Educate the High Net Worth Customer

Personal Liability Coverage Limits 

"It still surprises me how many affluent families we meet who don't have liability coverage," said Jonathan H.F. Crystal, executive vice president of Frank Crystal & Co., which insures more than 5,000 HNW individuals and families. "It's about so much more than the basics; a full risk profile requires exploring purchase and investing habits, lifestyle of the insured and their family, geographic presence and future aspirations. Discussing liability limits is one of the most vital conversations we have with a client."

Related: Read the article by Gary Stephen "The Value Is In The Service."

Most wealthy U.S. consumers do not carry adequate coverage to protect their hard-earned assets. For starters, only a select group of providers sell personal excess liability policies with limits between $5 million and $10 million. If your new clients previously did not receive guidance from professionals who could offer alternatives, they may believe that they already have purchased the maximum available limits. 

A best practice for assessing liability coverage needs is to use the client's net worth as a benchmark. In our litigious society, jury verdicts and settlement amounts are higher than ever. When economic times are as challenging as they have been, those with deep pockets can become targets for liability lawsuits. Adequate protection, therefore, should be a cornerstone of the insurance portfolio. 

When discussing liability coverage needs, here are some of the most prevalent areas of exposure: 

1. Private staff. Personal assistants, nannies, housekeepers, chauffeurs, gardeners and other domestic employees have access to properties, assets and families on a day-to-day basis. It is critical to ensure that these individuals are reliable and trustworthy. Some risks can be avoided if more up-front attention is paid. For example, advise clients to take precautionary measures such as writing formal job descriptions and conducting background checks. 
2. Risk on the road. Multi-million dollar verdicts in automobile-related lawsuits have been seen across the country, and the liability limits within an auto policy generally won't suffice if there's an accident. Your customers need to look beyond their own actions, too. The Insurance Research Council reports that as many as 13 percent of drivers, or one in every seven, is uninsured. Coverage to protect from uninsured or underinsured motorists is particularly critical for those with significant wealth.
3. Parental liability. Each state has its own laws, but typically parents could be vicariously liable in the way that an employer is liable for the acts of its employees. Courts can hold parents liable even when they had no direct role in the act that led to damages. Someone can sue parents under the theory of negligent supervision—meaning they knew or should have known and failed to take appropriate actions. 
4. Social media. A number of widely publicized lawsuits have used social media content as evidence, and bloggers have been sued for libel and defamation of character as a result of the content of their messages. For example, Courtney Love settled a 2011 lawsuit filed by her fashion designer who alleged that the singer defamed her in a series of Tweets. The reported settlement value: $430,000.
5. More. The high net worth lifestyle creates other unique exposures, such as:

• Owning exotic cars, powerful boats, homes with pools, firearms and other items that pose inherent danger from accidents
• Sitting on not-for-profit boards, with underlying minimal liability coverage
• Entertaining at home, increasing the chance of injuries on the property.

Automobile Policy Nuances 

"We recently acquired a former [direct writer] customer who has a disabled adult child requiring a customized van for transportation," said Thomas E. Hopkins, principal at TDC Risk Management. Seventy percent of the company's business is affluent personal insurance. Previously the van was damaged and unable to be driven for three weeks. A like replacement van had a cost of $150 per day. [The direct writer] only provided $25 per day, and the resulting out-of-pocket cost was over $2,500. To compound the situation—and create our opportunity—the [captive] agent failed to recommend a higher limit at the next renewal." 

Automobile insurance is viewed as a commodity in the U.S., yet there are significant variations in coverage breadth and service quality. Convincing your clients to look beyond price can be an uphill battle, unless you can explain the substantial coverage differences that could profoundly impact the claims experience. Using Chartis' Private Client Group as an example, improved features may include:

1. Agreed value coverage. Many insurers settle a total loss based on actual cash value at time of damage. Depreciation could result in a significant financial loss. Agreed value coverage means the value attributed to a vehicle at the beginning of the policy period is what a client would receive in the event of irreparable damage. 
2. Cash settlement option. There are a multitude of reasons why an owner may not want to keep a vehicle after an accident, even if it can be fixed. The repairs may be extensive and lengthy, or he may prefer to move on after the trauma of the incident. With cash settlement coverage, the client can elect to take an agreed value payout—provided the vehicle suffered a covered loss that resulted in damage of 50 percent or more than the agreed value. 
3. New vehicle replacement. If a new (not previously titled) vehicle is totaled within 3 years of its purchase, the client can opt to receive the agreed value; replace it with a vehicle of the same year, make and model; or receive a new vehicle of the same make and like model—including hybrids or alternate fuel editions. 
4. Use of original manufacturers' parts (when available). Some automobile policies do not offer this certainty, and aftermarket parts often are used instead. These parts do not meet the same level of quality and safety as original manufacturers' parts. This coverage distinction becomes incredibly important to those who own collector cars. 

