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

Rich Americans are receiving a wealth ofattention 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.

Giventhe current economic uncertainty and the national dialogue aboutthe "1 percent," more millionaires feel as though they're targets for legal action, according to MaryBoyd, chief operating officer of ACE Private Risk Services. ACE provides insurance coverage to high-net-worth people.

wealthy_insuranceA recent ACE survey of U.S. households with at least $5 million in investment-worthy assetsfound:

• 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.

Buteven wealthy Americans who are aware of the potential risksfailto recognize the high costs of potential lawsuits and fail to adequately protect themselves withliabilityinsurance, experts say. Some affluent people underestimate how much they could besued for and don’t always carry enough insurance to cover their exposure, Boyd says.

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

Risky business

For wealthy Americans, the top four situations that cause the most concern about lawsuits, according tothe 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 terminationclaims by household employees.

O’Hara says aninflux 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 notprotecting 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 officeof private asset management firm Lowry Hill, says media coverage ofvariouslawsuits has prompted his clients to mention the potential for legal action more often than in the past.

“It’s more in the forefrontof our clients’ minds,” Maloney says. “Now it’s something that’s talked about andreviewed on a more regular basis. Some clients aredeciding, 'You know, with allthat’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 theycould be saddled with if they were ordered to pay damages in a civil lawsuit.

“It was surprising thatthey did not realize they could be the subject of lawsuits or awards that couldgo 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 surveyfound:

• 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 listbecause 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 beusing 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 combinationof policies may be necessary to cover risks such as employment practices claims brought by household staff (31 percent of survey respondents didn’t have thiscoverage) 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 publicdatabases to confirm the financial status of an affluentperson,O’Hara says. The chances are greatthat 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 ifthey do sue you andget 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.

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