September 17, 2013

Making Sure Clients’ Umbrella Liability Insurance Keeps Them Dry

When it comes to net personal wealth, there is wisdom in the common truism: the more money and assets that people have, the greater the risk of their loss. From a legal standpoint (and to put it more bluntly), the deeper one’s pockets, the deeper fingers will reach.

It is the job of plaintiffs’ attorneys to seek the largest recovery possible for victims of an automobile accident or even a slip and fall at someone’s home. If the defendant has substantial net wealth, the sought-after recovery will be greater than if the defendant is of lesser means. Despite this difference, individuals with significant assets often buy roughly the same amount of personal excess liability insurance that more average income earners buy.

This makes little sense, given the stark disparity in potential litigation outcomes. There is more than one way to obtain more personal excess insurance (also called umbrella insurance). Some individuals can get more coverage through what is known as group personal excess liability insurance.

Just like individual umbrella insurance, group personal excess absorbs catastrophic financial losses above the limits provided in the underlying automobile and homeowners insurance policies. In the aforementioned scenario, if the attorney representing the injured person in the car wreck seeks a financial recovery in excess of the limits on the defendant’s automobile insurance policy, the money will come out of the defendant’s pockets, assuming there are less-than-adequate personal excess limits.

With group insurance, as with an individual umbrella policy, some policyholders can significantly increase their limits. As its name implies, the insurance is purchased on a group basis—for instance, by an accounting firm covering key executives or by a family office covering various family members. The policy provides each participating employee or family member with excess liability insurance up to the policy limit, when the underlying auto or homeowners insurance coverage has been exhausted. Group personal excess coverage is typically less expensive than when purchased on an individual basis.

The advantages of group personal excess policies came to mind while speaking with Michael Elitzer, president of Lester Brokerage Inc., an Englewood Cliffs, N.J.-based independent agency that serves a primarily high-net-worth clientele. Michael affirmed that many wealthy individuals lack adequate financial levels of insurance to protect them against personal liability lawsuits. “It’s astonishing to me when I learn that someone with $100 million in assets has a $3 million umbrella policy,” he told me. “If this person injures someone in a boating accident, and the victim becomes paralyzed, that’s $20 million out the door—easily.”

He added, “If a financial advisor is spending more time on getting high rates of investment returns than on protecting their clients’ assets with adequate financial limits of insurance, they’re falling down on the job. More balance is required.”

Collective Bargaining

Michael is not alone among agents with affluent clients urging them to increase their personal excess limits. “Say a client is a managing partner in a law firm, private equity firm or an accounting firm,” he said. “It would behoove this person to encourage the firm to implement a group umbrella policy to ensure that each partner’s net wealth is not subject to great financial loss. A $10 million lawsuit, for example, might wipe out the assets of a fellow partner, with potentially dire consequences for this individual and, by extension, the firm. He or she arguably would lose focus on the firm’s clients, given the devastating financial problems, thereby creating client retention issues.”

Group personal excess policies can often be customized to provide higher limits of protection for selected employees. “Determining how much coverage is more a question of the insured’s individual risk tolerance rather than one’s net wealth,” Michael said. “But the cost of the insurance is extremely low not to consider the highest limits possible.”

Group coverage can also provide worldwide liability protection, absorbs employer liability for lawsuits filed by domestic employees, and offers coverage for volunteer, charitable and home business exposures, depending on the insurer. Both employers and family offices can structure the policy to provide different limits of financial protection for specified employees or family members, respectively.

Depending on the insurer, the premium remains the same no matter how many vehicles or homes are acquired during the policy period. With individual policies, failing to notify the insurer of these purchases could result in a coverage gap. Some policies absorb kidnap expenses, identity theft and reputational injury risks, as well as the aforementioned employment practices liabilities.

Another reason why an organization or family office should consider providing group personal excess liability insurance coverage is that it protects people that are important to a business and loved by a family. Offering the policy to high-level executives shows the organization’s commitment to the financial wellbeing of key employees and their families, and in the context of a family office, it effectively addresses the concerns of wealthy family members to preserve and transfer wealth to future generations.

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