Wealthy And Wise Winter 2009
7
By Mark Battat Vice President The Insurance Institute for Highway Safety is an independent, nonprofit, scientific and educational organization dedicated to reducing the losses – deaths, injuries and property damage – from crashes on the nation's highways. The institute offers a variety of consumer brochures, including: Shopping for a Safer Car About Airbags including on/off switches and child safety Beginning Teenage Drivers Vehicle Research Center Guide To learn more about how you can improve your travel safety, simply go to www.ihs.org/brochures/default.htm WEALTHY & WISE PRIVATE CLIENT GROUP March 2009 — Issue 7 continued on page 2 TIMELY TIP: THE INSURANCE INSTITUTE FOR HIGHWAY SAFETY www.willis.com CUTTING COSTS? DON’T REDUCE YOUR LIABILITY LIMITS! By Lynn Killeen Senior Vice President “Shouldn’t I reduce the amount of coverage on my house in light of its decreased market price?” That’s the question of the hour, as home values continue their downward slide. We are fielding many calls from clients asking to reduce the amount of insurance coverage on their Homeowners or Excess Liability policies. Our response: Consider increasing your policy deductible or removing physical damage coverage on older vehicles if you wish to reduce your premiums. Do not reduce your Excess Liability coverage. And let’s discuss the correct amount of coverage for your home. For most of us, our home is likely our most valuable physical asset. We need enough insurance coverage to rebuild in the event of a total loss. While the market value of many homes has fallen, construction costs have not. The fluctuating but generally increasing costs of fuel and sluggish new home sales have kept the costs for residential building from falling. Typically, contractors find it more expensive to build one home than work on a new housing development – a factor in estimates to rebuild an existing home. Most insurance policies require the amount of insurance carried on the dwelling itself be equal to 100% of the cost to rebuild the home as it currently exists. If you agree to do this, then several carriers that specialize in insuring high-value homes will agree to rebuild your home, even if the amount of coverage shown on your policy is not enough. (Individual contracts vary and should be reviewed with your broker.) If, at the time of loss, your home is insured for less than 100% of the cost to rebuild, you could be subject to a coinsurance penalty. Although coinsurance is more common in commercial property policies, we also see it in many personal home policies. For example, if your home is destroyed in a fire, and it costs $1,000,000 to rebuild and you only had $800,000 of dwelling coverage at time of loss, you were insured 80% to value. A coinsurance penalty is computed by “did over should.” In other words, you “did” have $800,000 of coverage; however, you “should” have had $1,000,000. Therefore, you were 20% underinsured, so if
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Transcript of Wealthy And Wise Winter 2009
By Mark BattatVice President
The Insurance Institute forHighway Safety isan independent, nonprofit, scientific andeducational organization dedicated toreducing the losses – deaths, injuries andproperty damage – from crashes on thenation's highways.
The institute offers a variety of consumerbrochures, including:� Shopping for a SaferCar� AboutAirbags including on/off switches
and child safety� BeginningTeenageDrivers� Vehicle ResearchCenterGuide
To learnmore about howyou can improveyour travel safety, simply go towww.ihs.org/brochures/default.htm
WEALTHY & WISEPRIVATE CLIENT GROUP
March 2009 — Issue 7
continued on page 2
TIMELY TIP:THE INSURANCEINSTITUTE FORHIGHWAYSAFETY
www.willis.com
CUTTING COSTS?DON’T REDUCE YOURLIABILITY LIMITS!By Lynn KilleenSenior Vice President
“Shouldn’t I reduce the amount of coverage onmy house in light ofits decreasedmarket price?” That’s the question of the hour, as homevalues continue their downward slide.We are fieldingmany callsfrom clients asking to reduce the amount of insurance coverage ontheir Homeowners or Excess Liability policies. Our response:Consider increasing your policy deductible or removing physicaldamage coverage on older vehicles if youwish to reduce yourpremiums. Do not reduce your Excess Liability coverage. And let’sdiscuss the correct amount of coverage for your home.
