Understanding your personal insurance program can protect asset value

Many companies have risk management departments.  The job of the chief risk officer is to gage potential issues for the company, manage risks and insure against them.  Risk officers work closely with their brokers to put into place the requisite insurance program.  Smaller businesses go through a similar process but usually assign risk management duties as collateral job functions. 

But what about high net-worth individuals?  Many of these individuals and families have formalized estate planning structures — focused primarily on lowering taxes and protecting assets from creditors — but few acknowledge insurance as a critical aspect of estate planning and wealth preservation.  How many individuals really read their automobile or homeowners policies? Not surprisingly, a large percentage of these individuals are underinsured with respect to asset protection and the risks posed by their lifestyle. Substantial wealth and valuable assets present unique exposures that necessitate a careful review of personal risk management and insurance programs.

Insurance brokers provide a valuable service to their clients.  They know the available coverage in the marketplace and the best carriers to consider.  If an insured has a claim, the broker can file it with the carrier and assist in trying to secure coverage if there are problems.  If individuals, families and family offices want to ensure they have the best coverage, however, there is an additional step to consider: an insurance audit.  An insurance audit can unearth inadequacies or overlaps in coverage that can result in significant savings for high net-worth and ultra-high net-worth individuals.

An audit serves as a second opinion on the personal insurance coverage.  An experienced insurance coverage attorney can examine the policies in an insurance program to identify possible gaps in coverage. This is particularly important for those holding valuable assets such as luxury homes, yachts, aircraft, jewelry and artwork.  Coverage for the assets — and recommendations for enhancements — are evaluated based on the policyholder’s risk tolerance.  Gaps can then be considered with the broker to ensure they are adequately addressed.

An effective insurance audit will be tailored to the specific assets involved, the current scope of insurance policies, the insured’s appetite for risk and coverage enhancements available in the marketplace. Consider these examples for a marine policy: An individual purchases a marine policy on his yacht. Buried in the policy are exclusions that reduce the scope of coverage. For example, it does no good for a marine policy on a yacht to sneak in an exclusion related to charters if the owner does in fact charter it out.  Or for the same policy to have carefully worded exclusions as to when coverage is excluded based on territorial limits or who is onboard. An audit of the policy will pick up these potential gaps in coverage and the owner can proceed to address them to expand coverage and reduce risk. 

The scope of an insurance audit will vary: it may include a single policy, multiple policies or an entire insurance portfolio.  For individuals and families looking to preserve net worth and asset value, understanding the plethora of available insurance and its unique coverage is a “must” for special assets categories.  A broker can provide benchmarking to select appropriate limits, general policy language and the best insurers; through an audit, an insurance coverage attorney can dive into the actual language of the policy to find gaps and ambiguities.  The combination ultimately creates much better coverage for the insureds and a stronger insurance portfolio to provide maximum protection across a broad spectrum of risks and assets. 

It is unfortunate when a policyholder learns of gaps in insurance coverage after the loss.  The costs associated with gaps are almost always more significant after a loss when the policyholder must cover the expense or litigate the coverage question.  Audits can help to ensure a policyholder is not left on the hook in such scenarios. A team approach involving the insured, broker and coverage attorney creates the best coverage possible in such scenarios. High net-worth policyholders should adopt a range of insurance solutions to eliminate risk exposures, including a thorough analysis of their insurance program. Of course, such an audit also can be completed for anyone that has insurance coverage concerns and makes a lot of sense for high income earners with respect to policies such as life insurance and private long-term disability policies. A coverage audit helps to ensure the coordination of policies and the placement of appropriate insurance.

Collin Hite is the practice leader of the Insurance Recovery team in Hirschler Fleischer's Richmond office. He can be reached at 804-771-9595 or [email protected].