How much liability insurance do HNW clients need?
While an advisor's job is to protect and hopefully grow his clients' assets, protection by use of liability insurance is another important component of retirement planning.
“The most serious threats to a retiree’s net worth involve exposure to high-stakes liability lawsuits and significant property loss at home, while many approaching retirement overlook easy savings opportunities in their personal insurance program,” says David Spencer, senior vice president of ACE Private Risk Services, part of the ACE Group, based in Zurich, Switzerland.
Spencer argues that high-net-worth individuals are especially at risk for a lawsuit because of their high asset levels, and liability laws in some states lead to “deep pockets.” In other words, he says, someone who might be only 1% at fault can be held responsible for up to 100% of the damages awarded.
“If a high-net-worth individual’s child is in an automobile that is deemed to have caused injury, the deep pockets theory comes into play, whereby the passenger because of their high net worth is responsible for paying the reward.”
The common solution to excess liability insurance needs is the standard umbrella policy, or personal excess liability insurance that supplements the liability coverage on a person’s home and auto policies.
Peter Godino, an advisor at Modera Wealth Management in Boston, Mass., says three-fourths of the firm's clients have some level of excess liability coverage.
“We often advise them to acquire additional coverage, because their net worth or career may change, which can make them more susceptible to a lawsuit,” says Godino. “In rare instances, clients may be in the ‘public eye,’ and require coverage that addresses libel, slander, and defamation.”
One type of coverage often overlooked, says Godino, is excess un-insured/under-insured liability coverage, which provides extra coverage for successful families and would help to protect their personal assets in the event they are seriously injured in an accident with another motorist who is un-insured/under-insured.
Not every umbrella has the same features and benefits. ‘We recommend that clients make sure those defense costs are included in their policy benefits,” says Godino. “The best policies include defense costs over and above the policy limits.”
Liability coverage is surprisingly affordable, according to ACE’s Spencer. “Ten million dollars of umbrella liability coverage for a high-net-worth individual with three homes, four cars, and a boat might run as little as $1,000,” he says.
In measuring how much protection advisors’ clients might need, Spencer recommends advisors tally their investable assets, tangible assets, estimated future earnings, and reputation value. The tally of those numbers, he says, would indicate how much liability an advisor’s client may need.
Bruce W. Fraser, a New York financial writer, contributes to Financial Planning.