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The unique challenges and opportunities of insuring high net worth clients and their valuables

Hollywood’s art thief is a suave bon vivant, a dashing type who swoops in to liberate a valuable painting from the wall of a wealthy, boorish businessman. Lurking behind the movie romance is a much grittier reality, however. A glimpse of the case files of the Los Angeles Police Department’s Fine Art Theft Detail reveals thieves as the greedy opportunists and their victims as defenseless art connoisseurs who have worked diligently, and paid dearly, to build their collections.

Take the case of a butler who worked in a mansion in the Bel Air section of Los Angeles. He replaced his employer’s Anders Zorn painting with a high-quality photograph and brought the original to Sweden, where he peddled it for more than $500,000. Then there’s the chauffer who stole more than $400,000 worth of art from a movie producer, then was caught trying to sell one of the purloined items — a Picasso — to an auction house.

Thieves who target expensive artwork, jewelry and fine furniture represent just one of many perils facing owners of big-ticket items. Given the high value of those items, their theft also becomes an assault on the victim’s financial worth and self-esteem. Fine homes and expensive possessions not only may represent a significant portion of a person’s wealth, they often reflect a major investment of time and money. A large uninsured or underinsured loss thus may negatively impact a person’s wealth as dramatically as the recent financial decline.

Cautionary  Insurance Tales

Insurance can protect personal wealth from losses due to theft, as well as fire, water, earthquake and storms that threaten high value homes and their contents, says Director of Claims Melanie Elias of Burns & Wilcox. Alarms, plans, and devices are a good first defense, but even with these protections, things can and do go wrong. Alarms may malfunction or simply not be activated. A sprinkler system can fail, leading to a loss. Sometimes, the escalation of a relatively small loss into a big one is just a matter of Murphy’s Law. Anything that can go wrong, does.

“We saw a huge electrical fire ravage a $10 million home owned by a financial services executive,” says Elias. It began in the attic where the tile roof intensified the heat, causing flames to spread quickly. Since the home was far from a hydrant or other public water source, firefighters sought to use water from a nearby swimming pool to fight the fire. But since the blaze occurred in the fall, the pool was filled with leaves that clogged their hose. The home was a total loss. Liability lawsuits are another insurable threat to the financial stability of high net-worth individuals.

Liability claims can come from anywhere, and the defense costs and judgments associated with them can be quite high, especially in cases involving people whose job, fame, notoriety or talent gives them “deep pockets.” Let’s say a driver accidentally taps the rear end of a vehicle just ahead, with no ensuing damage. Typically, the drivers involved would get back into their vehicles and continue on their way. In a recent case, however, the driver in the front car realizes the other driver is a famous musician, sees dollar signs and immediately starts moaning about his back and buttocks being injured. Fortunately, explains Senior Underwriter Sylvia Ornelas of Burns & Wilcox in Los Angeles, the musician has excess liability coverage, so when the “victim” sues, the musician’s insurance company handles everything, keeping the celebrity policyholder above the fray.

Insurance has played a key role in some of the splashiest news stories to hit the headlines in recent years. Former President Bill Clinton leaned on his umbrella policy to cover a large chunk of his defense costs when Paula Jones accused him of sexual harassment. Former football-player-turned actor O.J. Simpson’s policy paid a significant part of his legal costs in the civil case brought against him for the wrongful death of his wife, Nicole Brown Simpson, and her friend, Ron Goldman. Children, too, can put a family’s wealth at risk. Just ask the parents of Eric Harris and Dylan Klebold, the boys who in 1999 killed themselves and 13 other students at Columbine High School near Denver. The parents tapped their umbrella policies to pay the victims’ parents $1.6 million to settle a lawsuit that charged they were negligent in supervising their children.

Agent as a Trusted Advisor

Preserving wealth through insurance coverage requires solid advice from a knowledgeable person. The problem is finding the right advice, says Jim Fiske, Vice President and U.S. Marketing Manager at Chubb Insurance. Research by Chubb shows that high net worth individuals typically get advice on insurance from their trusted advisors — attorneys, financial planners, family office managers and the like — rather than the independent agents who typically know the products and how they meet peoples’ needs better than anyone. Worse, Fiske says, those trusted advisers often are “giving advice despite the fact they often know little about insurance.”

While affluent clients often rely on a team of professionals in devising a wealth preservation strategy, “financial planners, attorneys and family office managers are focused on investable assets, while the independent insurance agent is focused on insurable assets,” Fiske explains. To add that perspective to the mix, agents need to position themselves as an indispensable part of the client’s advisory team. They do so by becoming a trusted adviser to the client’s trusted advisers. Once on the team, the independent agent must bring understanding of all the insurable risks faced by the high-net-worth client and secure appropriate coverage. Otherwise, an agency’s own net worth could be at risk.

Take the real-life case involving the son of wrestler Hulk Hogan. Hogan’s son was involved in a 2007 auto accident in which his friend was critically injured. Hogan, who had coverage of only $250,000 and no excess liability policy, settled with the friend’s parents, then sued his insurance broker for the rest of the settlement. He is charging the agency with failing to protect his assets, to the tune of $30 million.

The agent also needs to clearly explain the responsibilities the client assumes in securing insurance coverage. In an example of a client who evidently wasn’t listening to his agent’s explanation of a policy, Elias recalls the case of an entertainer who neglected to adhere to a policy requirement that his $440,000 Rolex watch be locked away when it wasn’t being worn. The entertainer instead left the watch unattended on a desk one day, and when it disappeared, the insurance carrier denied the claim.

Placing high-end personal lines coverage is complicated and demanding, and sometimes requires the access and knowledge of a wholesale broker. It can be a profitable niche, though, bringing agents some very valuable assets to protect.

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