John E. Blachaniec
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Managing Complex Property & Casualty Risk and Understanding Liability Exposures For Your Affluent Clients • John E. Blachaniec
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Managing Complex Property & Casualty Risk and Understanding Liability Exposures For Your Affluent Clients. John E. Blachaniec. Today’s Goals Risk Management Personal Asset Protection. Outline definitions and details of personal excess liability coverage - PowerPoint PPT Presentation
Transcript of John E. Blachaniec
Managing Complex Property & Casualty Risk and Understanding
Liability Exposures For Your Affluent Clients
• John E. Blachaniec
Today’s GoalsRisk Management
Personal Asset Protection
Outline definitions and details of personal excess liability coverage
Identify key questions to ask regarding personal liability coverage
Highlight specialty liability areas which may be appropriate for some clients, based on their needs.
Define solutions for addressing liability needs within a risk management plan and a financial plan.
Bridging the Property and Casualty Gap
FPA Journal - November 2007
You work hard to help clients build up the asset base that will enable them to meet their
financial goals. Would it not be a spectacular financial planning failure to see assets built
up over years or decades evaporate overnight due to lack of appropriate or sufficient
property and casualty insurance protection?
“How to Buy Luxury Insurance.” Departures Magazine Jan/Feb 2007
• Remarkably, about 75% of the very affluent households in the United States are covered through mass-market insurance companies, with policies that could leave them deeply out-out-pocket in a nightmare scenario.
• Three large luxury insurers – AIG, Chubb and Fireman’s Fund – are trying to change that ratio.
• According to the CEO of American Express Publishing,
they received great feedback from readers on this article.
Q: Why do the rich need Risk Managers?
A: They have more to lose
Liability Awards
• Parents leave for the weekend having the 20 year old Nanny watching the 12 & 13 year old boys.
• The boys have their friends come over that Saturday afternoon. One of the boys decided to have a WWF wrestling match, after an hour of wrestling and doing moves that they see on TV.
• The Nanny was not paying attention to what the boys where doing in the back yard. One of the neighbors, age 12, gets body slammed and factures his spinal cord and is paralyzed from waist down.
• Only had a $5 million Excess Policy in place.
Various Insurance Company National claims records.
Judgment Amount: $7.5 million
Liability Awards
Insured: Chief Financial Officer of a manufacturing company
• The spouse was involved in a serious at-fault automobile accident
paralyzing a teenager. A $8,500,000 judgment was rendered
against the insured for which there was only $500,000 of primary
automobile liability insurance coverage plus the insured had a $1
million personal excess liability coverage.
• The large uninsured loss caused the CFO to borrow heavily
against personal assets. The stress involved with the two-year
litigation process adversely affected job performance.
Source: Various Insurance Company National claims records.
.
Judgment Amount: $8.5 million
Liability Awards
Insured: CEO’s son celebrates after college – drinking and driving
• College student and his friend celebrating the end of college
exams. Both boys had been drinking. Left hours after being at
the bar and witness stated the vehicle was moving at a high rate
of speed. The vehicle then ran off the road and hit a tree killing
the CEO’s son and the friend suffered brain damage.
• Outside of the CEO losing his son, a suit was settled for $5.5
million. The CEO only had liability coverage for $500,000 thru his
motorist coverage and a $1,000,000 umbrella policy.
Source: Various Insurance Company National claims records.
Judgment Amount: $5.5 million
Liability Awards
Insured: Senior Vice President for a holding company
• A visitor to the insured’s Utah ski resort condominium
tripped on a broken step and suffered a permanent
disabling injury.
• A lawsuit was filed alleging the insured was negligent
in maintaining the property and the claimant was
awarded a judgment of $1,500,000. Only $300,000 of
coverage was available under the insured’s primary
condominium policy. The insured had no personal
excess liability policy.Source: Various Insurance Company National claims records.
