The Big Hole In Most Financial Plans
Umbrella liability covers catastrophes, and premiums are reasonable.

By Gail Liberman

When insurance attorney Bill Bailey had a home in Fort Lauderdale, Fla., someone borrowed his car, drove to a store where drinks were served and later suffered a head-on collision. Fortunately, Bailey has a $5 million personal umbrella liability insurance policy. It clicked in to protect him personally from the resulting damages.

Today, Bailey, special counsel to the Insurance Information Institute in New York, believes that nearly everyone needs this insurance, often believed to be a product limited to the high-net-worth market. "If you’re old enough to have liability insurance, you’re old enough to create more liabilities than you can handle with your own personal finances," Bailey declares. It’s definitely worth foregoing a six-pack of beer weekly, particularly for anyone who has children driving their cars, he says.
Yet personal umbrella liability insurance, also known as "excess liability insurance," too often seems to slip through the cracks in client financial plans. Financial advisors say that most clients they see simply don’t have it. Those who do have coverage don’t carry enough.

"It’s a detail," says Jane King, CFP and principal of Fairfield Financial in Wellesley, Mass. In fact, King questions whether umbrella liability coverage gets the amount of attention it truly deserves in the Certified Financial Planner curriculum. Some leading advisors have often argued that umbrella liability is the biggest gap in most Americans financial plans.
Personal umbrella liability insurance provides coverage over and above a client’s primary insurance limits for damages arising out of personal injury and property damage. It does not kick in until the underlying policy limits are exhausted. Umbrella insurance, which often requires a minimum amount of coverage on the underlying policy, most commonly is added to auto and homeowner’s insurance. But it’s possible to have excess coverage for other risks as well, including boats and rental cars. Most recently, American International Group Inc. (AIG), New York, even extended personal umbrella liability coverage to employment-related allegations made by domestic help. That coverage, for up to five employees, handles charges of sexual harassment, wrongful termination and discrimination.

Most property-casualty insurers sell personal umbrella liability insurance along with their standard policies. However, it is possible to buy personal umbrella liability coverage through a company separate from the client’s primary insurer.
Premiums for umbrella liability insurance still are considered fairly cheap. A $1 million umbrella policy can cost as little as $200 to $250 annually for coverage of, say, one house and one car. Like other insurance, prices may vary by geographic area. Prices also may increase based on the types and number of risks that are added to the policy. Personal umbrella policies can provide as much as $50 million or $100 million in coverage. Beyond $100 million, notes Lisa Lindsay, managing director of Marsh Private Client Services in New York, an insurance broker may need to layer coverage from more than one company. Or, the broker may need to turn to specialty companies, such as Lloyds of London.

There are logical reasons personal umbrella liability coverage often is overlooked. The greatest catastrophic risks typically are related to cars, swimming pools and boats. These definitely are not the thrust of many financial advisors business, and few advisors sell umbrella liability insurance. They believe it’s the job of a client’s property-casualty insurer to bring up the idea in conjunction with their client’s auto and homeowner policies.

Yet, many insurance agents don’t. It then becomes the financial advisor’s responsibility to make sure a client knows about this gap. Nancy Coutu, principal with Money Managers Advisory in Oak Brook, Ill., says she is well-aware of this oversight on the part of property-casualty agents. "I’m asking 10 people if they have an umbrella policy, and nine people tell me no," she says. "I can see why. It’s not a huge premium. There certainly is not an incredible amount of motivation for a property-casualty agent to sell it."
Every time Coutu makes a client aware of this insurance, she says, the client immediately calls a property-casualty agent and buys it. "Most people today have more toys than they ever had, motorcycles, boats, snowmobiles, Wave Runners and swimming pools," she says. "All toys carry liability. If one has a guest using these toys, and the guest gets hurt, you are liable."
Rebecca Korach Woan, principal of Chartwell Insurance Services in Chicago, an insurance broker specializing in high-net-worth clients, warns that umbrella liability policies can differ dramatically. You can’t always tell the differences exclusively from reading the contracts, either. Sometimes, you need to know the company’s past history handling a particular type of claim.
Other times, it takes an attorney to battle it out with the insurance company. Published reports have indicated that former President Bill Clinton’s attorneys played a significant role in extracting defense funds from his personal umbrella policies with State Farm Group and Chubb Corp. in the sexual harassment case involving Paula Jones. Most personal umbrella liability policies since then, experts say, have excluded sexual harassment claims, and there have been no prominent published reports about what has happened to Bubba’s premiums since then.

