John E. Blachaniec

1. Managing Complex Property & Casualty Risk and Understanding Liability Exposures For Your Affluent Clients • John E. Blachaniec

2. Today’s GoalsRisk ManagementPersonal Asset Protection Outline definitions and details of personal excess liability coverage Identify key questions to ask regarding personal liability coverage Highlight specialty liability areas which may be appropriate for some clients, based on their needs. Define solutions for addressing liability needs within a risk management plan and a financial plan.

3. Bridging the Property and Casualty GapFPA Journal - November 2007 You work hard to help clients build up the asset base that will enable them to meet their financial goals. Would it not be a spectacular financial planning failure to see assets built up over years or decades evaporate overnight due to lack of appropriate or sufficient property and casualty insurance protection?

4. “How to Buy Luxury Insurance.” Departures Magazine Jan/Feb 2007 • Remarkably, about 75% of the very affluent households in the United States are covered through mass-market insurance companies, with policies that could leave them deeply out-out-pocket in a nightmare scenario. • Three large luxury insurers – AIG, Chubb and Fireman’s Fund – are trying to change that ratio. • According to the CEO of American Express Publishing, they received great feedback from readers on this article.

5. Q: Why do the rich need Risk Managers?

6. A: They have more to lose

7. Judgment Amount: $7.5 million Liability Awards • Parents leave for the weekend having the 20 year old Nanny watching the 12 & 13 year old boys. • The boys have their friends come over that Saturday afternoon. One of the boys decided to have a WWF wrestling match, after an hour of wrestling and doing moves that they see on TV. • The Nanny was not paying attention to what the boys where doing in the back yard. One of the neighbors, age 12, gets body slammed and factures his spinal cord and is paralyzed from waist down. • Only had a $5 million Excess Policy in place. Various Insurance Company National claims records.

8. Judgment Amount: $8.5 million Liability Awards Insured: Chief Financial Officer of a manufacturing company • The spouse was involved in a serious at-fault automobile accident paralyzing a teenager. A $8,500,000 judgment was rendered against the insured for which there was only $500,000 of primary automobile liability insurance coverage plus the insured had a $1 million personal excess liability coverage. • The large uninsured loss caused the CFO to borrow heavily against personal assets. The stress involved with the two-year litigation process adversely affected job performance. Source: Various Insurance Company National claims records. .

9. Judgment Amount: $5.5 million Liability Awards Insured: CEO’s son celebrates after college – drinking and driving • College student and his friend celebrating the end of college exams. Both boys had been drinking. Left hours after being at the bar and witness stated the vehicle was moving at a high rate of speed. The vehicle then ran off the road and hit a tree killing the CEO’s son and the friend suffered brain damage. • Outside of the CEO losing his son, a suit was settled for $5.5 million. The CEO only had liability coverage for $500,000 thru his motorist coverage and a $1,000,000 umbrella policy. Source: Various Insurance Company National claims records.

10. Judgment Amount: $1.5 million Liability Awards Insured: Senior Vice President for a holding company • A visitor to the insured’s Utah ski resort condominium tripped on a broken step and suffered a permanent disabling injury. • A lawsuit was filed alleging the insured was negligent in maintaining the property and the claimant was awarded a judgment of $1,500,000. Only $300,000 of coverage was available under the insured’s primary condominium policy. The insured had no personal excess liability policy. Source: Various Insurance Company National claims records.

11. The two most dangerous individuals in the world today…

14. “So easy, even a caveman can do it…”

15. “Give us 15 minutes…we may save you 15% or more on yourauto insurance…!”

16. The Reality Our motto: Give us 15 hours, and you will probably be spending more for your insurance. But you will be able to sleep at night knowing your assets are adequately protected. Don’t risk a little for a lot!!!

