To bridge the gap, Fiske recommends advisors work with a qualified expert in personal risk management licensed in their jurisdiction. "As the wealth of their clients increases it becomes a greater risk issue," he says.
The Advisor As Risk Manager
"The risk is out there," says Kevin Gahagan, of Mosaic Financial Partners Inc., in San Francisco, Calif., who has seen the effects of lack of attention to P&C coverage, and considers the nature of his work as a planner, at least in part, to be a risk manager. "We are very clear with our clients that this is not our field of expertise. We will always advise clients to review our recommendations on insurance issues with their agent. We haven't met with a client in the last 10 years where we have not recommended changes in their P&C coverage," says Gahagan.
Regarding clients with domestic workers, there are three fundamental areas of possible liability: employment practices, personal injury attributable to employment and personal injury due to negligence, Gahagan explains.
Without additional riders, employment practices are not covered under a typical homeowner policy, he points out. With respect to personal injury, if the injury occurs in the normal course of employment, a standard homeowner's policy may limit the remedies available to the injured party. "Claims for lost wages will not typically be paid under a homeowner's liability coverage," Gahagan says, although worker's compensation insurance purchased by the employer may cover such claims. Injuries that might result from employment are back injuries, repetitive stress injuries and others that may occur as a result of performing one's duties. Personal injuries attributable to negligence might occur when a person falls after a faulty stair rail breaks or after a deck gives way. In those instances, the homeowner's general liability coverage would likely apply, notes Gahagan.
Here are some red flags, Fiske says, that an advisor should watch for on behalf of wealthy clients with domestic workers:
1. Do the workers have access to private passenger vehicles? If so, do they drive them?
2. Do domestic employees have alarm codes and keys to the house?
3. Are your clients' computers password protected?
4. Has a background investigation been done on workers to check their driving records and possible criminal activity, not only at the hiring stage but periodically throughout their employment?
Advisors can advise clients to reduce their risk by having a job description, using an employment application, and making sure their employment practices comply with federal requirements, such as withholding of payroll taxes and proof of citizenship. The mistake most advisors make is focusing on the net worth of an individual rather than on the risks he or she faces and kind of insurance coverage needed, says Fiske.
"The standard industry policy does not provide liability on a worldwide basis," he adds. "So if your client with a nanny or personal assistant travels with them, a mass-market carrier will not cover them for liability. The industry standard also doesn't cover liability for personal injury, which generally distills down to liable and slander claims. That's important because if the domestic prints or says something that is attributed to you and judgment is found against you, it is libelous."
How much does such insurance cost? Personal liability is relatively inexpensive, says Fiske. For example, a $10 million liability policy for a family with a couple of homes and cars costs approximately $1,750 annually.
Mary Lacey Gibson, a planner in San Juan Batista, Calif., sometimes has clients who employ occasional labor or someone like a nanny on a regular basis. "Regardless of legal status, for all hires that do not come through an employment agency, I recommend that they become familiar with requirements," she says. "Clients regularly hire day laborers, engage trash haulers, painters, handymen and house cleaners. Points of discussion include the definition of an employee and independent contractor. What happens if they get hurt or report an unemployment claim, and the fact they are letting a stranger into their homes.
"They need to know the rules for employees, check with their homeowner's insurance company for what is covered, add necessary riders to homeowners insurance and add worker's compensation insurance. To keep ahead of potential headaches and not run afoul of the legal system, clients either need to use employment agencies or build a team which includes their insurance agent, tax professional, local state employment agency and possibly an attorney specializing in labor law."
Tom Scanlon, an advisor in Manchester, Conn., says one client became a guardian of three minor young children and decided to employ a nanny. The client purchased worker's compensation insurance, since it's required in Connecticut if you have an employee. Scanlon also suggested the client purchase an umbrella liability policy with auto coverage because the nanny would be driving the family car. The client complied and purchased a $5 million umbrella policy.