Transcript Ford Financial Partners March 31, 2003

Managing Complex Property &
Casualty Risk and Understanding
Liability Exposures For Your Affluent
Clients
• John E. Blachaniec
Today’s Goals
Risk Management
Personal Asset Protection
Outline definitions and details of personal
excess liability coverage
Identify key questions to ask regarding
personal liability coverage
Highlight specialty liability areas which may
be appropriate for some clients, based on
their needs.
Define solutions for addressing liability needs
within a risk management plan and a
financial plan.
Bridging the Property and Casualty Gap
FPA Journal -
November 2007
You work hard to help clients build up the asset
base that will enable them to meet their
financial goals. Would it not be a spectacular
financial planning failure to see assets built
up over years or decades evaporate overnight
due to lack of appropriate or sufficient
property and casualty insurance protection?
“How to Buy Luxury Insurance.”
Departures Magazine Jan/Feb 2007
• Remarkably, about 75% of the very affluent
households in the United States are covered
through mass-market insurance companies, with
policies that could leave them deeply out-outpocket in a nightmare scenario.
• Three large luxury insurers – AIG, Chubb and
Fireman’s Fund – are trying to change that ratio.
• According to the CEO of American Express Publishing,
they received great feedback from readers on this article.
Q: Why do the rich need
Risk Managers?
A: They have more to lose
Liability Awards
Judgment
Amount: $7.5 million
• Parents leave for the weekend having the 20 year old Nanny
watching the 12 & 13 year old boys.
• The boys have their friends come over that Saturday afternoon.
One of the boys decided to have a WWF wrestling match, after an
hour of wrestling and doing moves that they see on TV.
• The Nanny was not paying attention to what the boys where doing
in the back yard. One of the neighbors, age 12, gets body
slammed and factures his spinal cord and is paralyzed from waist
down.
• Only had a $5 million Excess Policy in place.
Various Insurance Company National claims records.
Liability Awards
Judgment
Amount: $8.5 million
Insured: Chief Financial Officer of a manufacturing company
• The spouse was involved in a serious at-fault automobile accident
paralyzing a teenager. A $8,500,000 judgment was rendered
against the insured for which there was only $500,000 of primary
automobile liability insurance coverage plus the insured had a $1
million personal excess liability coverage.
• The large uninsured loss caused the CFO to borrow heavily
against personal assets. The stress involved with the two-year
litigation process adversely affected job performance.
Source: Various Insurance Company National claims records.
.
Liability Awards
Judgment
Amount: $5.5 million
Insured: CEO’s son celebrates after college – drinking and driving
• College student and his friend celebrating the end of college
exams. Both boys had been drinking. Left hours after being at
the bar and witness stated the vehicle was moving at a high rate
of speed. The vehicle then ran off the road and hit a tree killing
the CEO’s son and the friend suffered brain damage.
• Outside of the CEO losing his son, a suit was settled for $5.5
million. The CEO only had liability coverage for $500,000 thru his
motorist coverage and a $1,000,000 umbrella policy.
Source: Various Insurance Company National claims records.
Liability Awards
Judgment
Amount: $1.5 million
Insured: Senior Vice President for a holding company
• A visitor to the insured’s Utah ski resort condominium
tripped on a broken step and suffered a permanent
disabling injury.
• A lawsuit was filed alleging the insured was negligent
in maintaining the property and the claimant was
awarded a judgment of $1,500,000. Only $300,000 of
coverage was available under the insured’s primary
condominium policy. The insured had no personal
excess liability policy.
Source: Various Insurance Company National claims records.
The two most dangerous
individuals in the world today…
“So easy, even a caveman
can do it…”
“Give us 15 minutes…we
may save you 15% or more
on your
auto insurance…!”
The Reality
Our motto:
Give us 15 hours, and you will
probably be spending more for your
insurance. But you will be able to
sleep at night knowing your assets
are adequately protected.
Don’t risk a little for a lot!!!
Worries of the Affluent
Fear
Being kidnapped
Lawsuits from people hurting selves
on property
Lawsuits because people think
you’re rich
Lawsuits because of business
you’re in
Theft of property
Significant investment losses
Source: Russ Alan Prince; Prince and Associates
% concerned
35.2%
52.6%
54.4%
67.0%
77.5%
91.2%
Trusted Advisor Services
Wealth Management
• Private Wealth Services
– Comprehensive Estate Planning
– Investment Advising
– Asset Protection Strategies
– Family Business Planning
– Tax Planning
– Insurance reviews
= Planning for the Protection of
Client’s Financial Interests
Wealth Creates Opportunities
and Risk

