Attorneys: Your Red Flag Insurance Issues
Ok, we have to talk insurance. Not life or health insurance. Hopefully, you're well covered there and they are both relatively straightforward compared to the world of Property and Casualty (P&C) insurance. With life and health insurance, you're insuring against having to pay for something you may not have the money for. But the liability is mostly known. With P&C insurance, you’re insuring against something you may cause and the liability is almost certainly unknown.
As a lawyer, you're particularly at risk. There are plenty of good plaintiff attorneys out there, so you need sound policies to protect your assets and family. And let’s be candid. Litigants don't go after massive damages if there’s nothing to collect. As a successful lawyer, you have a big target on your back. They know you have assets. Here's a quick review:
1. What’s insurable? What do you want insured? The chart below is a quick way to review the frequency and severity of losses. This is entry level P&C stuff but shows how insurance companies assess risk. It’s the top left corner we’re worried about. The others are either minor, and so losses relatively easily absorbed, or are essentially uninsurable because of adverse selection or the potential loss size. As a successful professional, we need you to concentrate on the top left where, if not covered, you can quickly find your assets at risk, particularly around liability. The good news is that this is exactly the quadrant where the insurance industry works well.
2. Excess Liability Insurance: Does your insurance coverage exceed or match your net worth? If a lawsuit puts your assets at risk, you don't want to be running out of insurance. Make sure your regular homeowners, rental and auto insurance covers you adequately and that you carry umbrella insurance.
3. Personal Umbrella Insurance: Protects you against claims and lawsuits above the limits of your personal auto or homeowners insurance. It can also protect you from claims like libel, slander and liability coverage on rental units. And from events like these:
· A guest trips on the ottoman in your home and develops sciatica
· A friend drinks in your home and causes an accident on the way home.
· Your dog causes that annoying jogger to take a header into the curb
· You hit someone’s 1955 D-Type Jaguar
· You chaperone a class field trip and Sebastian breaks his foot kicking a tree stump
· Your child damages college property (sure you can disown them later but…)
· Your neighbor sues you for mental anguish over that drone you haven’t quite got the hang of yet
· Your cat pees on a priceless Persian rug
Sure, some of these can be frivolous, but we saw the second one happen and cause years of anguish. Discovery, depositions and documents all take time and you don't want to represent yourself. An insurance company will have an obligation to defend you in court. That alone can be a primary benefit for the policy. So, umbrella insurance is not really an option for our lawyer clients. It’s a must.
4. How much and how much? Premium costs will depend on many things (don't they always). If you have a pitbull, children under 25 with access to your cars, a bad driving history, firearms, a swimming pool…you're going to pay more. Most of the major insurance companies offer umbrella insurance, even GEICO. Some require that you carry your home and auto insurance with the same company (which is a pain and messes with your no-claims history) but many do not (which is better). Rough cost? Start at $200 per $1m of coverage and work up.
One million dollars of coverage will pay for litigation defense and all the nuisance lawsuits. But if the claim is larger, you don't want to be in a position where wages are garnished or inheritances diverted. A reasonable amount of coverage is one-for-one of the family net worth up to around $5m. Settlements can be higher but it’s rare and the insurance cost can start climbing fast. It’s a self-selection problem.
5. The Three Quick Questions on Umbrella Insurance: You can buy most insurance direct but this is one case where you should talk to a broker. And not a tied broker, who represents one company, but a full service, multi-carrier broker who can provide multiple quotes. Make sure the insurance company is rated at least “A+” from A.M.Best. And it’s the “claims paying” rating you're looking for, not the credit rating. You're a policyholder not a creditor.
And the Three Questions are:
1. What are the risks you face? Consider your risk as a homeowner, the risk of causing an accident while commuting and any potentially dangerous activities you participate in that could put those around you at risk. Its not your personal risk at question here it’s your risk to others. That’s why riding a motorcycle may cost you less than driving a car. Sure it’s more risky to you, the rider, but not to “Joe Texts while Drives”.
2. What is the value of your assets? These include properties, possessions, stocks, bonds, savings and retirement funds. And in your law firm, it will be your deferred compensation and your capital. The more assets you have to protect, the higher the umbrella policy limit you need.
3. What's your potential loss of future income? Liability lawsuits can result in loss of both current assets and future income, so even those early in their law career may want to consider the consequences of a serious claim.
So while you may not have many assets now, if you’re on track for a high paying career, you could be involved in a lawsuit that can target money you haven’t earned yet. Fun, isn’t it?
6. D&O Insurance: if you or your spouse serves on a non-profit board, make sure your general liability insurance (for example, your umbrella insurance) carries a D&O and E&O rider. They’re not expensive but if something happens in that non-profit, for example an accounting, investments or employment problem, you don't want the plaintiff coming after directors’ personal assets. Those assets are likely to exceed those of the non-profit.
7. Consolidate: You may have acquired assets over time and so insured them in different ways. So, your fine art, second home or jewelry may have separate policies. You don't want to wait until claim time to find out what’s protected.
8. Staff: You may have a housekeeper/cleaner, part-time gardener or babysitter. All could be deemed employees. You should review Employment Practices Liability Insurance. This will cover wrongful dismissal, discrimination or visa problems.
9. Travel: A worldwide travel protection plan is a good idea. Not for cancelled trips (Amex can do that) but for medical emergencies and flights back home if you put your back out on that Provence bike-trip-of-a-lifetime. (That one cost a client $75,000.)
10. Make sure the insurance policies sync with the estate plan: Many wealthy people own property in LLCs or trusts. Not all insurance providers enable policies to reflect alternative ownership structures so these should all be aligned. Again, not something you want to deal with at claim time.
Brouwer & Janachowski, LLC
Mill Valley, CA
Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice. We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security. The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended. Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data. Past performance is no indication of future results.
All charts from Factset unless otherwise noted.