Formost of us, our home is likely ourmost valuable physical asset.We need enough insurance coverage to rebuild in the event of a totalloss. While themarket value ofmany homes has fallen, constructioncosts have not. The fluctuating but generally increasing costs of fueland sluggish new home sales have kept the costs for residentialbuilding from falling. Typically, contractors find itmore expensive tobuild one home thanwork on a new housing development – a factorin estimates to rebuild an existing home.
Most insurance policies require the amount of insurance carried onthe dwelling itself be equal to 100% of the cost to rebuild the home asit currently exists. If you agree to do this, then several carriers thatspecialize in insuring high-value homeswill agree to rebuild yourhome, even if the amount of coverage shown on your policy is notenough. (Individual contracts vary and should be reviewedwith yourbroker.) If, at the time of loss, your home is insured for less than100% of the cost to rebuild, you could be subject to a coinsurancepenalty. Although coinsurance ismore common in commercialproperty policies, we also see it inmany personal home policies.
For example, if your home is destroyed in a fire, and it costs$1,000,000 to rebuild and you only had $800,000 of dwellingcoverage at time of loss, youwere insured 80% to value. Acoinsurance penalty is computed by “did over should.” In otherwords, you “did” have $800,000 of coverage; however, you “should”have had $1,000,000. Therefore, youwere 20%underinsured, so if
turn on theTVany day of theweek to hear ofthe latest and greatest lawsuit in theU.S.Unfortunately, anyone can sue you for justabout anything. Law firms advertise “if wedon’twin, you don’t pay.” Add that to the factthat anyone canwalk into anymunicipality andpay $50 or so to file a small claims lawsuit, andthe potential exposure far outweighs thenominal savings realized from reducing yourliability coverage limits.
We see claims originating fromminor fenderbenders, clients’ children loaning their cars toa friend and the friend has an accident, dogbites, the guy hired to clean the gutters falls offthe ladder, familymembers falling on slicksidewalks, or amishap at the country clubreception that our client hosted. Then therearewatercraft accidents…thinkwater skiing,jet skis. And golf carts: the teenage sonwhipsaround the corner and his friend goes onewayas the cart goes the other. The list is practicallyendless! The 47th Edition of JVR’s CurrentAward Trends cites jury awards over $1millionrange from9%of the total of all judgmentsrendered in theNorthwest to a high of 27%ofall awards in theNortheast. This is the lastplace youwant to skimp on your insurance. Ifa judgment is rendered against you as theresult of a lawsuit and you do not have enoughinsurance, your assets are at risk. Additionally,yourwages can be garnished until the lawsuitis paid in full.
For Excess Liability, the bottom line is that$1M is the old $5M, and $5M is the old $10M!
Willis HRH • 03/092
Cutting Costs continued from page 1
your policy contains a coinsurance penalty clause, the amount youcollect could be reduced by 20%. Frequently, this also applies topartial losses. Let’s say you have a partial loss and the estimate is$300,000 to repair your home. Even though you have $800,000 ofdwelling coverage, if it is determined you should have had$1,000,000, then the insurance company can reduce your claim by20% and pay you only $240,000, i.e., your penalty for underinsuringyour home is 20% of your claim or $60,000.
A better solution is to consider increasing your deductible andessentially self-insuring the first $2,500, $5,000 or even $10,000.This should reduce your annual premium and eliminate submissionof smaller claims to your insurance company. Keep inmind thatstatistics indicate an insuredwill only submit one home claim every7 to 10 years.
Whenwe assist our clients inmaking this decision, we determine thepremium savings at each deductible option and divide it into thedifference between the deductible they have and the option they areconsidering. For example, if you currently have a $1,000 deductibleand are considering a $2,500 deductible, first determine the amountyouwill save annually if you choose the higher deductible option.
