Close Close

Life Health > Health Insurance

3 Critical Reasons Your HNW Clients Need a P&C Insurance Review

Your article was successfully shared with the contacts you provided.

Baby Boomers are beginning to transfer as much as $27 trillion of family wealth over the next 30 years, presenting wealth advisors with a significant opportunity to further engage with and better serve their high-net-worth (HNW) clients. The ongoing impasse over growing government obligations and taxes, increasing regulatory scrutiny and the nation’s hyper-litigious environment are giving rise to increasingly complex estate planning methods to preserve wealth, minimize risk and satisfy philanthropic goals. Too often, a client’s property and casualty insurance program fails to keep pace with new legal ownership structures and the assets they hold, sometimes with negative consequences. 

To avoid these problems, we recommend three strategies for advisors and their HNW clients to incorporate personal insurance considerations into the estate planning process. These include:

  1. Inform your clients’ insurance broker when using a trust or LLC to hold or protect assets.
  2. Regularly have collections appraised to ensure valuations are accurate and understood.
  3. Name charitable trusts as insured entities when donating collections of art, antiques or other valuables to museums.

Let’s look at each of these recommendations in greater depth. 

1)     Inform Your Clients’ Insurance Broker

Ultra-rich families are increasingly setting up complex trusts and limited liability corporations (LLCs) to hold assets and eventually transfer wealth. It’s common for wealthy families set up a trust to hold ownership of their home, but they might neglect to inform their insurance broker, an oversight that can lead to substantial financial consequences. For instance, when a trust is the legal owner of the home, the trust must be added as a named insured on the homeowner and umbrella liability policies. Otherwise, coverage disputes could arise if a loss occurred because the trust was not insured under the policy. 

In the case of LLCs, families sometimes structure insurance policies in such a way that defeats the very purpose of an LLC, which is to insulate assets from liability risk in jury awards and settlements. For example, a family that sets up an LLC to own vacant land might have both the LLC and family members listed as named insureds on the insurance policy. But by naming the family members, they have established a potential path for a plaintiff to pursue the family’s assets outside of the LLC. Involving an expert property and casualty insurance agent as such LLCs are established can help the family avoid such mistakes. 

The insurance agent can also remind the wealth advisor to make sure that a bank account has been set up for the trust or LLC. This is perhaps the most common, though not serious, oversight we see. If the trust or LLC suffers and covered loss that results in a claims payment, the payment must be made out to the trust or LLC. But if there are no accounts set up in the trust or LLCs name, there is no way to deposit the payment. The result is that the family can do nothing with the payment until they set up the account, causing an unnecessary delay. 

2. Regularly Have Collections Appraised

Many of our clients have extensive collections of art or other collectibles worth $10 million or more, some of which has been passed down for generations. Ironically, while these clients may be passionate collectors, they often are not equally passionate protectors, particularly when it comes to a fundamental step in protection” keeping the value of the collection up to date. Without a current valuation, it is doubtful the collection will be adequately insured.

A recent evaluation of 94 fine art collections scheduled on a valuables policy found that 70% of the items were underinsured or described so vaguely as to be of undetermined value if a loss occurred. In another instance noted by one of the appraisal firms we work with, a family was relying on a nearly 30-year-old appraisal that valued their collection at $2 million, but an updated appraisal placed the value at $100 million, dramatically changing their insurance, tax and estate planning needs.

To avoid such situations, we recommend having art pieces appraised at least every three years by an expert. 

3)     Ensure Proper Protection When Lending Art

Wealthy individuals often set up charitable trusts to hold art as part of a gifting strategy, and then lend the art to museums or send it on an exhibition tour in part to enhance the value and popularity of the collection. When doing so, they should not assume that the museum has adequate insurance.

Frequently operating as not-for-profit organizations on a tight budget, museums may not be able to afford gold-standard insurance programs. And strange accidents can happen while the artwork is in a museum’s care. In 2010, a woman visiting New York’s Metropolitan Museum of Art lost her balance and fell into a 1905 Picasso painting, “The Actor,” valued at $130 million. Her fall caused a six-inch tear in the canvas that required restoration.

The museum also may not take responsibility for the art while it is in transit between the owner’s home and museum. Shipping art is the most common cause of loss, so an insurance agent should be able to review the family’s and museum’s insurance policies to make sure proper coverage exists, as well as suggest shipping companies that specialize in moving artwork. 

As with other assets such as a home held in a trust, the agent can also make sure the charitable trust is properly named on the insurance policy.

Specialty insurers can help advisors and their HNW clients navigate the risks incurred by creating complex ownership structures, such as trusts and LLCs. With trillions of dollars of wealth expected to transfer over the next generation, advisors can provide added value to their HNW clients by recommending a robust personal insurance program during the estate planning process.