Wealth of concerns: Many millionaires fail to carry enough liability insurance

Lori Johnston

Rich Americans are receiving a wealth of attention these days, most notably from the Occupy Wall Street movement and the presidential candidacy of millionaire Mitt Romney. Yet many of these well-to-do folks aren’t paying attention to the threat of liability lawsuits — and they often lack the proper insurance in case they’re hauled into court.

Given the current economic uncertainty and the national dialogue about the “1 percent,” more millionaires feel as though they’re targets for legal action, according to Mary Boyd, chief operating officer of ACE Private Risk Services. ACE provides insurance coverage to high-net-worth people.

A recent ACE survey of U.S. households with at least $5 million in investment-worthy assets found:

• 68 percent think public perception of them has become “more negative” since 2008.

• 23 percent think their wealth alone makes them “very much” a target.

• 38 percent think they’re more likely to be sued in the aftermath of the recession.

But even wealthy Americans who are aware of the potential risks fail to recognize the high costs of potential lawsuits and fail to adequately protect themselves with liability insurance, experts say. Some affluent people underestimate how much they could be sued for and don’t always carry enough insurance to cover their exposure, Boyd says.

If damages for injuries exceed liability coverage, an affluent person has a greater likelihood than a middle-class person of a plaintiff continuing to pursue monetary damages that exceed their coverage, says Jeffrey O’Hara, senior equity partner in the Florham Park, N.J., office of law firm Clyde & Co. U.S.

Risky business

For wealthy Americans, the top four situations that cause the most concern about lawsuits, according to the ACE survey, are:

• A victim of an auto accident — 47 percent.

• An injured worker, such as a repairman or household employee — 31 percent.

• An injured visitor in their home — 29 percent.

• Being accused of misdeeds or held liable for incidents related to volunteer work — 22 percent.

Other risks include family disputes, sexual harassment claims by nannies or wrongful termination claims by household employees.

O’Hara says an influx of all civil lawsuits nationwide is driven by the public’s general belief that a wrong entitles an alleged victim to money. Heated disputes about the value of personal injury claims can lengthen the legal process. Civil case filings are at their highest levels in two decades, and media coverage is sensationalized, he says. Coverage of high-profile cases and large verdicts should signal to affluent individuals that the risk is real, he says.

“You’re not protecting against the unknown. You do know. Read the newspaper. Read the (news) ticker on CNN,” O’Hara says.

Chuck Maloney, a principal in the Minneapolis office of private asset management firm Lowry Hill, says media coverage of various lawsuits has prompted his clients to mention the potential for legal action more often than in the past.

“It’s more in the forefront of our clients’ minds,” Maloney says. “Now it’s something that’s talked about and reviewed on a more regular basis. Some clients are deciding, ‘You know, with all that’s going on, I want to increase my coverage.’”

Underestimating your payout

In a worst-case scenario, people questioned for the ACE survey thought $5 million was the highest amount they could be saddled with if they were ordered to pay damages in a civil lawsuit.

“It was surprising that they did not realize they could be the subject of lawsuits or awards that could go into the tens of millions of dollars or more,” Boyd says.

Wealthy Americans may have umbrella policies – or excess coverage – to supplement liability coverage that’s already part of their auto and home insurance policies. Still, that umbrella may not be big enough. The ACE survey found:

• 23 percent of rich Americans carry only $1 million to $4 million worth of umbrella liability coverage.

• 21 percent lack any umbrella coverage.

Standard insurance companies may offer only as much as $5 million in liability insurance, but specialty insurers can provide up to $100 million in umbrella coverage, experts say. The extra layer of coverage may cost only a few hundred dollars a year, O’Hara says.

Having appropriate liability coverage may be low on people’s priority list because they don’t want to think about potential lawsuits.

Another issue holding back some wealthy Americans from obtaining extra coverage: loyalty. Some rich people may be using the same carrier that insured their first car or first home, but that carrier’s representatives may able to satisfy a wealthy person’s need for souped-up liability coverage, according to Boyd. For example, a combination of policies may be necessary to cover risks such as employment practices claims brought by household staff  (31 percent of survey respondents didn’t have this coverage) and claims against members of charitable boards (35 percent didn’t have own directors-and-officers insurance).

Wealthy Americans should never underestimate how easy it is for someone to search public databases to confirm the financial status of an affluent person, O’Hara says. The chances are great that someone filing a claim will conclude that a high-net-worth defendant has more than the shirt on his back, he says.

“Does it increase the likelihood that if they do sue you and get a verdict in excess of your coverage, they will continue to pursue satisfaction of the excess? The answer is, it’s foolish to think otherwise,” O’Hara says.