Let’s say, your annual savings is $425. The difference between yourcurrent deductible and your potential new deductible is $1,500.Divide your annual savings into what your increase in risk is, i.e.,$1,500 divided by $425 equals 3.53 years. Thatmeans it will take you3.53 years to break even. Every year after 3.53 years that you do nothave a claim, youwill be ahead by $425. If you don’t have a claim foreight years, you have saved almost $1,900.
Reducing yourExcess Liability orUmbrella limit is almost never agood idea. You only have to open anewspaper, click on the internet or
Willis HRH • 03/093
ZONING IN ONFLOOD INSURANCEBy Frank RapisardaVice President
Doyou live in a flood zone? Most everyone in theU.S. does, thanks totheFederal EmergencyManagementAgency (FEMA). Althoughflooding causes over $3 billion per year in property damage in theU.S.,prior to 1968,whenCongress passed theNational Flood InsuranceActin flood insurancewas virtually unavailable from the private insuranceindustry. TheNational Flood Insurance Program (NFIP)managed byFEMA then began the ambitious task ofmapping communities todelineate special hazard areas and risk premiumzones.
A zone is a geographical area on a Flood Insurance RateMap (FIRM)that indicates the severity or type of flooding towhich it is susceptible.Zones are a key ingredient in the promulgation of flood insurancerates. Youmay be in a low-,moderate- or high-risk flood zone, but youare in a zone. You can buy flood insurance as long as your communityparticipates in theNational Flood Insurance Program. And, it’s a goodidea to buy even in low-risk areas because 20% to 25%of all floodinsurance claims come from low-risk areas. The FloodDisasterProtectionAct of 1973 requires federally regulated lendinginstitutions tomake sure thatmortgage loans secured by buildings inhigh-flood-risk areas are protected by flood insurance.
Flood zonesmay be changing as FEMA continues its ongoingmapmodernization project. Since themaps haven’t been updated in thelast 20 years, youmay find yourself in a higher-risk zone than before.If that happens, youmay also pay substantiallymore for your floodinsurance policy. If you own a home in Florida, Louisiana or Ohio,the likelihood of being re-zoned increases as FEMA is reported tohave putmost of its resources where storm patterns and real estatedevelopment have created new or higher-risk, flood-prone areas.Some communities have decreased the potential for flooding bymakingmodifications or improvements in certain structures (dams,levees, etc.). In some cases, communities have revised theirgeographical boundaries, resulting in reduced flood hazard areas. Instill other instances, the community has provided updatedinformation thatmore clearly delineates flood insurance risk zones.
Map upgrading was overdue, andwhile it couldmean higher rates,some relief is built into the system to rescue homeowners from anegative impact. Owners of properties thatmove from a low- ormoderate-risk zone into a high-risk zonemay be able to takeadvantage of a process known as grandfathering. If you have hadcontinuous flood insurance coverage, rules allow you to benefit in therating. You are given the option of using the new and updated ratingcriteria or having the premium rate determined using the FIRM in
continued on page 4
effect when the building was originallyconstructed or when flood insurance was firstprocured. This could result in a savings when thenewmap revision, by itself, would raise yourpremium.
Owners of properties thatmove from a high-riskzone to a low- ormoderate-risk zonemay beeligible for reduced insurance rates by convertingto a Preferred Risk Policy. This policy covers botha structure and its contents and offers substantialsavings. A PRP can be obtained for as little as $112a year.
TheNFIP flood policy provides the basicprotection needed for homes valued up to$250,000 and containing possessions with a valueup to $100,000. Since floods in fact frequentlycause total losses, and recognizing thatmanyhomes today have values substantially greaterthan the highest limits available through the floodprogram, some insurance companies offer ExcessFlood insurance tomeet the need for additionalcoverage. Even if you live in a high-risk floodhazard zone you can still obtain the neededcoverage. Like theNFIP policy, your rate is basedupon the flood zone, the age and type of home andthe amount of coverage you choose. Policies areavailable to homeowners, condominium ownersand renters. Youmay be eligible for a preferredrisk policy if your home is in a low flood hazardzone and has limited flood loss history. This is asimple, straightforward and very affordablecoverage. Deductible options further reduce yourcosts. Loss controlmeasures can be taken tomitigate the damage caused by floods.