Investment of wealth
 Structural ownership of wealth –
trusts and LLCs
 Preservation of wealth – tax
strategies, gifting, succession
planning
 Protection of wealth
The Missing Component
Protection of Wealth

Liability risks

Property risks

Personal and
family safety and
security
Protection of Wealth
The Personal Risk Management Process
• Thorough needs analysis to identify an
individual’s personal risks and exposures
• Educational process focused on potential future
risks and exposures
• An ongoing review of an individual’s program and
lifestyle to make sure their risk management
process meets their current needs
What is at Risk
Value of:

Current and future assets

Future earnings

Potential inheritance of significant
property or other assets
What Does Affluent Mean?
Complex P&C Profile
•
•
•
•
•
•
•
Single or Multiple High Value Homes
and Contents
Domestic Employees
Carpool
Liability mismanaged/not enough
High Profile Lifestyle
“Passion” Investments
– Farm, Ranch, Vineyard
– Auto or Valuable Collections, Fine Arts,
Jewelry
Multi-Generational Issues
Multiple Locations

Various State & Foreign Laws Apply

Multiple Agents / Companies - Patchwork
Program

Significant Coverage Gaps

Policies Overlap

Improperly Insured Assets

Not Listed on Umbrella
First Line of Defense for Asset
Protection - Umbrella Policy
• Buy “umbrella insurance.’ One of the first
lines of defense is to shift your risks to an
entity, such as an insurance company.
• Umbrella insurance protects assets from
personal injury claims above limits set by
standard – issue home or auto policies.
80% have insufficient limits
WSJ - A Fortress for Your Money 7/15/2006
What is Personal Liability
Coverage?
• Coverage that an individual purchases to protect
current assets and future earnings from a
covered lawsuit or settlement.
• Coverage for damages a covered person is
legally obligated to pay for bodily injury (personal
injury) or property damage which takes place
anytime during the policy period and are caused
by an occurrence, unless stated otherwise or an
exclusion applies.
Who Needs Excess
Liability Coverage?
• Own a home(s) or drive a vehicle
• Affluent individuals who:
– Employ domestic staff such as a
housekeeper or nanny
– Use wireless technology or have children who use the
internet
– Carpool
– Have teenage children who are driving
– Operate a home-based business
– Serve on the boards of a non-profit organization
– Maintain a high public profile
– Worldwide Travel – Car Rental
Personal Excess Liability Insurance
How does it work?
• An extra layer of protection over home, auto, jet
skis, motorcycles, boats, toys, etc.
• Requires minimum underlying limits of liability.
• Protects the insured against catastrophic lawsuits
or judgments.
• Provides expanded coverage and increased limits
of liability.
• Can be purchased as a separate
policy or as part of a package.
• Can be purchased on a group basis.
What is covered?
• Claims for bodily injury or property damage
caused by an insured or hazards on your
property
• Defense costs and associated court costs
By Endorsement • Non-business related personal injury such as
libel and slander
• Underinsured and Uninsured Motorist Claims
• Service on a Not-for-Profit Board
Personal Liability –
How Much Is Enough?
Factors To Consider
• Asset Base
– How Much Do You Have to Lose?
– Future Earnings?
• Exposures and Lifestyles
– Lifestyle Activity level