Judgment Amount: $1.5 million
The two most dangerous individuals in the world today…
“So easy, even a caveman can do it…”
“Give us 15 minutes…we may save you 15% or more
on yourauto insurance…!”
The Reality
Our motto: Give us 15 hours, and you will
probably be spending more for your insurance. But you will be able to
sleep at night knowing your assets are adequately protected.
Don’t risk a little for a lot!!!
Worries of the Affluent
Fear % concerned
Being kidnapped 35.2%
Lawsuits from people hurting selves on property
52.6%
Lawsuits because people think you’re rich
54.4%
Lawsuits because of business you’re in
67.0%
Theft of property 77.5%
Significant investment losses 91.2%Source: Russ Alan Prince; Prince and Associates
Trusted Advisor ServicesWealth Management
• Private Wealth Services
– Comprehensive Estate Planning
– Investment Advising
– Asset Protection Strategies
– Family Business Planning
– Tax Planning
– Insurance reviews
= Planning for the Protection of Client’s Financial Interests
Wealth Creates Opportunities and Risk
Investment of wealth Structural ownership of wealth –
trusts and LLCs Preservation of wealth – tax
strategies, gifting, succession planning
Protection of wealth
The Missing Component
Protection of Wealth
Liability risks
Property risks
Personal and
family safety and
security
Protection of Wealth
• Thorough needs analysis to identify an individual’s personal risks and exposures
• Educational process focused on potential future risks and exposures
• An ongoing review of an individual’s program and lifestyle to make sure their risk management process meets their current needs
The Personal Risk Management Process
What is at Risk
Value of:
Current and future assets
Future earnings
Potential inheritance of significant
property or other assets
What Does Affluent Mean?Complex P&C Profile
• Single or Multiple High Value Homes and Contents• Domestic Employees• Carpool• Liability mismanaged/not enough• High Profile Lifestyle• “Passion” Investments
– Farm, Ranch, Vineyard– Auto or Valuable Collections, Fine Arts,
Jewelry• Multi-Generational Issues
Multiple Locations
Various State & Foreign Laws Apply
Multiple Agents / Companies - Patchwork Program
Significant Coverage Gaps
Policies Overlap
Improperly Insured Assets
Not Listed on Umbrella
First Line of Defense for Asset
Protection - Umbrella Policy • Buy “umbrella insurance.’ One of the first
lines of defense is to shift your risks to an entity, such as an insurance company.
• Umbrella insurance protects assets from personal injury claims above limits set by standard – issue home or auto policies.
80% have insufficient limits
WSJ - A Fortress for Your Money 7/15/2006
What is Personal Liability
Coverage? • Coverage that an individual purchases to protect
current assets and future earnings from a covered lawsuit or settlement.
• Coverage for damages a covered person is legally obligated to pay for bodily injury (personal injury) or property damage which takes place anytime during the policy period and are caused by an occurrence, unless stated otherwise or an exclusion applies.
Who Needs Excess Liability Coverage?
• Own a home(s) or drive a vehicle
• Affluent individuals who:
– Employ domestic staff such as a
housekeeper or nanny
– Use wireless technology or have children who use the internet
– Carpool
– Have teenage children who are driving
– Operate a home-based business
– Serve on the boards of a non-profit organization
– Maintain a high public profile
– Worldwide Travel – Car Rental
Personal Excess Liability Insurance How does it work?
• An extra layer of protection over home, auto, jet skis, motorcycles, boats, toys, etc.
• Requires minimum underlying limits of liability.• Protects the insured against catastrophic lawsuits
or judgments.• Provides expanded coverage and increased limits
of liability.• Can be purchased as a separate policy or as part of a package.• Can be purchased on a group basis.
What is covered?• Claims for bodily injury or property damage
caused by an insured or hazards on your property
• Defense costs and associated court costs
By Endorsement -
• Non-business related personal injury such as libel and slander
• Underinsured and Uninsured Motorist Claims
• Service on a Not-for-Profit Board
Personal Liability –
How Much Is Enough? Factors To Consider • Asset Base
– How Much Do You Have to Lose?– Future Earnings?
