Driving on a major urban road in heavy traffic one rainy night, a woman rear-ended the car ahead of her. With no suitable place to pull over nearby, the two motorists got out of their vehicles to exchange insurance information. They were standing between their cars when a third driver hit the woman's car, trapping and seriously injuring the first two drivers. Vehicle damage came to about $2,500. But medical injuries, loss of wages, and pain and suffering resulted in a $5 million settlement, says Ross Buchmueller, president and CEO of insurer Privilege Underwriters Reciprocal Exchange.
Fortunately for the victims, the third driver carried the company's personal excess liability policy, which can cover up to $20 million in damages. "Five million dollars," Buchmueller notes, "and this was not even a case of recklessness - driving drunk, texting or speeding."
His company is one of a handful of insurers, including Fireman's Fund, Chubb, ACE and Chartis, whose niche is the top 1% to 2% of wealthiest Americans. The asset protection feature of umbrella liability insurance policies is not well understood by many clients or their advisors, the owners of the niche insurers say. But with lifestyles that often include expensive toys like yachts and jet skis, perks such as full-time domestic help and commitments like seats on nonprofit boards of directors, their deep pockets make the 1% attractive targets in any legal action.
Without appropriate liability coverage - which most experts place at 100% of net worth - a single incident could destroy an entire portfolio. Given the risk, insurers are trying to forge bonds with advisors and make them aware of the costs and benefits of this type of coverage.
Ironically, the cost of insuring great wealth is the best buy in the insurance business. "Excess personal liability is the most inexpensive insurance your clients can buy," says Jeff Kaplan, family office practice leader at Risk Strategies, a national, full-service property and casualty insurance agency. Kaplan's group serves clients with assets of $10 million and up. "A $1 million policy on your jewelry will cost $5,000 to $10,000 a year; $1 million in excess liability costs $200 to $500," he says. "Depending on individual circumstances, $10 million [costs] about $2,000."
BRIDGING THE GAPS
One reason advisors might want to explore this type of insurance, Kaplan says, is to counter the downside risk to clients should existing liability insurance prove insufficient. "If your liability insurance doesn't cover [an] award, and you're a high earner, [the courts] can garnish your wages, even wages going forward," he says.
That's an especially devastating consequence to younger clients who may be making $3 million a year but whose current net worth isn't much more. And while automobile accidents don't discriminate between rich and poor, the wealthy are considerably more vulnerable than the rest of the population to certain other kinds of liability.
Particularly threatening to the assets of the high net worth, says Jerry Hourihan, senior vice president and national sales manager for Chartis Private Client Group, are the following types of events:
* Internet-related incidents.
* Suits by domestic employees for termination or discrimination.
* Suits against nonprofit boards of directors.
* Injuries and damages caused by uninsured or underinsured parties.
Many wealthy individuals require services from various people who can "leave them open to lots and lots of property and liability exposure," says Hourihan, explaining that standard insurers typically limit such coverage to $1 million. The specialty companies offer limits as high as $20 million - more when you include the legal fees they cover in what's known as Defense Outside the Limits.
This means that in addition to providing legal advice from attorneys usually selected for their expertise, the niche firms recognize that clients might want to involve their own lawyers. And they provide from $10,000 to $25,000 for this so-called shadow counsel. (Additional coverage is available by endorsement.) Specialty firm ACE also builds in up to $25,000 for a public relations firm to manage reputation issues with more also available through endorsement.
A big risk the wealthy run is being involved in an accident caused by a person who has little or no insurance to cover damages. "We offer protection that covers our client in a case where the other party has no or too little insurance," explains Bob Courtemanche, division president of ACE private risk services. Like its competitors, ACE offers up to $10 million coverage as an optional piece of an excess liability policy. While some companies limit the option to auto-related incidents, others are less restrictive.
"Say a client is bitten by a dog whose owner has no insurance. We fill the gap between uninsured and underinsured at a cost of $125 per million," says Donald Soss, vice president and practice leader at Fireman's Fund. "That's not much to pay - $750 for another $5 million in coverage. Where else can you get this kind of security for that cost?"
In fact, its relatively low cost is such a major selling point with prospects that Buchmueller says his agents lead with the liability portion - ahead of cars, houses, etc. "Of course, premiums will vary depending on the number of drivers, driving records, kids," he explains, but "financially it's a smart, obvious decision, and that catches people's attention."
COVERING THE KIDS
Another way to get clients' attention is to tell stories of unanticipated disasters that can and do occur, or as Risk Strategies' Kaplan puts it, "insurance for the things you don't think are going to happen." Catastrophe management is, in fact, among Soss' responsibilities at Fireman's Fund. He cites the following examples:
* An insured client loaned his 27-foot boat to his adult son to take four friends on a fishing trip. They were in mid-channel when a boat ran into them. Deaths and multiple injuries on both boats led to multiple claims for medical expenses, lost wages, and pain and suffering. The client was worth $50 million, and needed every penny of it in coverage.
* Another client's college-age son and friends were staying in a condo rented by the insured. When the power went out, they lit candles. One tipped over and started a fire that claimed the life of a female guest and badly injured another, also causing more than $100,000 in property damage. This catastrophe triggered two lawsuits - one for the wrongful death, another for burns and other lifelong injuries to the roommate. As a college student in the care and custody of his family, the son was covered by his father's excess liability policy.
"Who," Soss wonders, "would think something like this could happen?" The complexity of the unforeseen has led Fireman's Fund to initiate a new category of accident coverage in addition to the usual claim for negligent entrustment. Last year, at the urging of its agents, the company filed for permissive use claims on every contract. The distinction often applies when parents allow their kids to use anything from automobiles to more complicated toys. "It's being rolled out nationwide at no additional cost to our customers," Soss says.
"From a liability perspective, children are the greatest risk factor," says Jim Fiske, U.S. marketing manager for Chubb Personal Insurance. "They go away to school; they have access to cars and alcohol for perhaps the first time. When you're evaluating risk factors, children are high on the list. These kinds of accidents don't happen a lot, but their severity is usually high."
Nancy R. Mandell, a freelance writer in Clifton, N.J., is a former managing editor of On Wall Street magazine.