to make sure that the corporation you work for indemnifies you for your actions, including errors and omissions.

Usually the question I have (when I go and work for someone else) is: "Do you have E&O insurance and how much is it?" The thing I have always wondered about that is: what if the damage is in excess of that? Like jayrod12 suggested, I've always relied on the corporate veil.....but its pretty easy to be added as a co-defendant in a lawsuit.

I notice a few people saying you have to be worth a lot (or have significant assets) to get sued. That isn't the case. I've seen people get sued over 5-10k. If the damage is in excess of E&O coverage/corporate assets.....it's pretty easy for you to be added as a co-defendant on a lawsuit.

I also wonder how a corporation could indemnify you. I've never seen that done anywhere (except as a 1099 employee)....just a statement in the level of E&O coverage.

[red]EDIT/UPDATE: Since I posted this......this subject has come up in conversation with a contractor I know whom has a partner who is now stamping drawings. They are obtaining legal advice in the coming weeks and will pass along to me what they learn......I will then pass along whatever I get here.[/red]

 

[sundale]

Thanks for the excellent responses. An attorney informally advised me to have the partners hold stock in a LLC that in turn owns the engineering corporation.

 

[IRstuff]

For which he was, no doubt, more than willing to set up, given a mere pittance of a fee ;-) Seems to me that shareholders are not liable beyond their investments to begin with.


I think plaintiff lawyers are smart enough to sue the deepest pockets and all the pockets, just in case. The discovery process will find all the parties, guilty or otherwise, that are sue-able, which are any bodies that signed or sealed a relevant document.

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[XR250]

My lawyer told me that as long as the assets were owned by me AND my wife they could not be touched as long as she was not involved in the business.

 

[WARose]

Good info XR. It's interesting you say that because a guy I know that runs a engineering firm put everything in his wife's name to be safe. (And she has no involvement in the business.) I guess he trusts her.

The contractor I mentioned in my last post is obtaining legal advice in the coming weeks.....will advise when I hear some feedback.

 

[havesealwilltravel]

Don't assume that if you work for a corporation as an engineer your assets are shielded from lawsuits.

I had an experience similar to zdas04. I worked for a huge (multi-billion dollar) international company. My boss asked me to P.E. stamp some drawings for the company. I asked for a standard Indemnify, Defend and Hold Blameless Agreement from them. My boss asked his boss who asked his boss ... etc. Eventually the request ended up at the main corporate office. I received a letter from the corporate lawyers stating "Under No Circumstances will the _______ Corporation be responsible for any liability or responsibility resulting from the use of a Professional Engineers Seal applied to a drawing by any employee”. It went on to say that only individuals can practice engineering, not corporations, and that the corporation considered the individual engineers responsible for the consequences of their actions.

Before P.E. sealing a drawing for a company, the engineer should be sure to have and Indemnify, Defend and Hold Blameless Agreement with the company. The engineer should also be sure that the company has sufficient assets and adequate insurance (with a tail) to protect the engineer if a lawsuit happens.

You protect your house with fire insurance even though a house fire is a very rare event. And you know the extent of coverage that you have. I don’t understand why some engineers are so willing to seal drawing without understanding what financial protections they have should something bad happen.

 

[WARose]

Today, the contractor I mentioned previously sat down with an attorney. He (the attorney) suggested that a statement could be made in the quote (for a job) that [whomever the job is being done for] agrees to indemnify the EOR and that all liability for E&O is solely that of the LLC the EOR works for. Indemnity clauses are sometimes hard to get these guys to agree to....so in lieu of that, you could also just make a general statement as to where the E&O liability lies. However, that leaves a loophole that a (injured) third party could find his/her way around to you.

He didn't ask about the co-ownership suggestion XR250 raised....he will do that once there is some follow up on language to be used in a contract/quote. Will post here once I know more.

PS: He will also ask how effective the LLC/INC you work for indemnifying you is as far as protection goes. It's not clear to me (or him) if that will protect you (especially in a the case of a third party injury).

 

[WARose]

Ok, between the contractor's attorney and the fact I contacted my own.......I think I have a handle on this now. What I found out:

1. The co-ownership approach might help but it isn't foolproof. If (for example) you co-own a home with your wife, a judgment will be attached to your half.....not your wife's. This has the effect of: few people are willing to buy half in such a case. (I would assume once the house was sold (when both owners die) the half could be gotten at that way. But I didn't ask.) Liquid assets would probably be wide open to be grabbed.

2. If you are self-employed (like me) your LLC needs to have an indemnification statement in the operating agreement. In my case, the operating agreement states that the LLC indemnifies me for all costs, losses, liabilities, and damages paid or accrued by me in connection with the business of the company. I was concerned that this would not stop someone from naming me as a co-defendant in a lawsuit so I asked my attorney:

"Consider the following scenario: along with my LLC, I (as the EOR on a project) am named as a co-defendant in a lawsuit for E&O. (That I lose.) Let us also assume that the damages are in excess the combined assets of my LLC and E&O insurance......since I am a co-defendant in the suit, will I then have to pay any damages from personal assets? Or will paragraph 6.1 [the indemnification statement] automatically kick that back to the LLC (as debt/liability I would assume)?

In some states the EOR can be named as a co-defendant in a lawsuit (along with his company).....so this is why I am asking."

His reply:

"If you were joined as a Defendant to a suit for something that your company has done, you do not face "personal liability" unless it can be shown that you were acting outside the scope of your work for the corporation."

So it appears you are safe with the indemnity clause. I'm not sure if that would apply if you were working for a company that did NOT have that clause. (I might ask him that in a follow up question.) If it didn't apply.....I guess you'd have to hope the "deep pockets" theory would protect you.

If I find out anything else....will post.