From the March 2009 issue of Wealth Manager Web • Subscribe!

Wired for Trouble

Technology that does more harm than good is a familiar sci-fi theme. For people who can afford the best, however, truth often proves scarier than fiction. Think of how the Internet has erased any meaningful distinction between public and private communication. Impulsively disseminated personal opinions, information and images can now "go global" in seconds, opening a brave new world of liability in the process. Likewise, hackers can cut into the innermost recesses of our virtual lives, robbing us of money, personal information and identity. Even when information is "protected," data can still be lost if the computer or its files are damaged.

The affluent have a special relationship with technology that deepens these risks. Upscale consumers are natural "first adopters" of each new--and initially expensive--consumer tech innovation. (Remember when cell phones and home Internet connections were the sole province of the wealthy?) From laptops to smart phones to home broadband connections to so-called "smart houses" that virtually control almost every aspect of the domestic environment, the wealthy live on a trendsetting "bleeding edge" where the risks and rewards of technology are typically discerned on the fly. In addition to being exposed to the highest tech-related risks, the rich have the most to lose from their exposure.

A Wakeup Call

To appreciate what's at stake, imagine for a moment that you're the well-to-do parents of a 15-year-old son who is planning an unauthorized house party while you're out of town. Now imagine the teen has posted an invite on his open-to-all Facebook profile--complete with street address, location of spare keys to the back door and alarm-system code. Luckily, in this situation, security consultants retained to monitor the home's network activity successfully pulled down the Web page even as mom and dad hurried back to "chat" with junior.

Not all affluent parents are so prepared to expect the unthinkable--or to retain someone to think about it for them. Risk Control Strategies, a New York-based security firm catering to high-net-worth individuals, finds that nine out of 10 clients are unprepared for cyber crime, which the FBI estimates costs at least $67.2 billion annually.

Statistics aside, there's no shortage of true horror stories to help you open the eyes of wealthy clients. Consider the New Englander who spent $6 million on "smart home" IT architecture for his new dream house. Not long after going online, independent consultants monitoring the system noticed an odd midnight-to-6 a.m. spike in traffic. One of the overseas subcontractors retained to help with the installation was secretly using the homeowner's network hub as a relay through which to send a flood of pornographic spam email into the United States. Fortunately, the homeowner's exposure was confined to the potential social embarrassment of being made an unwitting partner in a seedy online venture. He would have faced far more serious criminal and civil liability issues, however, had his network been co-opted to push child pornography or to launch spyware, malware and "worms" that attacked other networks.

The wealthy don't have to spend $6 million on technology to be exposed to serious personal liability. A socialite engaging in libelous rumor on a Web site exclusive to the super rich could do the job with nothing but a laptop and a free wireless connection. Then there's the damage a moody teenager could inflict by savaging a classmate or teacher on a blog, and inciting others to pile on. Given the possibilities, any Web-connected, affluent household should consider excess personal liability insurance that defends against potential legal action arising from these scenarios.

A little due diligence with a personal insurance professional could save a headache (and untold dollars) later. Mass-market homeowners' policies do not include automatic personal injury coverage. Carriers catering to affluent clientele provide more robust coverage without the need for a policy endorsement.

Reach In and Hurt Someone

In addition to the exposure clients can bring upon themselves as they reach out into the virtual world, there's the prospect of bad actors using technology to quietly reach into their lives. One high-ranking bank executive thought he was safe occasionally working from home because he backed up his in-house wireless network with some decent off-the-shelf encryption software. But he remained ideal prey for someone who already knew what he had and thought it was worth the extra effort to access it. Cyber-crooks staking out his home from a nearby van broke the encryption with relative ease. They were in the process of moving $250,000 in company funds the executive managed to an offshore account when he received a call from a compliance officer that thwarted the digital heist.

This last real-life tale raises a vital point: The more accomplished people are, the more likely they are to electronically manage personal financial matters from home. Whether directly conducting domestic business or leaving it to a family office manager, clients need to recognize how inadequately secured home networks increase the risk of information and identity theft. Working from inside an affluent household, for example, anyone with a pinkie-sized, portable flash drive could nab key-log histories (including passwords and account numbers) from a client's home PC.

Oldies but Not-So-Goodies
Other obvious but still under-scrutinized dangers include phony charitable email appeals or messages--"phishing"--that dupe recipients into keying in bank, credit card and Social Security information. Always-on DSL and broadband connections are also favored doorways for hackers. Pricier T1 data transmission services, by contrast, offer better protections, but aren't entirely failsafe. Owners of multiple homes should also consider a closed intranet configuration for more secure dwelling-to-dwelling communications.

The good news: Some homeowners' insurers provide free access to professionals who can reverse the bureaucratic damage that identity thieves cause. The bad news: Today's most readily available technologies have made some long profitable bricks-and-mortar crimes easier to commit. If someone wants to "case" an estate, he only needs to befriend and enlist a domestic staffer to take and email cell-phone pictures of each room.

Not all tech-related losses are criminal. Anyone who has lost important information due to physical or virtual damage to a PC or other electronic device knows the grief it generates. There are insurance products that compensate for restoration of information to the extent it is possible. But the best defense remains smart backup practices, such as paying a modest fee to securely upload vital documents for online storage, just as businesses do and as wealth managers should be doing.

In the final analysis, clients living tech-centric lifestyles need to more fully appreciate the risks they've downloaded. They must understand just how badly what they don't know can come back to "byte" them, and protect themselves accordingly.

Andrew McElwee is executive vice president of Chubb & Son and chief operating officer of Chubb Personal Insurance. He can be reached at amcelwee@chubb.com.

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