• Exposures and Lifestyles– Lifestyle Activity level– Tangible Exposures– Visibility in the Community– Court Venue in Which the Client Lives
What’s The Likelihood?
• Personal lines lawsuits comprised $82.5 billion of the $219 billion of tort costs in 2003.*
• One of every six jury awards now tallies $1 million or more.**
• The 6th largest verdict in 2004 was larger than the 1st largest verdict in 2003.**
• Defense costs can be equal to or greater than the final amount of the settlement
*Insurance Information Institute
**Jury Verdict Research, 2004, latest available
What is the cost of excess liability coverage?
Example:
Household Details
2 homes (one in Illinois, one in Florida)
3 vehicles – one teenage driver
1 yacht (40 feet long, more than 50 horsepower ________________________________________
$1,000,000 of excess liability $398
$5,000,000 of excess liability $990
$10,000,000 of excess liability $1,750
• U.S. TORT - Out of Control• Most clients need at least $5M if not $10M and
can afford to purchase these limits• 80% of YOUR clients do not have sufficient
liability protection • 50% have significant gaps in their underlying
personal insurance program • Most HNW/executives have not reviewed
personal liability exposures
What Do We Know!
Specialty Liability Coverage Areas
Trusts, Estates and LLCs Employment Practices Liability Directors and Officers Liability
Trusts, Estates and LLCs
• Increasingly popular vehicles for affluent and high net worth individuals for tax and wealth transfer purposes.
• Personal insurance policies are inherently designed to protect individuals, not entities such as trusts, estates or LLCs
• Some insurers such as Chubb, AIG and Fireman’s Fund can address the need for the trust, estate or LLC to be listed as an insured. Notice must be given to the insurer so that appropriate policy modifications and underwriting can occur.
• Estate Attorneys/Financial Planners should recognize that insurance exposures can be created when personal assets are placed in the name of a trust, estate or LLC and work with a qualified risk expert to align personal property and liability coverage.
Employment Practices Liability
CoverageWhat is covered?
• Wrongful termination of employment• Breach of any oral or written employment contract• Employment related misrepresentation, defamation
or wrongful infliction of emotional distress• Violation of employment-related discrimination laws
including workplace harassment
Employment Practices Liability Coverage
Who needs it?
• Individuals who employ domestic employees such as a nanny, housekeeper or caretaker
• Individuals and/or family members who have a family office
Employment Practices Liability
CoverageWhy do clients need it?
• The U.S. Department of Labor estimated that homeowners employed 896,000 housekeepers alone in 2003.
• Employment practices liability is one of the fastest growing areas of litigation.
• Employment practices liability is expensive to defend and the average verdict exceeds $450,000.
• 50% of all suits against private companies
come from employees
Personal Directorship Liability Coverage - What is it?
• Personal liability policy for independent directors serving on one or more boards.
• Unique in that limits are not shared with other directors or with the organization.
• Policy can be tailored for the individual to cover one, all, or any combination of boards a director serves on.
• Insured directorships can be with publicly traded, privately owned, or not-for-profit organizations.
Personal Directorship Liability Coverage - Who needs it?
• Anyone who serves on one or more boards
• An individual who serves on the audit committee of a board
• An individual who is concerned that the organization's D&O limits are inadequate
Personal Directorship Liability Coverage
What is covered?
