Learn about high net worth personal lines insurance and how it protects affluent individuals. Property and liability coverage is hard to understand for most people - and for the wealthy - it becomes exponentially more complex.
High Net Worth Personal Lines Insurance
There is a war going against the wealthy. It is a new theatre of class war, where successful individuals and families assets are targeted by government regulations and taxes (redistribution of wealth), personal injury attorneys, legislators like Bernie Sanders, movements like 'Occupy Wall Street', and others who think the rich should pay for their college, healthcare and more.
In a country that is already the most litigious in the world, the risks for high net worth individuals have been steadily increasing, and many of them are not prepared - not even close. This is usually not because they are unaware of these risks (these are typically smart people) - but rather from a huge underestimation of the personal liabilities they may face.
The main issue the high net worth face is that as their wealth grows - they continue to use the same insurance that was adequate when their income and assets were much smaller, and their financial situation was simpler. But as they acquire more expensive homes, personal staff, artwork & Jewelry, equity in businesses, vacation homes etc. - their insurance needs change and their liabilities exponentially increase.
This is where high net worth personal lines insurance and personal risk management strategies come into play.
High Net Worth Insurance Challenges
So the first challenge we discussed above - outgrowing their standard personal lines insurance and underestimating their risks. This is probably the most common issue the newly wealthy face. The right high net worth personal lines insurance coverage allows the affluent to transfer their rapidly increasing risks to an insurer.
Another challenge is those high net worth individuals that realize their personal insurance needs have changed - but instead of having a coordinated plan - they buy a policy here and there, often with different insurers, as their needs grow. So they create a complex patchwork of policies that is are hard to keep track of.
The issue with this approach is that they often pay more premium then they should for their high net worth personal lines insurance (like low deductibles, no package discounts and not getting credits for alarm systems and other loss prevention devices) and there is no policy coordination. Policy congruency can be very important if the claim is large enough to trigger an umbrella policy. For example - a lawsuit that is covered by an underling auto policy might be excluded from the umbrella.
Reasons For High Net Worth Insurance Gaps
The newly affluent who have outgrown their insurance usually have done so when their wealth has grown very fast. This puts them in a situation where they can be significantly underinsured and in one or both of these two dangerous situations:
- Not realizing their liabilities have significantly increased, or
- A patchwork and disorganized insurance program.
And they are typically underinsured in these specific areas:
- Umbrella Liability - Limits not sufficient to match liability risks. In 2008, $29 million was awarded to the family of a four-year-old boy who suffered a debilitating spinal cord injury while riding as a passenger in a vehicle involved in a head-on collision.
- Valuables - Not appraising jewelry / artwork / wine etc. periodically at current values. Example - The rapid rise in the prices of gold and silver have made jewelry made with those precious metals far more valuable then just a few years ago.
- Uninsured & Underinsured Motorist Liability - When the driver who hit you doesn't have any or enough liability coverage to pay for the damages and medical expenses you incur. Recent statistics show that one in seven drivers has no auto insurance. Also health insurance does not compensate for lost income and pain and suffering.
- Home Structure (Coverage A) - Not insuring their high value home for the proper replacement cost to ensure rebuild costs will be fully covered for a total loss. Their main home and any vacation homes often represent a significant part of a family's net worth.
- Employment Practices Liability For Domestic Staff - The standard liability coverage in a homeowners or umbrella insurance policy does not cover lawsuits brought by domestic employees for wrongful employment practices. If you employ residential staff like as gardeners, housekeepers or nannies - be aware that allegations of discrimination, sexual harassment, wrongful termination, and other wrongful employment acts are on the rise. Often, disgruntled nannies or housekeepers file frivolous lawsuits, in the hopes that the family will settle to avoid high legal expenses and possible reputational damage that could harm their businesses.
- Auto Liability - If you cause an accident, liability coverage helps pay for the other person's expenses - bodily injury liability and property damage liability. If these limits are too low they might not meet the requirements to trigger the umbrella. In 2012, a wealthy Floridian was convicted of manslaughter due to an auto accident and settled a related civil case for $46 million.
- Flood - Flood coverage is excluded from almost every homeowner's insurance policy on the market.
- Mold - Home insurance policies usually don't cover mold that resulted from a preventable water leak, flooding, or high humidity.
- Earthquake - Earthquakes can cause massive amounts of destruction to home structures. They can damage housing foundations and collapse walls. Even small tremors can destroy personal property including wine, artwork and furnishings. Homeowners insurance does not cover earthquake damage.
There are also other many other underinsured gaps the ones mentioned above such as:
- Other structures (Coverage B limit)
- Personal property (Coverage C limit)
- Loss of use of home (Coverage D limit)
- Worker's compensation for domestic workers
- Incidental business activity exposures
- Not-for-profit director's & officer's (D&O) liability
- Property association or club loss assessment exposures
- Off-road recreational vehicle liability
- Auto comprehensive and collision
- Deductibles too high
Personal Injury Attorneys Look For Deep Pockets
These high net worth individuals are favorite targets for lawsuits, and the specific reasons there can be massive gaps in their personal insurance plans are:
- Their current policies are no longer adequate to protect them and their growing assets and liabilities.