17. Worries of the Affluent Source: Russ Alan Prince; Prince and Associates

18. Trusted Advisor ServicesWealth Management • Private Wealth Services • Comprehensive Estate Planning • Investment Advising • Asset Protection Strategies • Family Business Planning • Tax Planning • Insurance reviews = Planning for the Protection of Client’s Financial Interests

19. Wealth Creates Opportunities and Risk • Investment of wealth • Structural ownership of wealth – trusts and LLCs • Preservation of wealth – tax strategies, gifting, succession planning • Protection of wealth

20. The Missing Component Protection of Wealth • Liability risks • Property risks • Personal and family safety and security

21. Protection of Wealth The Personal Risk Management Process • Thorough needs analysis to identify an individual’s personal risks and exposures • Educational process focused on potential future risks and exposures • An ongoing review of an individual’s program and lifestyle to make sure their risk management process meets their current needs

22. What is at Risk Value of: • Current and future assets • Future earnings • Potential inheritance of significant property or other assets

23. What Does Affluent Mean?Complex P&C Profile • Single or Multiple High Value Homes and Contents • Domestic Employees • Carpool • Liability mismanaged/not enough • High Profile Lifestyle • “Passion” Investments • Farm, Ranch, Vineyard • Auto or Valuable Collections, Fine Arts, Jewelry • Multi-Generational Issues

24. Multiple Locations • Various State & Foreign Laws Apply • Multiple Agents / Companies - Patchwork Program • Significant Coverage Gaps • Policies Overlap • Improperly Insured Assets • Not Listed on Umbrella

25. First Line of Defense for Asset Protection - Umbrella Policy • Buy “umbrella insurance.’ One of the first lines of defense is to shift your risks to an entity, such as an insurance company. • Umbrella insurance protects assets from personal injury claims above limits set by standard – issue home or auto policies. 80% have insufficient limits WSJ - A Fortress for Your Money 7/15/2006

26. What is Personal Liability Coverage? • Coverage that an individual purchases to protect current assets and future earnings from a covered lawsuit or settlement. • Coverage for damages a covered person is legally obligated to pay for bodily injury (personal injury) or property damage which takes place anytime during the policy period and are caused by an occurrence, unless stated otherwise or an exclusion applies.

27. Who Needs Excess Liability Coverage? • Own a home(s) or drive a vehicle • Affluent individuals who: • Employ domestic staff such as a housekeeper or nanny • Use wireless technology or have children who use the internet • Carpool • Have teenage children who are driving • Operate a home-based business • Serve on the boards of a non-profit organization • Maintain a high public profile • Worldwide Travel – Car Rental

28. Personal Excess Liability InsuranceHow does it work? • An extra layer of protection over home, auto, jet skis, motorcycles, boats, toys, etc. • Requires minimum underlying limits of liability. • Protects the insured against catastrophic lawsuits or judgments. • Provides expanded coverage and increased limits of liability. • Can be purchased as a separate policy or as part of a package. • Can be purchased on a group basis.

29. What is covered? • Claims for bodily injury or property damage caused by an insured or hazards on your property • Defense costs and associated court costs By Endorsement - • Non-business related personal injury such as libel and slander • Underinsured and Uninsured Motorist Claims • Service on a Not-for-Profit Board

30. Personal Liability – How Much Is Enough? • Factors To Consider • Asset Base • How Much Do You Have to Lose? • Future Earnings? • Exposures and Lifestyles • Lifestyle Activity level • Tangible Exposures • Visibility in the Community • Court Venue in Which the Client Lives

31. What’s The Likelihood? • Personal lines lawsuits comprised $82.5 billion of the $219 billion of tort costs in 2003.* • One of every six jury awards now tallies $1 million or more.** • The 6th largest verdict in 2004 was larger than the 1st largest verdict in 2003.** • Defense costs can be equal to or greater than the final amount of the settlement *Insurance Information Institute **Jury Verdict Research, 2004, latest available

32. What is the cost of excess liability coverage? Example: Household Details 2 homes (one in Illinois, one in Florida) 3 vehicles – one teenage driver 1 yacht (40 feet long, more than 50 horsepower ________________________________________ $1,000,000 of excess liability $398 $5,000,000 of excess liability $990 $10,000,000 of excess liability $1,750

33. What Do We Know! • U.S. TORT - Out of Control • Most clients need at least $5M if not $10M and can afford to purchase these limits • 80% of YOUR clients do not have sufficient liability protection • 50% have significant gaps in their underlying personal insurance program • Most HNW/executives have not reviewed personal liability exposures

