These clients' unique needs
warrant attention from advisors.
Planner Mitchell Freedman had talked once before
with his client about kidnap and ransom insurance, coverage designed to
protect everyone in the insured's household from abduction and
extortion. "He has a wife and children but wouldn't consider it at
all," says Freedman, president of MFAC Financial Advisors Inc. in
Sherman Oaks, Calif.
Then a magazine in the client's home country
glorified him on a list of its wealthiest citizens. "The net worth they
showed for him was many, many times what it truly was," Freedman says.
"He appeared to be enormously wealthy, so I brought up the subject
again and he said, 'Let's buy it.'"
This exotic policy is just one genre of property and casualty
insurance, an arena often neglected by many individuals and some
financial advisors. Why so? P&C is esoteric, complicated and tough
to present in a pie chart. None of that means it isn't important,
though. Just look: "On average, our clients pay $23,000 in annual
premiums for 3.2 lines of coverage," says Charles Williamson, president
of AIG Private Client Group, part of the triumvirate that dominates the
high-net-worth P&C marketplace, along with Chubb and Fireman's
Fund. "Homeowners is our clients' most common purchase," Williamson
says, followed in order by auto, collections (jewelry/fine art),
umbrella coverage and "other."
Now, you don't need to become an insurance expert to
help clients. You can effectively mind their P&C by
(oversimplifying here) doing just three things.
One, get familiar with the coverages available and
the issues surrounding them. The affluent have exposures that standard
policies don't cover, or don't cover adequately, which insurers
targeting the affluent routinely underwrite, Williamson says.
Two, thoroughly review the client's situation to make sure all risks
are properly managed, both at the start of the relationship and
periodically throughout.
Three, oversee implementation. Yes, that means
keeping an eye on premiums through, for example, prudent deductibles.
But it may also mean working with an insurance professional who either
the client or advisor has chosen. "In those cases we get something in
writing from the agent saying that the client is appropriately
covered," says wealth manager Stewart H. Welch III, founder of The
Welch Group in Birmingham.
When clients look to you to decide whom to buy from, steer toward an
independent agent representing numerous carriers rather than a captive
tied to one, recommends Alan Goldfarb, chief financial strategist at
Weaver and Tidwell Financial Advisors in Dallas-Fort Worth. "You want
flexibility," Goldfarb says, although spreading policies across a host
of carriers lessens the opportunity for multiline discounts or gaining
clout as a big customer.
Whoever the insurance specialists and carriers are, they should be
committed to delivering the top-shelf service the wealthy demand, or
the client could be disappointed. In a recent study by The Luxury
Institute, a New York research outfit, of 15 P&C carriers targeting
high-net-worth individuals, USAA scored highest in service, with Chubb
second and American Family third.
Your final implementation duty is to coordinate all
policies' deductibles, coverages and effective dates, says agent/broker
Lee Hargrove, president of Professional Service Associates LLC in
Raleigh, N.C. "One agent may not know what another is writing, and a
gap in coverage could leave the client responsible for a claim." Don't
let that happen, okay?
Homeowners
A key issue with homeowners is maintaining
sufficient coverage to rebuild in case of a partial or total loss.
Clients with vintage homes grandfathered into today's zoning
requirements need to realize that many homeowners policies pay only for
the materials and workmanship that was lost, even though replacement
construction would have to comport to modern, and potentially more
expensive, zoning rules. Additional protection, sometimes referred to
as building ordinance insurance, is needed to cover the incremental
cost of getting current.
A widespread concern is rebuilding costs' brisk
escalation. Many so-called "replacement cost" policies cap what they'll
pay to rebuild at, say, 150% of the policy face amount. So a home can
quickly become underinsured-just one reason why you revisit the P&C
file regularly. "Often the cost to replace a home is 100% or more of
the policy amount," says AIG's Williamson.
To make sure his clients aren't underinsured, Welch
puts the onus on the insurance guy. "Every few years we ask the agent
for a new written appraisal of the cost to rebuild, and we insure the
home for that amount. That way if it's destroyed and the actual cost is
significantly higher, there's a much better chance of working things
out with the insurer," Welch says.
All of this assumes your client can get insurance.
In some places, like the Gulf Coast, that's suddenly very difficult.
