You’ve got a rich client building a $22-million house. He’s a paranoid guy, and even though it’s located outside of Manhattan, he’s put hurricane-proof glass in the windows and specified that all the walls must be at least two feet thick. It seems he’s thought of everything.

Fast forward to two months before move-in date. The contractors are finishing the hardwood floors, and the solvents catch fire. While everyone gets out safely, the house itself isn’t so lucky. Normally, firefighters would have doused the blaze quickly. But those windows and walls? Impenetrable. Even for the fire department.

Your client’s mansion burns to the ground.

He turns to you, his financial advisor. Is he covered?

According to Gina Teresi, vice president, strategic sales, private client group with property and casualty insurer Chartis, many high-net-worth clients wouldn’t be. As she illustrated at the Strategy Institute’s 13th annual Marketing Wealth Management Services to High-Net-Worth Individuals summit, this is because their advisors don’t consider P&C insurance. Only two of the session attendees had placed this insurance for their clients.

Four questions to ask your clients

  1. Describe your annual insurance review policy.
    If your clients can’t do this, it often means their current broker is doing an inadequate job. The broker’s job is to make sure the insurance covers the client’s personal circumstances.
  2. How did you choose your limit of liability?
  3. How did you establish the replacement value on your homeowner’s policy?
    If the answer to either question 2 or 3 is, “My broker suggested it” or “It’s the minimum amount,” you’ll want to reexamine the policy to look for gaps.
  4. Describe the boards you or your spouse serve on.
    Many non-for-profit organizations have only minimal directors & officers insurance. If there’s a large claim, directors can be held personally liable.

The foundation of any financial plan is risk management, but Teresi finds life and health insurance tend to dominate conversations on the topic. Yet HNW clients have more property to lose than average folks, and their needs are often more complex. While the majority of insurance tends to be marketed on price, Teresi says coverage is the more important factor for HNW clients.

“You always hear about the claims that don’t get paid,” she says. Those are the result of underinsurance and gaps in the policies. An advisor can add value by helping the client see the whole picture.

Teresi gives the example of a client referred to her because his auto insurance premium went up after he insured his 17-year-old son. After interviewing him, she realized he also owned a beachfront home in partnership with his brother, was a director of a board, had a significant wine collection, and owned a property development firm. The associated policies were spread across multiple companies and American states, and as a result, there were significant holes in his coverage.

An advisor’s role is to educate the client on his various options. Often, this takes the form of illustrating not-so-uncommon scenarios. A favourite of Teresi’s is the situation where the other motorist in a collision is underinsured. In the state of New York (where Teresi is based), the minimum coverage for a driver is $25,000 per person and $50,000 per accident. If an accident were to not only damage a $100,000 car but also gravely injure the seven-figure-earning client, the minimum would barely cover the vehicle, never mind lost wages.

Most advisors aren’t P&C experts, so if you don’t already have a team member focused on insurance, look for an independent agent to add to your network. Teresi suggests looking for an agent who has a documented, detailed process for assessing clients.

Yet outsourcing insurance implementation doesn’t mean you aren’t involved. Analyzing whether your client needs P&C insurance is much like holistic financial planning, says Teresi, so it’s just a matter of taking your current client conversations one step further. As she did with the property developer, interview the client to find out what his current coverage is (see sidebar, “Four questions to ask your clients”). You’ll also want to know about his lifestyle, risk profile and attitude towards insurance. Those will help determine whether he gets insured for everything or just catastrophic events, and the amount of his deductible.

During this assessment, you’ll also want to look for gaps in coverage based on what you already know about your client’s assets. A red flag for an advisor could be a client with $1 million in personal liability coverage, but a $10-million portfolio.

Teresi stresses that P&C insurance is an integral component of wealth preservation. “Insurance premiums never bankrupted a client,” she says. “However, uninsured or underinsured losses can and will.”

And that house? It cost $16 million and two years to rebuild. And yes, the client was covered.

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