34. Specialty Liability Coverage Areas Trusts, Estates and LLCs Employment Practices Liability Directors and Officers Liability

35. Trusts, Estates and LLCs • Increasingly popular vehicles for affluent and high net worth individuals for tax and wealth transfer purposes. • Personal insurance policies are inherently designed to protect individuals, not entities such as trusts, estates or LLCs • Some insurers such as Chubb, AIG and Fireman’s Fund can address the need for the trust, estate or LLC to be listed as an insured. Notice must be given to the insurer so that appropriate policy modifications and underwriting can occur. • Estate Attorneys/Financial Planners should recognize that insurance exposures can be created when personal assets are placed in the name of a trust, estate or LLC and work with a qualified risk expert to align personal property and liability coverage.

36. Employment Practices Liability CoverageWhat is covered? • Wrongful termination of employment • Breach of any oral or written employment contract • Employment related misrepresentation, defamation or wrongful infliction of emotional distress • Violation of employment-related discrimination laws including workplace harassment

37. Employment Practices Liability CoverageWho needs it? • Individuals who employ domestic employees such as a nanny, housekeeper or caretaker • Individuals and/or family members who have a family office

38. Employment Practices Liability CoverageWhy do clients need it? • The U.S. Department of Labor estimated that homeowners employed 896,000 housekeepers alone in 2003. • Employment practices liability is one of the fastest growing areas of litigation. • Employment practices liability is expensive to defend and the average verdict exceeds $450,000. • 50% of all suits against private companies come from employees

39. Personal Directorship Liability Coverage - What is it? • Personal liability policy for independent directors serving on one or more boards. • Unique in that limits are not shared with other directors or with the organization. • Policy can be tailored for the individual to cover one, all, or any combination of boards a director serves on. • Insured directorships can be with publicly traded, privately owned, or not-for-profit organizations.

40. Personal Directorship Liability Coverage - Who needs it? • Anyone who serves on one or more boards • An individual who serves on the audit committee of a board • An individual who is concerned that the organization's D&O limits are inadequate

41. Personal Directorship Liability CoverageWhat is covered? • Mismanagement • Breach of duty • Improper business practices • Discrimination, harassment or wrongful termination

42. Selected Policies and Potential Coverage Gaps

43. Common Critical Gaps HOME

44. Home Insurance Gaps… • A whopping two out of every three homes nationwide are under-insured • High percentage of underinsured homes by more than 30% • Limited Replacement cost – NOT guaranteed • Contractual gaps such as ‘Similar vs. Like & Kind’ • Insufficient sewer/water & drain backup • No Flood Insurance *As reported by Marshall & Swift

45. Replacement vs Market Value • R/C is the cost to rebuild in today’s dollars • Market value-what you can sell your home for today • Construction costs rose 5-7% last year • In 2005, homeowners spent over $130 Billion on home improvements • Ordinance and law coverage • Extended replacement cost-most policies cap at 10-20% • Advise clients to review square footage

46. Common Critical Gaps AUTO

47. Who is Covered? • You, the insured ... Person or persons named on the declarations page and his or her spouse who lives in the same household • A dependent ... Person related to you by blood, marriage or adoption that lives in your household or is away at school • A domestic partner … ??? The definition of an “insured” or “dependent” is ambiguous!

48. Young Drivers Young drivers ages 16-20 years are at a disproportionately high risk for both fatal and non-fatal crashes, with the highest per capita and per-mile-driven crash rate of any age group. Motor vehicle crashes are the leading cause of teen deaths, accounting for 44% of teen fatalities in the U.S.

49. Percentage of Uninsured Motorists, Select States* CO has highest UM rate in US. ME has the lowest. Target States All Have Below Average UM Rates Source: Insurance Research Council, 2004

50. Uninsured Motorist Defined • Has no liability coverage at time of accident • Must be result of an auto accident involving injury • Has liability coverage but not enough to meet the State minimum • A hit and run driver who cannot be identified • Has invalid liability insurance at the time of accident because the insurer is insolvent or denies coverage