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PRIVATE CLIENT GROUP
WEALTHY & WISE
March 2009 — Issue 7 www.willis.com
DON’T REDUCE YOUR
By Lynn Killeen
Senior Vice President
“Shouldn’t I reduce the amount of coverage on my house in light of
its decreased market price?” That’s the question of the hour, as home
values continue their downward slide. We are fielding many calls
from clients asking to reduce the amount of insurance coverage on
their Homeowners or Excess Liability policies. Our response:
Consider increasing your policy deductible or removing physical
damage coverage on older vehicles if you wish to reduce your
premiums. Do not reduce your Excess Liability coverage. And let’s
discuss the correct amount of coverage for your home.
For most of us, our home is likely our most valuable physical asset.
We need enough insurance coverage to rebuild in the event of a total
loss. While the market value of many homes has fallen, construction
costs have not. The fluctuating but generally increasing costs of fuel
and sluggish new home sales have kept the costs for residential
By Mark Battat
building from falling. Typically, contractors find it more expensive to
build one home than work on a new housing development – a factor
in estimates to rebuild an existing home.
The Insurance Institute for Highway Safety is
an independent, nonprofit, scientific and
Most insurance policies require the amount of insurance carried on
educational organization dedicated to
the dwelling itself be equal to 100% of the cost to rebuild the home as
reducing the losses – deaths, injuries and
it currently exists. If you agree to do this, then several carriers that
property damage – from crashes on the
specialize in insuring high-value homes will agree to rebuild your
home, even if the amount of coverage shown on your policy is not
enough. (Individual contracts vary and should be reviewed with your
The institute offers a variety of consumer
broker.) If, at the time of loss, your home is insured for less than
100% of the cost to rebuild, you could be subject to a coinsurance
Shopping for a Safer Car
penalty. Although coinsurance is more common in commercial
About Airbags including on/off switches
property policies, we also see it in many personal home policies.
and child safety
Beginning Teenage Drivers
For example, if your home is destroyed in a fire, and it costs
Vehicle Research Center Guide
$1,000,000 to rebuild and you only had $800,000 of dwelling
coverage at time of loss, you were insured 80% to value. A
To learn more about how you can improve
coinsurance penalty is computed by “did over should.” In other
your travel safety, simply go to
words, you “did” have $800,000 of coverage; however, you “should”
have had $1,000,000. Therefore, you were 20% underinsured, so if
continued on page 2
turn on the TV any day of the week to hear of
Cutting Costs continued from page 1
the latest and greatest lawsuit in the U.S.
Unfortunately, anyone can sue you for just
your policy contains a coinsurance penalty clause, the amount you
about anything. Law firms advertise “if we
collect could be reduced by 20%. Frequently, this also applies to
don’t win, you don’t pay.” Add that to the fact
partial losses. Let’s say you have a partial loss and the estimate is
that anyone can walk into any municipality and
$300,000 to repair your home. Even though you have $800,000 of
pay $50 or so to file a small claims lawsuit, and
dwelling coverage, if it is determined you should have had
the potential exposure far outweighs the
$1,000,000, then the insurance company can reduce your claim by
nominal savings realized from reducing your
20% and pay you only $240,000, i.e., your penalty for underinsuring
liability coverage limits.
your home is 20% of your claim or $60,000.
We see claims originating from minor fender
A better solution is to consider increasing your deductible and
benders, clients’ children loaning their cars to
essentially self-insuring the first $2,500, $5,000 or even $10,000.
a friend and the friend has an accident, dog
This should reduce your annual premium and eliminate submission
bites, the guy hired to clean the gutters falls off
of smaller claims to your insurance company. Keep in mind that
the ladder, family members falling on slick
statistics indicate an insured will only submit one home claim every
sidewalks, or a mishap at the country club
7 to 10 years.
