An important part of the estate planning process is establishing appropriate asset protection. When considering proper asset protection planning, the first line of defense is risk transfer, that is, the purchase of insurance. A proper insurance plan usually includes coverage for automobile, property, and business liability, among other types of insurance.
As an estate planner, you should have a role in the overall risk management aspect of the client's planning and help the client identify gaps in insurance coverage.
The first step in the process is meeting the client and identifying the client's potential risks. Once you identify the risks, you can discuss the different types of coverage the client may need to consider. After that, with the client's permission, you can bring in the client's property, casualty and liability insurance consultant to discuss whether the risks are reasonably covered.
Types of coverage
Here are five types of coverage you should review with the customer:
Car. Auto coverage is ubiquitous and may seem like a simple risk to mitigate. However, many customers have substantial gaps in this standard coverage. Some clients are grossly underinsured, potentially putting their wealth at risk.
If the customer drives a vehicle for personal or business purposes, has a child using one of their vehicles, or owns a car that someone else can drive or borrow, they may have significant liability exposure. Ensure that insurance reasonably covers these risks as appropriate for the client. For example, vehicles driven by the elderly or those who may be physically or cognitively impaired, inexperienced or young should be owned and insured in their names separately.
To increase protection, isolate liability risks associated with customer vehicles. If possible, the client may be better off not owning vehicles on behalf of the main business entity (or practice). The customer must also provide excess uninsured/underinsured motorist coverage, which may be included in some umbrella policies. This coverage can help protect the customer from those driving without adequate coverage by stepping into the shoes of the other driver's policy.
Non-owner liability insurance is another important form of coverage for business and practice owners that is often overlooked. This coverage is usually added as an endorsement or rider to a commercial auto insurance or general liability policy listed in the endorsement section. It helps insure against liability that may arise if an employee is in a car accident while on the job.
Property. Many clients have real estate interests in addition to their homes. Review these agreements regarding the legal structure, type and amount of property, casualty and liability insurance coverage. The client may own an investment property or vacation home when entity ownership may be more protective. Tailor the insurance coverage according to the type of ownership structure used. Residential property can be held as a tenant by the entirety, providing a measure of protection against claims unrelated to the home. If the property's use changes, customers often overlook notifying their carrier to update coverage. For example, customers can rent their previous residence when they move, but they cannot upgrade insurance coverage from personal to rental.
It is important to identify all rental and commercial properties owned by customers to assess whether they are held in separate entities and the limits of liability on related insurance policies. The “Named Insured” on the insurance policy statement page must exactly match the legal entity holding the property.
In some cases, it may make sense to own an ownership entity, such as a limited liability company, in an irrevocable trust or, even better, to divide the ownership interests of the entity between two or more trusts. irreversible, with one or more trusts. having situs in a jurisdiction other than that in which the customer resides.
A related consideration is the customer's activities on their properties and how they affect coverage. For example, if the client hosts social gatherings at their residence or business, suggest hiring professional bartenders with liquor liability insurance to serve their guests.
Business. Clients who own interests in an active business should ensure that the business involved has appropriate commercial coverage. Sometimes, customers mistakenly assume that personal coverage will address business risks.
These policies are usually written on a commercial general liability form, a business owner's policy, or some variation of the two. They are mainly geared towards general liability coverage, excluding many ancillary coverages and critical exposures.
Purchasing independent cyber liability coverage through specialty carriers is also a prudent move. Carriers specializing in cyber liability coverage have nuanced coverage offerings, specialized claims and data recovery capabilities, and advanced ransomware solutions.
The client should consider employment practices liability, workers' compensation insurance and, depending on the type of business, other coverages. Too often, customers buy a general business package, not realizing how important types of coverage are carved out, and without specialized policies, these risks will not be covered. This analysis can be nuanced, and even savvy customers may not realize that gaps in coverage exist. With your knowledge of the client's business and risks, you can discuss coverage with the client's insurance consultant to identify those gaps.
Ensure that the client provides as much commercial umbrella coverage/excess liability insurance for the primary business as is reasonable. Determining what is reasonable can be based on a conversation between the agent and the client.
Excessive personal responsibility. Advise clients to purchase as much personal umbrella/excess liability insurance coverage as possible. The customer can often obtain this coverage through the same insurance carrier that covers the customer's residence and primary vehicles. Coverage may also extend to other personally owned property, assuming sufficient underlying coverage is in place. Umbrella insurance is extremely cost effective. It is not unusual for a customer to be able to purchase $5 million in coverage for under $1,000 per year. If done correctly, umbrella coverage can provide additional liability coverage above your client's liability limits for their personal auto, home, boat, and other “toy” policies.
Professional liability/malpractice. All too often, professional advisers are like the proverbial barefoot shoemaker in regards to their liability insurance protection. These policies tend to be top of mind for professionals such as doctors, accountants, consultants and lawyers. However, they are often procured through untrained insurance agents unfamiliar with the nuances associated with their specific risks and coverages.
Providing strong coverage for these risks requires subject matter expertise that most general insurance agents do not possess. It is expected that extremely low limits of liability will be written into policies that are full of exclusions, excluding coverage for activities performed/provided by professionals and employees working under their supervision. Some standard exceptions may include activities on a board of directors, work for nonprofit organizations, and even certain services regularly provided by the professional. However, they may exclude any of the above risks from coverage if the carrier was not made aware of them or based on the operator's assumption that the service is outside the general scope of work for that professional.
Carriers have different definitions of who the “named insured” is, thereby affecting how widely coverage is offered. Medical practices with multiple physicians, credentialed health care staff, and clerical employees should read the definitions section of their insurance policy under “named insureds” to verify that all practice staff fall within the definition of “insured by name” or otherwise covered.
Make sure your client clearly and accurately communicates the scope of work they do with the operator in the application and that it is reflected in the policy. Dozens of insurance companies write malpractice insurance policies, many of which have material gaps in coverage. It is vital to know which carriers best serve which professionals/specialties.
*This article is an abridged version of “Review of property liability insurance
And Asset Protection Planningwhich appears in the April 2024 issue of Trusts & Estates.