"The problem is really twofold, because there's also been a huge
increase in rates," says Benjamin Tobias, president of Tobias Financial
Advisors in Plantation, Fla. "We laugh with clients that you hope your
homeowners is renewed, and if it is, you're thankful whatever the cost."
The root of the problem is protection for windstorm damage.
Historically that coverage has been part of the HO form. But now
insurers are reticent to write it in hurricane zones. Some carriers
have pulled out, others folded. At least in the Sunshine State there is
an insurer of last resort, state-backed Citizens Property Insurance
Corp. "But it's very expensive and not great insurance," Tobias says.
Yet there is good news, according to James Kane,
president of HUB International Personal Insurance, an arm of
Chicago-based brokerage HUB International. Many insurers have the
capacity to write a small amount of wind coverage in coastal areas, he
says, and individuals with high-value homes who are willing to manage
their property's risks are among the most likely candidates to get it.
Taking out a high deductible is often treated favorably by underwriters.
Underwriters also like it when the company is
insuring a noncoastal property in a different state as well, Kane
explains. The insurer not only gets more premiums, but also equally
importantly gets a more diverse collection of risks (two houses in two
different areas). For clients building new residences in storm-prone
areas, installing shutters and wind-resistant glass improves the odds
of approval for HO. Insurers have loss prevention experts who can aid
clients during the design phase.
Many consumers are unaware of the modest limitations
(e.g., $1,000) that HO policies typically place on losses of jewelry,
furs, antiques, Oriental rugs and other collectibles. Yet even those
who are familiar with these limits frequently believe the value of
their possessions is less. "Then you point to the [client's] antique
French Provincial dining room set," Kane says. To protect such
treasures, a rider or separate policy is needed. "Otherwise the insurer
gives you back eight chairs and a table." Active art buyers may require
quarterly or semiannual check-ups to ensure all new acquisitions get
covered, Kane adds.
Another policy underappreciated by the public is
excess liability insurance, or umbrella coverage, which provides
protection from lawsuits over and above that afforded by the client's
home and auto policies when the deductibles are properly coordinated.
For example, if the HO policy only covered liability up to $100,000 and
the umbrella policy kicks in at $300,000, a $280,000 claim would mean
the homeowner would be left paying $180,000.
"People either don't have enough umbrella protection or don't have it
all," says Tobias. As a rule of thumb, clients should have coverage
roughly equal to their net worth.
Flood Insurance Gets Personal
Should residents of areas which historically have
not flooded buy flood coverage? Maybe. "Because of increased runoff
from development, you're seeing flooding in areas that you didn't used
to," Kane says. But federal flood insurance often doesn't cover damage
below ground, such as to a finished basement. And it halts protection
at $250,000 for building coverage and $100,000 for contents, limits
that may not be sufficient for well-to-do clients. In such cases,
excess flood insurance, available in the excess and surplus lines
market (e.g., Lloyd's of London), historically has been the answer.
Yet in select states there's a new kid in town.
Within the last several months, the high-end carriers have introduced
personal flood insurance with coverage into eight digits. It's an
endorsement to the homeowner's contract against certain kinds of
surface water damage, and is designed to compete with national flood
(which Kane says it's better than) and excess flood policies. The only
problem so far is limited availability. "That will change," Kane
predicts.
"Other"
Sitting on a corporate board as an independent director is one of the
more thankless jobs around these days. Clients in such positions can
protect themselves with personal director's liability insurance. It
pays off when the corporate directors' and officers' policy doesn't,
either because the client's actions aren't covered or its limits have
been exhausted. "This coverage is a last line of defense before digging
into your own pocket," says Jim Fiske, a vice-president at Chubb
Personal Insurance. Chubb's policy also protects clients serving on
not-for-profit and charitable boards.
For families who employ household staff, state law
may require worker's compensation insurance. But an employment
practices liability policy might be a good idea, too. It indemnifies
the family and foots certain legal expenses when a domestic worker sues
for wrongful discharge, discrimination, or harassment, including by a
houseguest or other domestic worker.
As bad as that could be, the kidnap policy is the
one that's hopefully never relied upon. But if it is, it pays for
negotiators and the ransom. Who might need it? "Someone with high
visibility, or who is well-heeled and travels internationally," says
Freedman, whose client mentioned at the outset definitely appreciates
the protection. About a year after buying it, he rang Freedman and said
with nervous excitement, "That list came out again and I moved up
several notches. Mitch, is my kidnap coverage adequate?"