• Mismanagement
• Breach of duty
• Improper business practices
• Discrimination, harassment or wrongful termination
Selected Policies and Potential Coverage Gaps
Common Critical Gaps
HOME
Home Insurance Gaps…• A whopping two out of every three homes nationwide are
under-insured
• High percentage of underinsured homes by more than
30%
• Limited Replacement cost – NOT guaranteed
• Contractual gaps such as ‘Similar vs. Like & Kind’
• Insufficient sewer/water & drain backup
• No Flood Insurance
*As reported by Marshall & Swift
Replacement vs Market Value
• R/C is the cost to rebuild in today’s dollars
• Market value-what you can sell your home for today
• Construction costs rose 5-7% last year
• In 2005, homeowners spent over $130 Billion on home
improvements
• Ordinance and law coverage
• Extended replacement cost-most policies cap at 10-20%
• Advise clients to review square footage
Common Critical Gaps
AUTO
Who is Covered?
• You, the insured ...
Person or persons named on the declarations page and his or her spouse who lives in the same household
• A dependent ...
Person related to you by blood, marriage or adoption that lives in your household or is away at school
• A domestic partner … ???
The definition of an “insured” or “dependent” is ambiguous!
Young Drivers
Young drivers ages 16-20 years are
at a disproportionately high risk for
both fatal and non-fatal crashes, with
the highest per capita and per-mile-
driven crash rate of any age group.
Motor vehicle crashes are the leading
cause of teen deaths, accounting for
44% of teen fatalities in the U.S.
Percentage of Uninsured Motorists, Select States*
32%
22%
16% 16% 15% 15% 14%12%
10%8%
4%
CO CA AZ AK NV WA US OR HI ID ME
Source: Insurance Research Council, 2004
Target States All Have Below Average UM Rates
CO has highest UM rate in US.
ME has the lowest.
Uninsured Motorist Defined
• Has no liability coverage at time of accident• Must be result of an auto accident involving
injury• Has liability coverage but not enough to meet
the State minimum• A hit and run driver who cannot be identified• Has invalid liability insurance at the time of
accident because the insurer is insolvent or denies coverage
Other Underappreciated Aspects of the Personal Lines Planning
Challenge
• Valuable Articles • Domestic staff• Personal and Home
Security/Travel
Valuable Articles
• Commonly known as a “floater”
• Provides broad protection for ten classes of
personal property
• Blanket vs itemized
• Additional Premium
Classes of Valuable Articles
• Jewelry• Furs• Cameras• Musical Instruments• Silverware
• Autos
• Fine Arts
• Stamps/Coins
• Firearms
• Wine, etc
Typical Coverage Under Homeowners
• Jewelry, watches, furs and
precious stones-$1,500
• Silverware, goldware-$2,500
• Firearms-$2,000
Nanny Hazards Bridging the Property and Casualty Gap
Exposure from liability associated with a nanny or housekeeper who isn’t properly insured for sickness, injury, or automobile accidents. Clients typically treat them as independent contractors and not employees-potentially a very costly mistake
“I suggest to the client that they need to get workers comp insurance for their employees and they say, ‘Hey, I’m not running a business here.’ Then I ask, ‘What happens if she gets injured at your home?’ They say, ‘She has health insurance.’”
“Then I ask, ‘How do you know she has health insurance? And even if she does and files a claim, the first thing she’s going to be asked [by her insurance company] is, ‘Was it on the job?’” (If so, of course, she’s likely to be denied benefits.)
Nanny Hazards Bridging the Property and Casualty Gap
And what happens if the nanny is driving the client’s car, taking his child to the park, and has an accident? “This varies by state,” Randall says, “but typically, a nanny wouldn’t be covered by your policy because she’s not considered a member of the family.” Therefore, he suggests, you need to put her on your policy.”
“Even if the nanny’s driving her own car and has a wreck, if it’s determined that she was working for you when she had the wreck, you as the ‘employer’ are now liable.”
