Identifying risks and advising on proper property & casualty insurance coverage

Hard as it may be to believe, overlooking a client’s backyard trampoline could pose a serious risk to all your carefully crafted financial plans and your client’s retirement savings.

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Considering the time and effort you spend speaking with clients about the risk of rising inflation and market corrections, to cite just a few financial risks, it’s important to know that some risks to your clients’ portfolios pop up in areas where you might least expect them.

Liability risks

One risk area that financial advisors often overlook involves liability risks. And something that you and your clients may not even think twice about — such as that backyard trampoline — could pose major financial risks.

Consider the case of a couple we’ll call Rick and Sue Smith. They have a net worth of $1.75 million — $275,000 in home equity and $1.475 million in investable accounts.

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While playing on that backyard trampoline, one of their friend’s children is severely injured. The child’s parents sue Rick and Sue for $2 million in medical damages and negligence, and they collect. The Smiths have $100,000 in homeowners’ liability coverage and a $1 million umbrella policy to cover losses over the policy limit.

Because their insurance covers only $1.1 million of the $2 million in losses — not to mention hefty legal fees of $500,000 over the course of the lengthy case — the Smiths must come up with $1.4 million! If you’re assuming the couple will have to deplete their $1.475 million investment accounts, you’re right.

Umbrella policy needed?

The solution would have been for the Smiths to have had a larger umbrella policy that also covered legal defense costs outside of the policy limit. A $5 million umbrella policy of that type would have covered the entire judgment and the Smiths’ legal bills — and left their savings, investment accounts and children’s college portfolios untouched. And while such a policy would have cost more than their original $1 million umbrella coverage, it probably would have cost just a few hundred dollars incremental annually.

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To be sure, property & casualty (P&C) risk and insurance are not areas of expertise for most financial advisors. Still, research conducted by the consulting firm of Oliver Wyman has shown that most advisory firm clients want and expect their advisor’s help in identifying property and casualty risks and taking steps to protect them from those risks.

More than three-quarters (77%) of advisors’ clients surveyed by the Wyman study said they would appreciate their advisor providing holistic asset protection advice including access to property & casualty insurance counsel. More than a third (37%) said they even would be willing to switch to an advisor who made such advice available.

Finally, more than a quarter said they would increase the amount of money they invest with their advisor, 41% would stay with the advisor longer and 50% said they would be more likely to recommend their advisor if that advisor were a resource for P&C information.

Trusted independent insurance agent

Fortunately, advisors can help clients and at the same time protect assets under management by developing a strong relationship with a trusted independent agent who can be part of yearly asset protection reviews with clients. Such reviews are crucial, because while most homeowners have P&C insurance coverage, the coverage of many affluent clients often is inadequate or absent entirely.

In short, providing access to P&C insurance counseling through a qualified insurance expert could be a very much appreciated service addition to your business — that also protects the valuable work you already do for your clients.

Fran O’Brien is Division President, North America Personal Risk Services, Chubb. She can be reached at AskFran@chubb.com.