– Tangible Exposures
– Visibility in the Community
– Court Venue in Which the Client Lives
What’s The Likelihood?
• Personal lines lawsuits comprised $82.5 billion of
the $219 billion of tort costs in 2003.*
• One of every six jury awards now tallies $1 million
or more.**
• The 6th largest verdict in 2004 was larger than the
1st largest verdict in 2003.**
• Defense costs can be equal to or greater than the
final amount of the settlement
*Insurance Information Institute
**Jury Verdict Research, 2004, latest available
What is the cost of excess
liability coverage?
Example:
Household Details
2 homes (one in Illinois, one in Florida)
3 vehicles – one teenage driver
1 yacht (40 feet long, more than 50 horsepower
________________________________________
$1,000,000 of excess liability
$398
$5,000,000 of excess liability
$990
$10,000,000 of excess liability
$1,750
What Do We Know!
• U.S. TORT - Out of Control
• Most clients need at least $5M if not $10M and
can afford to purchase these limits
• 80% of YOUR clients do not have sufficient
liability protection
• 50% have significant gaps in their underlying
personal insurance program
• Most HNW/executives have not reviewed
personal liability exposures
Specialty Liability Coverage Areas
Trusts, Estates and LLCs
Employment Practices Liability
Directors and Officers Liability
Trusts, Estates and LLCs
• Increasingly popular vehicles for affluent and high net worth
individuals for tax and wealth transfer purposes.
• Personal insurance policies are inherently designed to
protect individuals, not entities such as trusts, estates or
LLCs
• Some insurers such as Chubb, AIG and Fireman’s Fund
can address the need for the trust, estate or LLC to be listed
as an insured. Notice must be given to the insurer so that
appropriate policy modifications and underwriting can occur.
• Estate Attorneys/Financial Planners should recognize that
insurance exposures can be created when personal assets
are placed in the name of a trust, estate or LLC and work
with a qualified risk expert to align personal property and
liability coverage.
Employment Practices Liability
Coverage
What is covered?
• Wrongful termination of employment
• Breach of any oral or written employment contract
• Employment related misrepresentation, defamation
or wrongful infliction of emotional distress
• Violation of employment-related discrimination laws
including workplace harassment
Employment Practices
Liability Coverage
Who needs it?
• Individuals who employ domestic employees such
as a nanny, housekeeper or caretaker
• Individuals and/or family members who have a
family office
Employment Practices Liability
Coverage
Why do clients need it?
• The U.S. Department of Labor estimated that
homeowners employed 896,000 housekeepers
alone in 2003.
• Employment practices liability is one of the fastest
growing areas of litigation.
• Employment practices liability is expensive to
defend and the average verdict exceeds $450,000.
• 50% of all suits against private companies
come from employees
Personal Directorship Liability
Coverage - What is it?
• Personal liability policy for independent directors
serving on one or more boards.
• Unique in that limits are not shared with other
directors or with the organization.
• Policy can be tailored for the individual to cover
one, all, or any combination of boards a director
serves on.
• Insured directorships can be with publicly traded,
