Financial Planning: Focus on Property, Casualty, and Liability Insurance

If you are like many of our clients the process of growing your wealth has created transitions in the advisers you hire.

As your income grew, you may have moved from doing your own taxes (or using TurboTax) to working with a CPA. As your net worth grew, you may have hired an estate planning attorney. As your investment balances grew, you may have moved from a discount brokerage to a full service broker (operating under the suitability standard of care)to an investment adviser such as MCS (providing a fiduciary standard of care). What many people do not realize is that property and casualty (and personal liability) insurance is also an area where a smaller niche of professionals provide services geared specifically to high net worth individuals.

Recently, I reviewed homeowner policies for two clients. What struck me immediately was that, although both clients had moved the ownership of their homes to asset protection and/or estate planning entities, none of those entities was listed on their insurance policies. In one case, damage to the home would have triggered a payment to the client that would have violated the trust agreement, because the client was not a principal beneficiary of the trust that owned the home. In the other case, the entities that owned the homes were not protected by the liability coverage wrapped into the homeowner policies. Gaps like these in insurance coverage are much more likely to occur with high net worth families.

Are You A Candidate?

When should you consider high net worth property and casualty insurance? Ask yourself if one or more of the following describes your situation:

  • Your primary residence is valued at more than $500,000 or includes unique, difficult-to-replace features
  • Your net worth is over $2 million
  • You own two or more homes (vacation, investment)
  • Your homes are titled to trusts or other entities for asset protection or estate planning purposes
  • Your lifestyle involves private art collections, extensive travel, or a plane or yacht
  • You employ private staff, such as a nanny, a housekeeper, or a personal assistant
  • You are a board member for non-profit organizations
  • Your family’s wealth is managed through a family office

Policy Features to Consider

How should you evaluate your situation? Questions to consider include:

  • Do I have the right insurance agent?
  • Are all of my entities covered in my policy?
  • Does my policy cover all aspects of my lifestyle?

First, is your agent captive or independent? A captive agent works for one insurance company and will be able to offer only that company’s products to address your family’s needs. An independent agent may choose from among various competing products to find the solution that best fits your needs. Thinking back to my Peace Corps experience, I see a captive agent like a person whose only tool is a machete. I discovered that you can not only clear a path with a machete, you can also chop down a tree, mow your lawn, do carpentry (an expert with a machete can make a decently straight cut on a 1 x 8 tropical hardwood plank, plane off the splinters and router the edges), peel an orange, or paddle a canoe. On the other hand, an independent agent is like the person who has not only a machete, but also has access to a lawn mower, a carpenter’s saw, a paring knife, and a paddle. One multipurpose tool can be adequate when all you need is generic types of coverage, but someone with access to a variety of tools may be better able to provide specifically tailored results. Independent insurance brokers can also provide claims servicing, in which case your agent will not be in the position of having to service claims against his/her own employer, mitigating that conflict of interest.

If you or your attorney(s) have created LLCs (limited liability companies), FLPs (family limited partnerships), trusts, or other vehicles for estate planning or asset protection purposes, then it is important to make sure that these entities are covered for the property they own and the liabilities they may incur. For my recent client, I created a table of all of their entities and then cross-referenced that with how they owned properties and who was covered by their supplemental liability policy. It turned out that the homeowner policies named the husband and wife as insured entities, but not the LLCs and trusts that owned their properties. Their $6 million supplemental liability policy did not insure the entities either, so they could have been completely unprotected if someone had initiated a personal liability claim against the LLCs or the trusts rather than against the couple.

Finally, are the additional coverages and benefits offered by high net worth policies a match for your lifestyle, and do they give you value? Do you own a yacht or an airplane, expensive jewelry or artwork, or do you travel frequently? High net worth policies can include enhancements that add protection from theft, fire, earthquake, and other risks. A good agent will be able to provide you a complimentary vulnerability assessment of your property to identify ways you might benefit from these enhancements. These policies can also include benefits that cover the cost of private counsel (rather than relying on the insurer’s counsel) to defend you in liability suits.

We Can Help

We offer evaluations of your property and casualty and liability insurance as part of a comprehensive financial plan. If you feel that you may be a fit for a high net worth policy, give Jeff or Kath a call or send us an email. We would be happy to talk you through some of the questions and provide additional advice if a need is identified.