Advisors need to be extremely careful in scrutinizing their client’s personal umbrella liability policies. Coverages under personal injury differ. "Many policies will only cover you for bodily injury," warns Ross Buchmueller, president of AIG Private Client Group. This could, for example, exclude charges for claims that fail to produce a medical bill, such as pain and suffering. But Buchmueller says his company, along with many others, carves out much broader coverage of personal injury claims, going so far as to include libel and slander.

There’s also a good chance that your client’s umbrella policies have a massive omission, Woan cautions. Many fail to cover clients if they are hit by uninsured motorists, one of the most common catastrophes. Umbrella coverage for uninsured motorists often needs to be purchased at an added charge. In fact, despite the extra charge, many insurers severely limit this coverage.
"Often (the limit is) $1 million," says AIG’s Buchmueller. "You might be able to buy $10 million. It’s very expensive in the higher limits because (uninsured motorist coverage) is almost impossible to underwrite. You’re underwriting the world at large. You can’t select who might hit your client."

Another critical area to examine is how umbrella policies handle your client’s legal defense. Some policies cut off legal defense coverage once clients hit the policy limits. So, if a client has a $1 million umbrella policy, legal defense might be limited to $1 million more than standard policy coverage. But other clients could be left out in the cold prior to the resolution of a court case. Other companies would continue to defend your client even if he or she blows through those limits, Woan says.
While some policies provide for the insurance company to select the defense, AIG lets the policyholder select from a panel of prestigious defense firms, Buchmueller adds. It also has an allowance for consultation with a family lawyer. How defense is handled, he says, is particularly important when your client is dealing with a small $1 million policy.
You also need to determine how the umbrella policy responds to a client who might be sitting on a board of directors. "A lot of people sit on boards for non-profits," says Marsh Lindsay. "Some umbrellas will provide limited coverage. Some will specifically not provide any coverage."

Both Lindsay and Woan agree that if your concern is obtaining broad coverage for your client, the Cadillacs of personal liability umbrella policies are: AIG; Chubb Group of Insurance Cos., Warren, N.J.; and Fireman’s Fund Insurance Cos. of Novato, Calif.
But clients need to balance their risk with what they can afford. The more coverage your client seeks, the more expensive it typically gets. Lindsay says that since the terrorist attacks of September 11, there are fewer insurance companies providing personal umbrella liability insurance. She attributes that to the uncertainty of the reinsurance market. "Once you go out above $10 million, the insurance carrier offering the coverage has to go out and buy reinsurance," she says. "Once you get into limits that require reinsurance, it becomes more costly."

Prior to September 11, she says, you could buy personal umbrella liability coverage of $50 million at a cost of $500 to $750 per $1 million. Now, once you hit that $50 million threshold, she says, expect your client to pay between $1,000 and $2,000 per $1 million of additional coverage.

Sometimes, she says, the price can be cut by adjusting the mix between the underlying coverage and the umbrella. Say, for example, a client needs a $15 million umbrella policy that is going to cost $10,000. It could prove more cost-effective to buy more coverage under the underlying policy instead. You might increase the premium on the underlying policy from $1,000 to $5,000 for more coverage and buy less umbrella coverage.

How much personal umbrella liability coverage should clients have? Lindsay says advisors need to take into consideration their client’s assets and, even more important, "visible assets" and future earnings. "It’s one thing if I were involved in a car accident and another if I were the CEO of a major corporation, someone you might read about in The Wall Street Journal."
You also must consider what things in client’s lifestyles put them at risk. Are their children driving cars? Are they skiing? Do they have domestic help? Do they drink regularly?

There are a couple of other critical issues that financial advisors need to watch for in their client’s umbrella liability insurance policies. Woan warns that advisors need to make certain that all assets are covered under the umbrella liability policy. Too often, she says, clients will buy a new car for a vacation home, buy auto insurance for it, and forget to have their agent add it to the umbrella policy.

Also, make certain umbrella policies accurately reflect the way assets are titled, suggests AIG’s Buchmueller. "A financial advisor might work on an elaborate asset-protection strategy involving things like LLCs (limited liability corporations) or family trusts," he says. "All assets may be held in six trusts and the liability policies show no protection for those."
Gail Liberman’s latest book is More Rags to Riches: All New Stories of How Ordinary People Achieved Extraordinary Wealth! (Dearborn).