With the Occupy Wall Street protests still smoldering and the national debate over wealth and income disparity in full gear, many high- net-worth families feel that public perceptions of them have grown more negative since the 2008 economic crisis. Amid calls for imposing the “Buffett Rule” and other measures to increase taxes on the rich, they are also concerned about a less publicized but potentially serious threat to their financial well-being: a costly liability lawsuit.
Indeed, a new survey commissioned by ACE shows that many wealthy families, defined as households with $5 million or more in investable assets, increasingly fear such lawsuits. Almost 40% believe they are more likely to be sued in the aftermath of the economic crisis, compared to only 7% who say they are less likely to be sued. More than 80% agree their wealth alone makes them an attractive target for liability lawsuits.
Their fears are well founded. Under the widespread doctrine of joint and several liability, if more than one defendant is responsible for a plaintiff’s injury, any one of them may be held liable for the full amount of the damage award. Therefore, a lawyer will often target the person with the highest net worth, not the one most at fault.
Few wealthy families, however, have translated their increased concern into action. According to our survey, more than 40% carry less than $5 million in umbrella liability insurance, including 21% who have none. An umbrella policy is essential for high-net-worth families. It provides additional liability coverage on top of the coverage in home and auto policies for extreme cases. What’s extreme? InCalifornia, when a college student was injured in a multi-vehicle crash and expected to require lifetime care, the jury verdict was $49 million.
To guard against costly personal liability lawsuits, wealth advisors and their clients should engage an independent insurance agent or broker skilled at working with high-net-worth individuals and families. (Read our previous article on how to find one.) The agent can review the exposure to liability risk and ensure that the following protective measures have been taken.
- Purchase the level of coverage to meet extreme cases, not the likely cases.
While trusts and other techniques can shield some assets from the court’s reach, prudence suggests choosing umbrella liability coverage at least equal to your current net worth and present value of your employment income stream. Umbrella coverage typically costs only a few hundred dollars in premium per million dollars of coverage, and the cost-per-million decreases as the amount of coverage increases. Moreover, the expense can often be entirely offset by choosing a higher deductible in the home and auto policies.
- Make sure the liability components of your auto, home, watercraft, umbrella and other personal insurance policies work together as a seamless plan.
Avoid gaps in coverage between the auto and home policies and the umbrella policy that acts on top of them. For instance, if the umbrella policy coverage starts when losses exceed $300,000, then the auto and home policies must provide coverage up to $300,000, not less. Also, seek to combine as many of these policies as possible with one company. Using one company adds consistency to legal defense efforts. If you face a multi-million-dollar lawsuit after an auto accident, you don’t want to have the legal team from the auto insurance carrier arguing with the legal team from the umbrella insurance carrier.
- Understand the differences between the coverages and services offered by insurance carriers.
Resist the temptation to choose an insurance carrier based on price alone. The umbrella liability policies offered by carriers that specialize in insuring high-net-worth families have many advantages. For instance, limits of coverage up to $100 million are often available, instead of maximums in the $5 million range. Clients can be reimbursed for having their personal lawyer shadow the defense effort, handle paperwork, and fulfill other tasks to make the process easier for them. To protect reputations, clients can be reimbursed for the cost of hiring a public relations firm to maintain their standing in the community. Additionally, carriers that specialize in serving high-net-worth families will frequently send risk consultants to the clients’ homes to suggest safety measures that can help prevent accidents from happening in the first place.
A more expansive set of steps to build a solid plan for protecting against liability lawsuits can be found in our new white paper on the subject.