Inadequate Liability Insurance May Prove Costly For Wealthy Families
Risk Factors, Level of Damages Often Underestimated
By Melissa Neis
Parr Insurance Brokerage, Chicago
How does one’s financial success become a costly liability – literally?
It happens when a high net worth individual or family becomes the target of a successful multi-million-dollar liability lawsuit and the damages awarded far exceed the coverage provided by insurance. And it happens with greater frequency than one would expect.
Unfortunately, a number of wealthy individuals do not devote enough attention or time to best protect their financial assets and future earnings. They tend to underestimate the multitude of risk factors their lifestyles present and the high levels of liability damages often awarded. The affluent need to understand that if an accident or other incident occurs, an excess liability policy is essential to cover costs that could go well beyond the coverage provided by their existing insurance policies. This article explores these issues and outlines how to address them.
Understanding Liability Risk Factors
Situations such as an automobile accident, or a worker or guest injured at one’s home, are easily recognized as events that pose liability risks and concerns. Yet, even these typical types of incidents present greater dangers, and occur in larger numbers, than imagined. And, at times, this is due to one’s wealth.
The reasons for the latter are two-fold. First, high net worth individuals and their families often have active lifestyles and busy schedules that can increase their exposure. Secondly, just the fact that they have major assets can prompt lawsuits that seek significant damages.
For example, when analyzing one’s exposure to risk due to a car mishap, the number of teenage car drivers at home is a critical factor to address. Another issue to cover is whether long commutes to work occur on a daily basis. Obvious scenarios, true. However, what if an accident involves colliding with a mini-bus carrying 15 or 20 people? One may be liable for damages awarded to all of the injured passengers, particularly if resources exist to cover such expenses.
For the wealthy, owning more than one home is the rule rather than the exception. Multiple homes and homes with swimming pools certainly increase liability risks.
A less obvious risk factor that involves personal residences, yet frequently evident, is the employment of domestic employees such as a cook, driver or housekeeper. In addition to sustaining an injury while on the job, one needs to be protected against potential lawsuits that relate to discrimination, sexual harassment, wrongful termination and other issues. These workers may know more than most about the financial wherewithal of their employers, and if they are disgruntled or feel maligned, see a lawsuit as one way to gain significant compensation. Adequate insurance is a must for such scenarios.
Among other situations that may impact one’s liability are:
- Ownership of watercraft. Yes, insurance policies for such vehicles will cover a number of claims, but may not provide enough coverage in a liability situation.
- Nonprofit board positions. Many wealthy individuals volunteer to serve on boards of directors for not-for-profit organizations. But if these groups do not provide adequate liability insurance for directors and officers, or none at all, board members could be at great risk if the organization is sued.
- Social media accounts. Those who blog, tweet or post comments on social media platforms are at risk if such remarks are viewed by an individual as slander, libel or character defamation. Yes, the Internet poses a risk factor never imagined two decades ago.
Recognizing the Risk Levels
Another major issue not understood is the amount of damages awarded in liability lawsuits. According to a 2012 survey conducted by the ACE Group of high-net worth households, more than half – 51 percent – remarkably believe the highest amount of damages they could be held liable for if someone sustained serious injury as a result of an accident involving their vehicle or on their property is less than $5 million.
Without question, a reality check is needed here. A review of media coverage across the nation will reveal verdicts and settlements in such cases are in the multi-millions, particularly if plaintiffs have permanent disabilities as a result of the incident. Even events that appear minor at the outset can generate major awards. Here’s one case in point:
The insured client, a member at an elite health club, had a disagreement with another club member about rules concerning the running track. The dispute escalated to a shoving match, and the other club member, who was a surgeon, fell, breaking his wrist. The injury prevented the surgeon from operating for the remainder of his career with an annual loss of income of more than $500,000 annually. The overall claim value was $13 million in lost wages, not even calculating medical costs, punitive damages, and pain and suffering.
Then, there is the straightforward fact that one’s wealth status alone serves as a catalyst for liability lawsuits that seek huge amounts of dollars. Plaintiffs and their attorneys aware of the high assets owned by the defendant likely will seek larger payouts than if the defendant is not affluent.
