Most wealthy individuals associate the term “risk management” with hedging against market losses, managing tax exposures and buttoning up estate plans. What might not come to mind first, however, is the impact of a contractor seriously injuring himself on their property, a friend borrowing a vehicle and causing an accident, or a flippant remark becoming grounds for defamation.
Yet, any accident or event that leads to a lawsuit can instantly wipe out wealth, and the impact can be far more severe than a bear market or sustained recession. Litigation not only puts current assets at risk, but it can also undermine future earnings.
Brian Talbot, vice president of Insurance Operations at Fifth Third, explains why personal liability insurance is a critical piece of the financial planning puzzle.
Q: Most people have some liability protection through their car insurance or homeowners policies. Why do they need additional coverage?
A: For high net worth individuals, in particular, the risks are often much more diverse—for example, they own multiple houses—and their assets are such that they need insurance above and beyond what’s offered by standard policies. A key part of preserving wealth is managing risk—and litigation is a major risk. It can change a family’s financial outlook in an instant. I recommend an umbrella policy for anyone, but especially someone who has significant assets and income.
There are many cautionary tales that underscore this. In one example, an individual let his friend borrow his McLaren sports car, and the friend caused an accident where, tragically, someone was killed. The owner of the car was sued for $30 million, taking his net worth from $50 million to $20 million.
Q: What are some other reasons people need to make sure they have enough insurance?
A: What’s interesting is that you aren’t just insuring against a lawsuit in which you’re the defendant. Additional liability insurance can also protect you if the person at fault is underinsured or has no insurance. That’s a real risk considering that one in eight Americans is driving around without auto insurance. In that case, having additional coverage would ensure that the victim doesn’t have to dip into his or her own assets to cover medical costs or lost income. CHECK ALL.
Q: Accidents are a major risk, but what are other reasons to have additional coverage?
A: Many wealthy individuals employ household staff or personal assistants, which poses additional risks, not just for accidents but also comments or actions that might be misconstrued as harassment or misconduct. While every policy is different, many umbrella policies would cover related damages.
Q: What isn’t covered by liability insurance?
A: Intentional and criminal acts. That really just sums up. There are other things that are excluded, but those are the big ones.
Q: How can people make sure they have enough?
A: The best strategy is to work with a wealth advisor and insurance professional to do a comprehensive analysis of your exposures and your assets. Remember that it isn’t just your liquid assets that are potentially at risk. Your property, art, jewelry, and even future earnings could be fair game. Just looking at your current net worth is overly simplistic.
For most people, it makes sense to err on the side of more, rather than less. Obtaining and umbrella policy is relatively inexpensive depending on what assets you are trying to safeguard. If you have not had a quote, I recommend asking your agent about options. As with most insurance policies, it becomes incrementally less expensive as you buy more.
Q: Would someone need multiple policies?
A: You have to check with your carrier, but one umbrella should cover all of your underlying risks. The majority of carriers we work with offer one umbrella policy that goes over top of all underlying homes, cars, boats, etc. There are specific requirements of the underlying insurance policies, please speak with an insurance professional for eligibility.
Q: Once someone secures the right coverage, how often should the review and update it?
A: As a rule of thumb, a good agent will meet with clients twice a year. High net worth individuals tend to make major purchases more frequently, so a mid-year checkup is generally a good idea. Again, we highly encourage doing this in conjunction with a wealth advisor to make sure the policies are keeping pace with any changes in a client’s net worth or potential exposures. Insurance is another facet of asset protection, which means it should be front and center in any conversation about building and preserving wealth.