Insuring Homes to Reflect Their True Value

"We had a prospect come to us who had insured his home with a direct writer for $2 million," said Bruce Gendelman, chairman of Bruce Gendelman Co., which has offered HNW personal insurance for more than 30 years and has more than $60 million in high net worth annual premium.

"The prospect was concerned that the limit probably wouldn't be enough to rebuild, but he was told that was the maximum coverage he could get with the insurance company. We worked with a more appropriate carrier and determined the true replacement cost of the home was about $3.7 million. In addition to securing sufficient coverage, we introduced broader solutions such as guaranteed rebuilding cost, replacement cost on contents and a suite of loss control services."

Related: Read the article "The Great Underserved Niche: High-Net-Worth Clients" by Mark E. Ruquet.

As you may know, replacement cost is the single most critical component of a homeowners' policy. If a home is damaged significantly, costs to rebuild can increase greatly due to supply and demand for materials and experienced contractors and artisans. 

Carriers that specialize in the high net worth niche will not only provide broader coverage, but also take on the responsibility of establishing the accurate replacement value for the home and other permanent structures. This may be accomplished through a variety of activities, including an on-site inspection of the property, examination of plans or blueprints for a new or renovated home and application of costs for building materials and labor for the type of construction in an existing home. 

Conversely, a "mass market" carrier usually leaves it to the homeowner, a captive agent or an outside inspection company to determine replacement cost. As a result, properties can be vastly underinsured by the time you are in a position to present alternatives. 

Obtaining the right coverage may mean a higher premium than what one paid previously, but there are a number of measures you can point out to help clients control costs:

1. Premium credits for safety features, such as central reporting fire and burglar alarm systems, fire sprinkler systems and low-temperature sensors 
2. Credits for purchasing multiple lines—automobile, personal excess liability, private collections, watercraft, etc.—from the same carrier
3. Taking a high deductible, which can be an attractive option for people with substantial wealth; absorbing more up-front risk can lower annual premiums. 

Another meaningful way to manage insurance costs is to reduce hazards in and around the home, lessening the chance of claims. The carriers who specialize in high net worth personal lines employ residential risk managers, who will work proactively with homeowners to identify potential exposures and recommend measures to mitigate risk. In most cases, these services are complimentary for policyholders and can result in additional premium credits.

Insuring "Passions" Properly

Diane Brinson, president of Momentous Insurance Brokerage, knows how high net worth clients can underestimate the worth of their belongings. The brokerage is a top 25 personal lines broker (among privately owned brokerages) in the U.S. based on 2010 premiums written, and 30 percent of the individuals listed on the Celebrity Forbes Top 100 List are its clients. "Early in my career, there was a scenario that played out many times. A client would lose a valuable piece of jewelry that was not scheduled on the personal articles floater policy, and the homeowners' policy sublimits for jewelry were either insufficient or nonexistent," she said. "This happened frequently when the piece was a gift or a family heirloom. We have since adopted the addition of 'blanket jewelry,' which can help in these emotionally charged losses. We've seen great results and many happy clients."

Related: Read the article "Chartis Boosts Training to Serve High Net Worth Clients" by Laura Mazucca Toops.

As the commitment to collect increases, there needs to be a corresponding change in perspective. The items are investments and should be handled as such to ensure they maintain their value. One key difference: unlike financial investments, collectibles require additional attention to the object's physical care to maintain its value. 

Distinct insurance coverage is available for fine art, jewelry, wine, antiques and other valuable articles, yet many include these items in a homeowners' policy and unknowingly diminish their protection. New clients may not realize that homeowners' policies generally cap limits on contents coverage. They also may not understand that the value of covered items may be subject to depreciation. Insuring high-value items appropriately can provide broader, more flexible protection. 

Whether due to misconceptions about confidentiality or reluctance for other reasons, many people do not properly insure their collections. Here are a few compelling points you can share with your clients. A private collections insurance policy: 

1. Protects against the largest cause of loss—breakage and accidental damage
2. Provides coverage that is not usually offered on a standard homeowners policy, including automatic coverage for catastrophic perils, coverage for diminution of value, no deductibles (typically),worldwide coverage and more
3. Can be set up in a variety of ways, including through trusts, estates, LLC's, foundations or additional named insureds
4. Often is complemented by a menu of risk management services (organized by the insurer) to address vulnerabilities and help preserve long-term value.

While the majority of successful consumers continue to use captive agents or direct writers for their property casualty insurance, they also have become more conscientious about how to manage and hold onto their wealth. When you are presented with the opportunity to advise an affluent individual or family, take the time to educate them on effective personal risk management. Opening their eyes to the exposures they face—and the solutions you can introduce—can lead to lifelong customer relationships.