There also are common law joint and several liability statutes on the state level than can exacerbate the situation. If several parties are found liable, the statutes allow the plaintiff, if desired, to collect the entire judgment from just one defendant. In such instances, attorneys may target the one defendant with the greatest wealth. These are the dynamics one can expect in this litigation-driven era.
Interest in Insurance Issues Lacking
It’s no surprise that allocating funds for insurance is not as compelling to people as making and monitoring investments in the stock market, real estate or other more intriguing, income-generating vehicles. Wealthy individuals, understandably, devote much greater attention to increasing or, at the very least, maintaining their significant assets. Protecting them via this mundane mechanism called insurance can be quite low on their radar.
However, this mindset provides yet one more reason why so many fail to obtain sufficient liability coverage and do not factor in the worst-case scenarios. Many affluent individuals are comfortable with the typical $1 million or $2 million umbrella policy sold by the carrier who provides their other policies. There also may be a belief that more coverage will require substantial increases in premiums, a cost they can skirt with minimal impact. Such assumptions are both inaccurate and possibly dangerous to one’s financial well-being.
Another risky area involves the adult children of the affluent. Here, too, disinterest or lack of understanding of the impact liability settlements can have on their holdings or inheritances may result in significant financial losses.
How Much Is Enough? How Much Will It Cost?
How much excess liability coverage should one purchase? Of course, there is no absolute answer to the question. Coverage typically can range from as little as $1 million to more than $50 million in the United States, and additional coverage may be secured by purchasing multiple excess liability policies.
But one should not begin with a specific number in mind. Thinking strategically is the key. One should:
- Detail and analyze all or the risk factors
- Avoid being conservative when identifying those risk factors, determining a coverage amount and budgeting for premiums
- Think of worse-case scenarios to help ensure protection will be adequate
- Consider all of the assets that could be impacted if coverage is lacking, such as retirement plans, trusts, real estate holdings and even one’s income possibly being garnished
- Factor in existing policies and current liability coverage to ensure the excess liability policy ideally complements current coverage, and there are no loopholes or gaps in coverage
One’s specific profile will dictate the coverage required and, in turn, premium costs. To provide some frame of reference, here are three estimated annual premiums for a client who owns two homes and two automobiles:
- Coverage limit of $10 million; estimated annual premium of $1,400
- Coverage limit of $20 million; estimated annual premium of $6,500
- Coverage limit of $50 million; estimated annual premium of $24,000
Considering what could be at stake, such premiums are less expensive than most people anticipate. Insurance firms that focus on high net worth individuals have designed programs specifically for the inherent risks associated with this lifestyle. Therefore, the premiums for such policies are relatively inconsequential in comparison to the potential liability.
How to Take Action
High net worth individuals often rely on trusted, knowledgeable advisors when major financial decisions must be made, and liability protection warrants expert counsel as well. One approach is to enlist an independent insurance agency or broker that focuses on affluent clients. These firms, unlike agencies that represent a bevy of insurance products and a variety of clientele, provide the in-depth expertise the wealthy expect and demand. Alternatively, some financial advisors may bring this knowledge to the table, or liaison with these insurance agency specialists, and can offer expert guidance.
An experienced, knowledgeable insurance specialist or financial counselor will understand the many nuances in available policies and coverage. For example, it may surprise many that no more than a handful of insurance carriers offer products specific to this market segment, and likely should be the source for the best plan of protection.
These experts can work together to create a long term plan that addresses the various risk factors, incorporates existing policies and ensures minimal risk is achieved.
High net worth families should – and must – recognize they have the most to lose in a countless number of liability situations. But they do have the resources, both in terms of knowledgeable counselors and finances, to protect those hard-earned assets.
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About the author: Melissa Neis is vice president of Chicago-based Parr Insurance Brokerage, an independent insurance agency founded to protect high-net-worth individuals and families nationwide with customized insurance coverage. Through national and global carriers, Parr Insurance provides coverage for high-value homes, automobiles, valuable articles, and collections. Neis can be reached at 773.489.3001 or firstname.lastname@example.org.