Contact yourWillis HRHClient Advocate forinformation on how you can control the cost ofprotecting your property from flood losses. Alsobe sure to check out the FEMAwebsite atwww.fema.gov/business/nfip for additionalinformation.
Willis HRH • 03/094
HRH HASJOINEDFORCES WITHWILLISWillis HRH, the North American armof Willis Group Holdings, came intobeing in October 2008 after thetransformational $2.1 billioncombination of Willis and HRH.
The deal doubled Willis’ NorthAmerica revenues and enhanced itsleadership in attractive growthmarkets. It more than doubled Willis’high-growth Employee Benefitsbusiness in North America whilestrengthening Willis’ middle-marketleadership.
Willis HRH is now among the topthree brokers in 15 of the 20 largestU.S. markets – and number one inChicago, Philadelphia, Phoenix andseven other major U.S. markets. Alltold, the combined company is in 210locations in North America, up fromWillis’ 70 locations previously.
Flood Insurance continued from page 3
By Marnie Everline
Most of us thinkwe are smart enough and financially sophisticatedenough to avoid becoming victims of fraud or embezzlement. But,sadly, the rash of recent Ponzi schemes and other fraudulentactivities that have been uncovered have substantially diminished, ifnot totally destroyed, the assets ofmany of even the wealthiestindividuals and some of world’s largest charitable organizations.What constitutes fraud and embezzlement and is there anyway toprotect yourself from these crimes?
WHAT IS FRAUD?In criminal law, fraud is a crimeoroffenceofdeliberatelydeceivinganother inorder todamage them,usually toobtainpropertyor servicesunjustly. Fraudcanbecommitted throughmanymethods, includingmail,wire, phoneand the internet (computer crimeand internet fraud).
WHAT IS EMBEZZLEMENT?Embezzlement, considered a white-collar crime, is a type of fraudwhere a personmisappropriates the assets entrusted to them. Assetsare held lawfully but used for an unintended purpose. Embezzlementis a breach of the fiduciary responsibilities placed upon a person andcan adversely affect individuals and corporations.
Methodical and systematic, the embezzler conceals his or her actions,which of course are donewithout the consent or knowledge of thewronged party. Often it involves the trusted person embezzling onlya fraction of the funds received tominimize detection. If successful,this crime can continue for years undetected and ismost likelydiscovered only when the funds are requested or needed and they areno longer available.
FRAUD ANDEMBEZZLEMENTCOVERAGE
AN EXAMPLE OF ANEMBEZZLEMENTCRIME
A trusted assistant, responsiblefor paying bills for theiremployer also writes checks outto “cash” and transfers moniesinto their own personal bankaccount. By the time theemployer discovers the crime,the assistant has embezzled atotal of $50,000.
Embezzlement can be small or large; asminor as a retail store clerk pocketing a fewextra dollars from the cash register or asmajor as an executive of a large companyillegally transferringmanagedmoney into apersonal account.
ASSET PROTECTIONSomeHomeowners policies can be endorsedwith supplemental coverage options thataddress embezzlement and fraud crimes andrespond to the loss ofmoney, securities andpersonal property.
Check yourHomeowners policy to see if suchcoverage is afforded or contact your ClientAdvocate for further assistance andinformation.
Willis HRH • 03/095
Q. WHAT ARE THE MOST LIKELY ANDCOSTLY EXPOSURES THATCOLLECTORS FACE?
A.The singlemost frequent case of Fine Artslosses are transit related. Consider for amoment the entire process ofmoving a pieceor a collection of artwork. The planning,packaging, the physical transportation,unpacking and hanging. It’s all a chain ofrelated events with somany opportunities forlosses or damage to occur. Think of arttransport like a chain that is only as strong asits weakest link. A piece of artworkwill passthroughmany hands and you need to test thestrength of every link in the chain before apiece starts its journey.