privately owned, or not-for-profit organizations.
Personal Directorship Liability
Coverage - Who needs it?
• Anyone who serves on one or more boards
• An individual who serves on the audit
committee of a board
• An individual who is concerned that the
organization's D&O limits are inadequate
Personal Directorship Liability
Coverage
What is covered?
•
•
•
•
Mismanagement
Breach of duty
Improper business practices
Discrimination, harassment or wrongful
termination
Selected Policies and
Potential Coverage Gaps
Common Critical Gaps
HOME
Home Insurance Gaps…
• A whopping two out of every three homes nationwide are
under-insured
• High percentage of underinsured homes by more than
30%
• Limited Replacement cost – NOT guaranteed
• Contractual gaps such as ‘Similar vs. Like & Kind’
• Insufficient sewer/water & drain backup
• No Flood Insurance
*As reported by Marshall & Swift
Replacement vs Market Value
• R/C is the cost to rebuild in today’s dollars
• Market value-what you can sell your home for today
• Construction costs rose 5-7% last year
• In 2005, homeowners spent over $130 Billion on home
improvements
• Ordinance and law coverage
• Extended replacement cost-most policies cap at 10-20%
• Advise clients to review square footage
Common Critical Gaps
AUTO
Who is Covered?
• You, the insured ...
Person or persons named on the declarations
page and his or her spouse who lives in the
same household
• A dependent ...
Person related to you by blood, marriage or
adoption that lives in your household or is
away at school
• A domestic partner … ???
The definition of an “insured” or
“dependent” is ambiguous!
Young Drivers
Young drivers ages 16-20 years are
at a disproportionately high risk for
both fatal and non-fatal crashes,
with the highest per capita and permile-driven crash rate of any age
group. Motor vehicle crashes are
the leading cause of teen deaths,
accounting for 44% of teen fatalities
in the U.S.
Percentage of Uninsured
Motorists, Select States*
32%
CO has highest
UM rate in US.
ME has the
lowest.
Target States All Have
Below Average UM Rates
22%
16% 16% 15% 15%
14%
12%
10%
8%
4%
CO
CA
AZ
AK
NV
WA
US
Source: Insurance Research Council, 2004
OR
HI
ID
ME
Uninsured Motorist Defined
• Has no liability coverage at time of accident
• Must be result of an auto accident involving
injury
• Has liability coverage but not enough to meet
the State minimum
• A hit and run driver who cannot be identified
• Has invalid liability insurance at the time of
accident because the insurer is insolvent or
denies coverage
Other Underappreciated
Aspects of the Personal Lines
Planning Challenge
• Valuable Articles
• Domestic staff
• Personal and Home
Security/Travel
Valuable Articles
• Commonly known as a “floater”
• Provides broad protection for ten classes of
personal property
• Blanket vs itemized
• Additional Premium
Classes of Valuable Articles
•
•
•
•
•
Jewelry
Furs
Cameras
Musical Instruments
Silverware
• Autos
• Fine Arts
• Stamps/Coins
• Firearms
• Wine, etc
Typical Coverage Under
Homeowners
• Jewelry, watches, furs and
precious stones-$1,500
• Silverware, goldware-$2,500
• Firearms-$2,000
Nanny Hazards
Bridging the Property and Casualty Gap
 Exposure from liability associated with a nanny or
housekeeper who isn’t properly insured for sickness, injury, or
automobile accidents. Clients typically treat them as
independent contractors and not employees-potentially a very
costly mistake

