Wealth Protection Strategy #3: Umbrella and Excess Liability Insurance Coverage

NOTE:  This blog is part of a series of blogs dedicated to wealthy individuals, families and their wealth advisors to provide tips and strategies for protecting wealth and assets from an insurance perspective.

As a financial advisor to wealthy, affluent, successful individuals and families, you know firsthand how they have worked extremely hard and have made many sacrifices to be where they are today.  Heck, you have worked extremely hard to get to where you are today as well.  Maintaining your client’s lifestyles and preserving their wealth and assets to enjoy and to pass on for future generations is essential.  Protecting those assets is just as critical but is often overlooked by individuals and their wealth advisors when discussing strategy.  Often times it is mentioned to carry an umbrella or excess liability policy but it is rarely deeply discussed as to how much should be purchased and how the umbrella policy should be structured to properly protect their assets.  To give a refresher, an umbrella liability policy is an additional layer or multiple layers of liability coverage that sit on top of ones’ underlying insurance policies (home, secondary home, autos, yacht, etc.).  If structured properly, many umbrella policies can “drop down” and provide first dollar coverage where there might not be coverage in the underlying policy.

As a wealth advisor, it is paramount to make sure your clients carry adequate liability limits because they are often seen as an easy “deep pocket” red flag for someone else to dip into.  How much coverage is enough?  According to a recent study produced by ACE Private Risk Services, more than 40 percent of wealthy households have less than $5 million in umbrella liability coverage and 21 percent have none at all.  Click here to read the full article. This study suggests that many wealthy individuals are drastically under-insured or simply uninsured and exposing their assets to significant loss.

The question is how much extra liability insurance should you carry?

A few questions wealthy individuals, their wealth advisors and insurance advisors need to consider when discussing umbrella liability limits are:

• What is your net worth?
• What are you trying to protect?
  • How many homes do you own, do you own a yacht or plane, valuables, what are your other assets
• What activities are you involved in?
  • Do you own a business, rent out property, are you a high profile public figure in politics or sports, do you sit on non-profit boards
• Do you travel abroad?
• Do you have teen drivers?
• Do you employ domestic house workers?
• If something could go wrong, what would it be? If someone sued you, what do you think it might be for?  What are others in your similar position being sued for and at what amounts?
• Lastly, how much are you willing to give up?

These are just a few questions to get started with to help advisors decide on a comfortable limit to purchase for umbrella liability coverage.

Another important topic to discuss with the insurance advisor after deciding on a limit is which carrier do you go with?  Many insurance carriers offer different umbrella liability coverages.  For example, as mentioned earlier, many umbrella policies will “drop down” and cover uninsured exposures in your underlying home and auto insurance policies while others will not.  Some will offer legal defense “outside of your limit” while others “eat into” your liability limits leaving you with lower limits to actually pay a claim.  Some umbrella policies dedicated to high-net-worth individuals and families will allow their personal attorney to “shadow” the selected legal team from the insurance company.  These are very important subject matters to discuss as the final premiums are dictated by coverage and it might be more advantageous to invest into an umbrella liability policy that costs more due to personal preferences and value.

Hopefully this article has shed some light on umbrella liability insurance coverage and its importance.  Remember that not all policies are created equal and working with an insurance advisor that understands wealthy individuals and the affluent market is extremely important in properly developing an insurance program.  It is also highly recommended to have all of a client’s advisors working together when building and structuring a personal insurance program for proper wealth protection.

Should you wish to discuss this subject matter or consult with one of our advisors about your client or yourself please click here or call our office at 843.763.4200.  If you are interested in reading the other articles in this series then please visit our main blog site.