- Their current property casualty agent (like a State Farm, Allstate, Nationwide, Progressive, GEICO etc. agents) most likely does not have the expertise - or the access to high net worth personal lines insurance and personal risk management solutions needed at their new level of wealth.
Think of it this way - if you needed open heart surgery, would you go to your family doctor? Of course he answer is no. You would seek the advice and skillset of the best heart surgeon you could find. And it's not that your family doctor isn't competent, he might be the best general practitioner available. It's just that his education and competence are at a different level then the heart specialist for your condition.
And the same thing is true for property casualty insurance agents. If you have substantial assets, most mass market agents typically do not have the expertise or resources to understand and properly insure their clients at that level of financial complexity. And most of them do not have access to the high net worth specialty carriers because of contractual limitations.
Since many high net worth families are still using mass market carriers (and agents) that used fit them in the past, there can be massive insurance gaps that can cost them thousands or millions of dollars out of pocket for a lawsuit- if they are not properly insured with specialized advice and coverage.
And for those affluent individuals that don't take the time to educate themselves about their new exposures - it usually takes being on the receiving end of a lawsuit (like a dog bite or slip and fall), or a property loss (house fire, flood loss etc.) that costs far more than their insurance limits - to look for expert help and leave their current agent.
That being said, the newly affluent are usually educated, intelligent and financially responsible. They work long hours building their businesses and usually have them properly insured. The also have their investments managed by investment advisory firms specializing in high net worth.
Many of these successful families are unaware of their increasing risks and growing exposures as they accumulate wealth. This is where dangerous gaps can be found in their personal liability exposures. So affluent families typically are underinsured primarily because they do not adjust their personal insurance program as they build their wealth. With the complexity of insurance contracts and being so wrapped up in their businesses, charities, travel etc. - they leave their personal insurance policies mostly unchanged. And this is why they need professional advice from a high net worth insurance specialist for their personal property and liability polices.
Risk Management Strategies
It's not just about insurance... high net worth families should have a risk management team, to help them reduce their risk on a personal basis. This team should include an attorney, accountant (CPA), high net worth personal lines insurance specialist and a risk management specialist at the minimum. This team can provide you with insurance loss-prevention advice and techniques that can help with:
- Family safety
- Residential Exposures
- Personal Staff
- Personal Information
- Travel Safety
these services not only help protect the family, but also can reduce insurance premiums for having less exposure.
Disadvantages Of Being Wealthy
Following is an example of a liability lawsuit that high net worth families may face:
Colleen B. and William C. v. The Estate of Sharon J. Shipley, et al. - $25,750,666 award. - This was a car accident, personal injury case. Defendant Sharon Shipley was reversing her SUV out of a driveway being partially obstructed by a truck. Plaintiff Colleen was positioned behind the defendant's SUV and directing her when the SUV suddenly accelerated and pinned plaintiff Colleen's arm against the truck obstructing the driveway. Due to the accident, Colleen lost use of her right arm despite the painful harvesting of skin, muscle, and bone from other donor locations on her body. Plaintiffs sued Shipley's estate for negligence, the truck operator for obstructing defendant Shipley's view, and the truck operator's employer. The judge ruled in favor of the plaintiff and granted plaintiff a $25,750,666 (yes, millions) award for damages. See Rains Lucia Stern St. Phalle & Silver, PC.
While this is an extreme award, let's say the award was for 5 million, and the driver had a $500,000 auto liability & a $2,000,000 personal umbrella. She still would be short $2,500,000 that she would have to pay out of pocket. That is a lot of cash, even for the wealthy. If she did not have that money liquid, she would have to sell assets to meet the judgement. Assets that she or someone in her family worked very hard to get.
There are also large risks at home - the most common types of liability lawsuits for homeowners involve:
- Dog bites (very common lawsuit)
- Slipping and falling, accident in the stairwells, on steps, icy sidewalks and wet surfaces
- On-site guests suffering injuries at the pool
- Wrongful death on the premises
- Lawsuits based on defamation, invasion of privacy, slander and libel
High Net Worth Personal Lines Insurance - The Bottom Line
We hope this article on high net worth personal lines insurance has been informative. Families that are rapidly climbing the wealth ladder have to be very carful about their personal insurance as their assets, liabilities and risk for lawsuits typically outgrow their mass market insurance protection very fast. If you are in this situation please seek the advice of a competent high net worth insurance advisor. High net worth insurance carriers, high net worth insurance market share, high net worth personal insurance, high net worth insurance brokers, health insurance for high net worth individuals and umbrella insurance for high net worth.
High Net Worth Insurance Information
EK Insurance advises our affluent clients on what coverage options are available to them. Please check out more of our articles on insurance choices for wealthy families: