The US multi-family office talks about an area known as personal umbrella liability policies and their role in the protection of assets.

There are a number of ways to think through the process of protecting assets and of course, insurance is one of the oldest forms. In the following article, Gary J Pasternack, who is principal and director of insurance advisory, Bessemer Trust, the US multi-family office, drills down into areas such as personal umbrella liability policies, showing their benefits and challenges. The editors are grateful for this detailed insight; as ever, they don’t necessarily share all the views expressed and invite readers to come back with their views. 

As wealth planning professionals, there’s a myriad of “what-if’s” we consider that can plague a client at any given moment. What if one of their houseguests slips on the staircase and suffers major trauma? Or their child is accused of cyber-bullying, resulting in emotional harm and reputational damage to a schoolmate?

Yes, your client will have automobile, homeowners, or watercraft insurance, but have you ever considered just how much financial protection these policies offer? With coverage limits that rarely exceed $500,000, they’re not likely to make much of a dent in financial obligations - at least not with the large legal judgments often associated with serious accidents. How many of your clients have additional insurance - umbrella (also known as personal excess) liability insurance? This can help when the financial limits on the policies are exhausted. But is even that enough? Likely not, since most insurance companies cap their umbrella liability coverage at $5 million.  

Far too often, high-net-worth families have faced court-ordered liquidation for assets, and even garnished income, when their insurance coverage falls short of a legal judgment against them. Such a devastating outcome is especially unfortunate because it can be so easily avoided. 

Personal umbrella liability insurance: an overview 
Personal umbrella liability insurance, in short, begins to pay when the limits are reached on individuals’ and families’ primary policies. Policies typically cover claims related to bodily injuries - as well as personal injury (which includes libel, slander and defamation) - and property damage caused to a third party for which the policyholder is determined to be legally responsible.

For the most part, umbrella liability mirrors the liability coverage in primary policies (known as “follow form” coverage), but there are exceptions where coverage at the primary level is not mirrored in the umbrella policy (known as “exclusions”), or where coverage that’s not provided in the primary policy can be covered in the personal umbrella liability policy (known as drop-down coverage). When the umbrella coverage drops down, some insurers require the policy holder to pay for a small portion of the covered loss, usually $500 or $1,000 (these are known as self-insured retentions, or deductibles). Overall, the parts of a personal umbrella liability policy should work together to provide comprehensive liability protection.

Coverage considerations
Although not available with all insurance companies, some additional umbrella coverage options may be appropriate: uninsured/underinsured motorist coverage, employment practices liability insurance, not-for-profit directors and officers (D&O) liability insurance, and family trustee liability insurance. 

But, there is a downside: personal umbrella liability policies don’t cover everything. Policy exclusions typically include aircraft, watercraft (usually for vessels longer than 26 feet and with more than 50 horsepower, unless approved by the insurer), intentional acts and business pursuits. 

Assessing limits
It’s best for ultra-high-net-worth clients to consider taking a personal umbrella liability policy with a coverage amount that is at least equal to their net worth, up to $20 million dollars.

Why $20 million? Almost all liability judgments (settlements are private) against individuals and families are under $20 million, with a few outliers above that amount. That said, families with low tolerance for risk and/or an elevated risk exposure, more than $20 million of coverage could be prudent.

Where to find it 
While it’s true that most mass-market insurance companies limit personal umbrella liability coverage to $5 million, there is a select group of more specialized companies that focuses on the high-net-worth market, offering coverage as high as $100 million.

Additional coverage can also be obtained through a layered program. For example, you can use your insurance provider’s $5 million maximum for umbrella coverage, but also take advantage of a second or third layer of excess coverage from alternative insurance providers, which would then reside on top of the underlying homeowners, automobile, or watercraft policies.

Whenever possible, however, we advise working with a single insurance company for the administrative simplicity, as well as the fact that only one insurer will defend a claim filed against you. This helps avoid potential inconsistencies in defense strategies if multiple insurance companies are involved. 

The cost of protection 
Umbrella insurance premiums are surprisingly affordable. Since the serious types of accidents we’ve outlined are rare, the cost of insuring against them is relatively low. The cost varies based on several factors, but the annual cost per million dollars of coverage typically averages from $100 to $500. At coverage amounts greater than $5 million or $10 million (depending on the specific insurer), the incremental cost per million dollars of coverage for these greater limits can jump to $600 or more.

Avoiding pitfalls 
To maximize coverage, there are important steps to be taken. First, it’s crucial to ensure there is no gap between when the primary liability policy stops paying and the personal umbrella liability policy begins to pay, or your client could be on the hook for the difference.

Also, don’t take policy options for granted, since a coverage gap in the underlying primary policy will create coverage gaps in the umbrella policy. One gap to watch out for involves personal injury, which includes libel, slander, and defamation.

Finally, when properties are owned by a trust, limited liability company or other entity for estate or tax planning, asset protection or privacy purposes, it is important to add the entity to the personal umbrella liability policy as an insured, in addition to adding it to the underlying homeowners, automobile or watercraft policies. Should an accident occur at a property owned by a trust or LLC, the entity will likely be sued as the owner, putting its assets at risk.

The importance of an advisor 
High net worth families face a variety of challenges when creating a wealth plan, but comprehensive insurance coverage doesn’t have to be one of them. Help your clients build a wall of protection by regularly evaluating their exposure, analyzing their existing insurance programs, and building out umbrella liability policies to bolster coverage, where appropriate. 

Yes, serious accidents can be catastrophic. But with the right insurance coverage in place, you can help ensure your clients have financial peace of mind.