Domestic Employees
Workers Compensation
- Medical expenses
- Lost wages
Health Insurance
Employment Practice Liability
- Wrongful termination
- Sexual harassment/ Misconduct
Risk ManagementThe Process
1. Identify and analyze loss exposures
2. Prioritize loss exposures3. Examine feasibility of
alternative risk management techniques
4. Select the best risk management technique(s)
5. Implement the technique(s)6. Monitor and revise the
program, when necessary
Common Findings
• Multiple Agents – Patchwork Plan
• Inadequate Limits• Coverage Gaps or Overlaps• Uncovered Exposures• Underinsured Homes, COC’s• Uninsured Collections• Agent Never Asked Questions
Relationship ManagerThe Process
• Proactive Periodic Review
• Personal Attention
• Single Point of Contact
• Satisfaction Measurements
Carrier Selection and Management
What to look for – Red Flags
• Own single/multiple high value homes?• Own condo or other as an investment?• Own property in a catastrophic loss area?• Plan to remodel or renovate/expand existing home?• Own a home with unique features or building
material?• Co-own or have property in trust or LLC?• Have significant collections or art, cars or other
valuables?• Own aircraft, large boats, thoroughbred horses?• Have domestic help?• Serve on boards of profit or non-profit organizations?• Have a high visibility career or lifestyle?
Personal Insurance Proposalfor
Mary and Thomas Smith
Issues
Mary and Thomas Smith have a primary home in Milwaukee, Wisconsin. They also have additional residences in
Delavan, Wisconsin and Indian Wells, California. They have four automobiles, two watercraft, two personal watercraft,
three ATVs (currently not covered by their insurance program), two snowmobiles, jewelry, musical instruments andneed excess liability coverage.
Have an immediate need for earthquake coverage on the newly acquired California home.
Would like to be sure they are adequately insured. Would like quotes for $5 million and $10 million excess liability insurance. Would like proper liability protection for their ATV exposure. Would like to explore the coverage benefits offered by insurers who focus on the high net worth individual.
Proposed Solutions
1) Suggest insuring the Milwaukee home for $950,000 however the interior appraisal may indicate that thereplacement cost is higher.2) Suggest insuring the Delavan home for $804,000 however the interior appraisal may indicate that thereplacement cost is higher.3) Suggest insuring the Indian Wells home for $1,300,000 however the interior appraisal may indicate that thereplacement cost is higher.4) Recommend the purchase of at least $5 million of excess liability (umbrella).5) Recommend ACE as the insurer for the homes, valuable articles, automobiles, watercraft and excessliability.6) Recommend Progressive as the insurer for the personal watercraft (jet skis), snowmobiles and ATVs.
Benefits to your clients of introducing Personal Risk
Management
• Proper liability limits• Proper insurance coverage and
values in place prior to loss• Identification of overlaps or gaps in
coverage• Potential consolidation of policies
and policy effective dates for ease of management
• Maximization of insurance dollars spent
Three things you might need to buy where price should never be a
consideration…
Brain surgery
A Parachute
____________insurance
Insurance premiums never bankrupted a client;
uninsured losses can (and will)
The Role of the Trusted Advisor
• Recognition of importance of property/casualty planning
• Identification of reliable, trustworthy and expert P&C advisors
• Discussion/analysis of loss exposures
• Coordination and facilitation of planning
What’s In It For You…
• Provides ongoing, regular access to your client or prospect
• Competitive edge: few others do it
• Solidifies and broadens Relationship
• Can provide access to other family members, friends, business associates
Next steps…• Start integrating into discussions with clients about their P & C exposures.
• Ask the questions about the Red Flags exposures.
• Serve as a personal risk management resource for your clients
• Align yourself with Risk Managers who specialize in personal insurance and employ a risk management approach.
Summary• A comprehensive financial and wealth management plan is
only as strong as its weakest link.
• A sound property and liability insurance program is very important to protect your client’s wealth.
• Don’t lead with price; lead with value
• Clients need to be educated as to value we bring to the table
• Addressing these needs will help you:
– Deliver a comprehensive and integrated solution to your client’s insurance needs
– Protect the relationship you have with your clients
Outsource To A Professional You Trust
Questions