“I suggest to the client that they need to get workers comp
insurance for their employees and they say, ‘Hey, I’m not
running a business here.’ Then I ask, ‘What happens if she
gets injured at your home?’ They say, ‘She has health
insurance.’”

“Then I ask, ‘How do you know she has health insurance?
And even if she does and files a claim, the first thing she’s
going to be asked [by her insurance company] is, ‘Was it on
the job?’” (If so, of course, she’s likely to be denied benefits.)
Nanny Hazards
Bridging the Property and Casualty Gap
 And what happens if the nanny is driving the client’s
car, taking his child to the park, and has an accident?
“This varies by state,” Randall says, “but typically, a
nanny wouldn’t be covered by your policy because
she’s not considered a member of the family.”
Therefore, he suggests, you need to put her on your
policy.”
 “Even if the nanny’s driving her own car and has a
wreck, if it’s determined that she was working for you
when she had the wreck, you as the ‘employer’ are
now liable.”
Domestic Employees

Workers Compensation
- Medical expenses
- Lost wages

Health Insurance

Employment Practice Liability
- Wrongful termination
- Sexual harassment/ Misconduct
Risk Management
The Process
1. Identify and analyze loss
exposures
2. Prioritize loss exposures
3. Examine feasibility of
alternative risk management
techniques
4. Select the best risk
management technique(s)
5. Implement the technique(s)
6. Monitor and revise the
program, when necessary
Common Findings
• Multiple Agents – Patchwork
Plan
• Inadequate Limits
• Coverage Gaps or Overlaps
• Uncovered Exposures
• Underinsured Homes, COC’s
• Uninsured Collections
• Agent Never Asked Questions
Relationship Manager
The Process
• Proactive Periodic Review
• Personal Attention
• Single Point of Contact
• Satisfaction Measurements
Carrier Selection and
Management
What to look for – Red Flags
•
•
•
•
•
•
•
•
•
•
•
Own single/multiple high value homes?
Own condo or other as an investment?
Own property in a catastrophic loss area?
Plan to remodel or renovate/expand existing home?
Own a home with unique features or building material?
Co-own or have property in trust or LLC?
Have significant collections or art, cars or other
valuables?
Own aircraft, large boats, thoroughbred horses?
Have domestic help?
Serve on boards of profit or non-profit organizations?
Have a high visibility career or lifestyle?
Personal Insurance Proposal
for
Mary and Thomas Smith
Issues
Mary and Thomas Smith have a primary home in Milwaukee, Wisconsin. They also
have additional residences in
Delavan, Wisconsin and Indian Wells, California. They have four automobiles, two
watercraft, two personal watercraft,
three ATVs (currently not covered by their insurance program), two snowmobiles,
jewelry, musical instruments and
need excess liability coverage.
Have an immediate need for earthquake coverage on the newly acquired
California home.
Would like to be sure they are adequately insured.
Would like quotes for $5 million and $10 million excess liability insurance.
Would like proper liability protection for their ATV exposure.
Would like to explore the coverage benefits offered by insurers who focus on the
high net worth individual.
Proposed Solutions
1) Suggest insuring the Milwaukee home for $950,000 however the interior
appraisal may indicate that the
replacement cost is higher.
2) Suggest insuring the Delavan home for $804,000 however the interior
appraisal may indicate that the
replacement cost is higher.
3) Suggest insuring the Indian Wells home for $1,300,000 however the interior
appraisal may indicate that the
replacement cost is higher.
4) Recommend the purchase of at least $5 million of excess liability (umbrella).
5) Recommend ACE as the insurer for the homes, valuable articles,
automobiles, watercraft and excess
liability.
6) Recommend Progressive as the insurer for the personal watercraft (jet skis),
snowmobiles and ATVs.
Benefits to your clients of
introducing Personal Risk
Management
• Proper liability limits
• Proper insurance coverage and
values in place prior to loss
• Identification of overlaps or gaps in
coverage
• Potential consolidation of policies
and policy effective dates for ease of
management
• Maximization of insurance dollars
spent
Three things you might need to buy
where price should never be a
consideration…
Brain surgery
A Parachute
____________insurance
Insurance premiums never
bankrupted a client;
uninsured losses can (and will)
The Role of the Trusted Advisor

• Recognition of importance of
property/casualty planning
• Identification of reliable,
trustworthy and expert P&C
advisors
• Discussion/analysis of loss
exposures
• Coordination and facilitation
of planning
What’s In It For You…
• Provides ongoing, regular
access to your client or
prospect
• Competitive edge: few
others do it
• Solidifies and broadens
Relationship
• Can provide access to other
family members, friends,
business associates
Next steps…
• Start integrating into discussions
with clients about their P & C
exposures.
• Ask the questions about the Red
Flags exposures.
• Serve as a personal risk
management resource for your
clients
• Align yourself with Risk
Managers who specialize in
personal insurance and employ a
risk management approach.
Questions???
John Blachaniec
312-286-1988
[email protected]
Summary
• A comprehensive financial and wealth management plan is
only as strong as its weakest link.
• A sound property and liability insurance program is very
important to protect your client’s wealth.
• Don’t lead with price; lead with value
• Clients need to be educated as to value we bring to the table
• Addressing these needs will help you:
– Deliver a comprehensive and integrated solution to your
client’s insurance needs
– Protect the relationship you have with your clients
 Outsource To A Professional You Trust
Questions