An important part of the estate planning process is having proper asset protection in place. When considering proper asset protection planning, the first line of defense is transferring risk, that is, purchasing insurance. A proper insurance plan usually includes auto, property and business liability coverage, 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 with the client and identifying the client’s potential risks. Once you identify the risks, you can discuss the various 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 being reasonably covered.
Types of Coverage
Here are the five types of coverage you should review with the client:
Auto. Auto coverage is ubiquitous and may seem like a simple risk to mitigate. However, many clients have essential gaps in this standard coverage. Some clients are grossly underinsured, potentially putting their wealth in jeopardy.
If the client drives a vehicle for personal or business purposes, has a child who uses one of their vehicles or owns a car that someone else may drive or borrow, they may have a significant liability exposure. Ensure that the insurance reasonably covers these risks as appropriate for the client. For example, vehicles driven by the elderly or by those who may be physically or cognitively impaired, inexperienced or young should be owned and insured in their names separately.
To enhance protection, isolate liability risks associated with the client’s vehicles. If feasible, the client might be better off not owning vehicles in the primary business entity (or practice’s) name. The client should also secure excess uninsured/underinsured motorist coverage, which can be included in some umbrella policies. This coverage can help protect the client from those driving without adequate coverage by stepping into the shoes of the other driver’s policy.
Non-owned auto liability insurance is another important form of coverage for business and practice owners that’s often overlooked. This coverage is typically 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 an auto accident during work.
Property. Many clients hold real estate interests other than their homes. Review these arrangements 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 to the type of ownership structure used. Residential property may be held as tenants by the entirety, providing a measure of protection from claims unrelated to the home. If the property’s use changes, clients often overlook informing their carrier to update coverage. For example, clients may rent their former residence when they move, but they may not update the insurance coverage from personal to rental.
It’s critical to identify all rental and commercial properties owned by clients to assess whether they’re held in separate entities and the limits of liability on the associated insurance policies. The “named insured” on the insurance policy declaration page should precisely match the legal entity that holds the property.
In certain instances, it may make sense to own a property entity, such as a limited liability company, in an irrevocable trust or, even better, have the entity’s ownership interests fractionalized between two or more irrevocable trusts, with one or more of the trusts having situs in a jurisdiction different from the one where the client resides.
A related consideration is the client’s activities in 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 proper commercial coverage. Sometimes, clients mistakenly assume that personal coverage will address business risks.
These policies are usually written on a commercial general liability form, business owner’s policy or some variation of the two. They’re geared primarily toward general liability coverage, with many critical ancillary coverages and exposures excluded.
Purchasing standalone cyber liability coverage through specialty carriers is also a prudent step. 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, clients will purchase a general business package, not realizing how important types of coverage have been carved out, and without specialized policies, those risks won’t be insured. This analysis can be nuanced, and even astute clients may not realize that gaps in coverage exist. With your knowledge of the client’s business and risks, you can discuss the coverage with the client’s insurance consultant to identify those gaps.
Ensure that the client secures as much commercial umbrella/excess liability insurance coverage for the primary business as reasonable. Determining what’s reasonable may be based on a conversation between the agent and the client.
Personal excess liability. Advise clients to procure as much personal umbrella/excess liability insurance coverage as possible. The client can often secure this coverage through the same insurance carrier that’s covering the client’s primary residence and vehicles. The coverage may also extend to other personally owned property, assuming sufficient underlying coverage exists. Umbrella insurance is extremely cost-effective. It isn’t uncommon for a client to be able to buy $5 million in coverage for under $1,000 per year. If done correctly, umbrella coverage may provide additional liability coverage above your client’s liability limits on their personally owned autos, residences, boats and other “toy” policies.
Professional liability/malpractice. Too often, professional advisors are like the proverbial barefoot shoemaker regarding their liability insurance protection. These policies tend to be top of mind for professionals such as physicians, accountants, consultants and attorneys. However, they’re often procured through insurance agents untrained and unfamiliar with the nuances associated with their specific risks and coverages.
Securing robust coverage for these risks requires subject matter expertise that most general insurance agents don’t possess. It’s expected that astonishingly low liability limits will be written on policies that are full of exclusions, excluding coverage for activities being performed/offered by the professional and employees working under their supervision. Some standard exclusions may include activities on a board of directors, work for nonprofits and even certain services rendered regularly by the professional. They may, however, exclude any of the above risks from coverage if the carrier wasn’t made aware of them or based on the carrier’s assumption that the service is outside of the general scope of work for that professional.
Carriers have different definitions of who’s the “named insured,” thus affecting how broadly coverage is afforded. Medical practices with multiple physicians, credentialed health care staff and clerical employees should read the definitions portion of their insurance policy under “named insured” to verify that all the practice staff fall within the “named insured” definition or are otherwise covered.
Ensure your client clearly and accurately communicates the scope of work they perform to the carrier in the application and that it’s reflected in the policy. Dozens of insurance carriers write malpractice insurance policies, many of which have material gaps in coverage. It’s vital to know which carriers best serve which professionals/specialties.
*This article is an abbreviated version of “Liability Insurance Review in Estate
And Asset Protection Planning,” which appears in the April 2024 issue of Trusts & Estates.