Malpractice Insurance and the Use of Retainers
Malpractice insurance is a racket. Yet it is a necessary evil. In my state, and most states, you can form a professional association, professional corporation, professional limited liability company, a corporation, or a limited liability company, and those structures won’t save you from being exposed personally for making a mistake, and exposing your personal assets. This is the reason I have a $2 million policy, per aggregate. However, one thing that in surname companies never covered until recently was cannabis.
To get this out of the way, I experimented with cannabis 36 years ago. I don’t like the side effects of the drug, but I am keenly aware that most people use it for the side effects. However, I am high strung, and I don’t like being drugged down to a level where I slow down and feel stupid. They call it dope for a reason. At the same time, I’m not against it. I don’t touch the cannabis plant, I only provide ancillary services to the industry, by consulting, tax consulting, entity structuring, tax planning, and tax prep.
When I get my malpractice insurance, I have to exclude cannabis. Until this year. There is a company that provides insurance for those that provide ancillary services to cannabis. However, it is a second policy, and it isn’t cheap.
I provide business consulting for cannabis clients, as well as business advice, entity structuring, tax consulting, tax planning and tax prep. How is this any different than the services that I already provide to any other business?
Like most people in this industry, I provide a free one-hour consultation. After that consultation, if I am asked to give free advice, that email is met with a consulting engagement agreement, which requests a retainer. Once the retainer gets below $500, it is recharged. This has cut down on those clients that just want free advice, and I explain the engagement letter and retainer as my insurance requires it. Every email, call, and even texts are billed against the retainer. How did I get to this point?
There was a time that I would offer a free, no time-limit consultation. Those consultations turned into phone calls, and emails, and began taking up a lot of my time that wasn’t billable, so I began sending a retainer agreement. What I noticed was the people seeking free advice left me alone and the ones who were engaged respected me.
To give you an example, I just had to order another cell phone. Clients get mine and seem to think that they can text at all hours of the day, as if I am on duty during Super Bowl Sunday, weekends, you name it. I even got a text at 2:30 a.m. Some of those people are on retainer, and some aren’t. The ones who are, I respond to, and bill them. The ones who aren’t are met with a retainer agreement, which will either get them to go away, or they will pay it.
Where my insurance company has an issue is that I am doing consulting for something other than taxation. However, I convinced them, and we are fine now. Malpractice insurance has become almost like health insurance. Your doctor gives you a prescription for an ailment. The insurance company rejects it starting that you have to get a pre-authorization from your doctor. Forget the fact the the doctor writing the prescription should have been their authorization, but I digress.
The reason I have malpractice at such a high level is that when I was a partner at a partnership, the main senior partner, who honestly should have retired years before he did, had so many claims against him he couldn’t get malpractice insurance.
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Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...