Catastrophic exposures are another peril. Acollector purchases an item at auction inNewYork only to have it shipped to their home inFlorida. Did the collector consider that thereis a loss potential due to wind or flood? Thesame could be said for a piece of artwork in ahome located in a wildfire zone. Collectorsmust be proactive to preserve their art andthat begins in where the art will be housed.
Q. ARE COLLECTORS STILLPURCHASING AND SELLING AT THESAME FRANTIC PACE AS IN PREVIOUSYEARS?
A.Todaymany collectorsmay find itnecessary to hold on to an item for a period oftime before the right opportunity arises to sell.Whether they are purchasing to enjoy or to sell,collectorsmust safeguard their collections.
ClaireMarmionMarmion Advisory, LLC312 375 [email protected]
Willis HRH • 03/096
THE VALUEOF FINE ARTSBy Wayne WiedenbeckVice President
Did you know that over the past three years the number of activecollectors of Fine Arts tripled? This resulted in large general pricingincreases in the Fine Artsmarketplace.Many collectors bought andsold items frequently andmany realized a gain in value.
In the last quarter’s volatile economy,many collectors are wonderingif their collections have retained, gained or decreased in value.Because every collection and art piece is different, no one broadanswer can be given.
Recently, I spoke with ClaireMarmion, a highly respected privatecurator and consultant who ownsMarmion Advisory, LLC. Claire hastremendous experience in the fine artsmarket, having worked forboth the AIG Private Client Group and Chubb as Director of FineArts Services.What follows is a brief excerpt of our discussion.
Q. WHAT HAS BEEN THE FASTEST GROWING SEGMENT OFTHE FINE ARTS MARKET?
A.Over the last three years we have witnessed a revolution in thecontemporary artmarket. Never before have somany collectors beendrawn to art that is so difficult to look after – themost fragile ofpieces in themost volatilemarket.
Q. WITH REAL ESTATE VALUES DECLINING IN MANYLOCATIONS, COULD THE SAME BE SAID FOR FINE ARTS?
A.Many collectorsmistakenly assume that because real estate valueshave generally fallen that the samemust be also true for theircollection. Not necessarily so. Some homes have held their values.The same could be said with Fine Arts. Some artist’s pieces still holdexcellent value while othersmay not.
Collectors with well prepared collections schedules should look intohaving a qualified appraiser conduct a “Schedule Review.” Theappraiser will review and identify those specific itemswhichmayhave gained or lost value and offer updated values. This saves thecollector significant appraisal fees while at the same time keepingtheir values current.
Willis HRH • 03/097
KEY CONTACTSFFOORR FFUURRTTHHEERR IINNFFOORRMMAATTIIOONN,, PPLLEEAASSEE CCOONNTTAACCTT::
Sandra BravoPractice Leader212 915 [email protected]
Laura EbertPhoenix, AZ602 787 [email protected]
Mark BattatSan Francisco, CA415 955 [email protected]
Ken KreutzDenver, CO 303 765 [email protected]
Karen MurphyHartford, CT860 756 [email protected]
Robert J. ClarkTampa, FL813 490 [email protected]
Leslie HernandezVero Beach, FL772 469 [email protected]
Lynn KilleenBaltimore, MD301 527 [email protected]
Frank RapisardaHunt Valley, MD410 584 [email protected]
Jim JamesonNew York, NY212 915 [email protected]
Joseph ClarkRadnor, PA610 254 [email protected]
Lori CaldwellKnoxville, TN865 583 [email protected]
Lesa BlaserDallas, TX972 715 [email protected]
Brian OliveSeattle, WA206 386 [email protected]
CANADA OPERATIONS
Irene DickToronto, ON416 216 [email protected]
Trish McClintickVancouver, BC604 605 [email protected]
Wealthy & Wise provides a general overview and discussion on a wide range of topics. It is not intended, and should not be used, as a substitute forprofessional advice in any specific situation.