reception that our client hosted. Then there
are watercraft accidents…think water skiing,
When we assist our clients in making this decision, we determine the
jet skis. And golf carts: the teenage son whips
premium savings at each deductible option and divide it into the
around the corner and his friend goes one way
difference between the deductible they have and the option they are
as the cart goes the other. The list is practically
considering. For example, if you currently have a $1,000 deductible
endless! The 47th Edition of JVR’s Current
and are considering a $2,500 deductible, first determine the amount
Award Trends cites jury awards over $1 million
you will save annually if you choose the higher deductible option.
range from 9% of the total of all judgments
rendered in the Northwest to a high of 27% of
Let’s say, your annual savings is $425. The difference between your
all awards in the Northeast. This is the last
current deductible and your potential new deductible is $1,500.
place you want to skimp on your insurance. If
Divide your annual savings into what your increase in risk is, i.e.,
a judgment is rendered against you as the
$1,500 divided by $425 equals 3.53 years. That means it will take you
result of a lawsuit and you do not have enough
3.53 years to break even. Every year after 3.53 years that you do not
insurance, your assets are at risk. Additionally,
have a claim, you will be ahead by $425. If you don’t have a claim for
your wages can be garnished until the lawsuit
eight years, you have saved almost $1,900.
is paid in full.
Reducing your Excess Liability or Umbrella limit is almost never a
For Excess Liability, the bottom line is that
good idea. You only have to open a newspaper, click on the internet or
$1M is the old $5M, and $5M is the old $10M!
2 Willis HRH • 03/09
ZONING IN ON
By Frank Rapisarda
Do you live in a flood zone? Most everyone in the U.S. does, thanks to
the Federal Emergency Management Agency (FEMA). Although
flooding causes over $3 billion per year in property damage in the U.S.,
prior to 1968, when Congress passed the National Flood Insurance Act
in flood insurance was virtually unavailable from the private insurance
industry. The National Flood Insurance Program (NFIP) managed by
FEMA then began the ambitious task of mapping communities to
delineate special hazard areas and risk premium zones.
A zone is a geographical area on a Flood Insurance Rate Map (FIRM)
that indicates the severity or type of flooding to which it is susceptible.
Zones are a key ingredient in the promulgation of flood insurance
rates. You may be in a low-, moderate- or high-risk flood zone, but you
are in a zone. You can buy flood insurance as long as your community
participates in the National Flood Insurance Program. And, it’s a good
idea to buy even in low-risk areas because 20% to 25% of all flood
insurance claims come from low-risk areas. The Flood Disaster
Protection Act of 1973 requires federally regulated lending
institutions to make sure that mortgage loans secured by buildings in
high-flood-risk areas are protected by flood insurance.
Flood zones may be changing as FEMA continues its ongoing map
modernization project. Since the maps haven’t been updated in the
last 20 years, you may find yourself in a higher-risk zone than before.
If that happens, you may also pay substantially more for your flood
insurance policy. If you own a home in Florida, Louisiana or Ohio,
the likelihood of being re-zoned increases as FEMA is reported to
have put most of its resources where storm patterns and real estate
development have created new or higher-risk, flood-prone areas.
Some communities have decreased the potential for flooding by
making modifications or improvements in certain structures (dams,
levees, etc.). In some cases, communities have revised their
geographical boundaries, resulting in reduced flood hazard areas. In
still other instances, the community has provided updated
information that more clearly delineates flood insurance risk zones.
Map upgrading was overdue, and while it could mean higher rates,
some relief is built into the system to rescue homeowners from a
negative impact. Owners of properties that move from a low- or
moderate-risk zone into a high-risk zone may be able to take
advantage of a process known as grandfathering. If you have had
continuous flood insurance coverage, rules allow you to benefit in the
rating. You are given the option of using the new and updated rating
criteria or having the premium rate determined using the FIRM in
continued on page 4
3 Willis HRH • 03/09
Flood Insurance continued from page 3
effect when the building was originally
constructed or when flood insurance was first
procured. This could result in a savings when the
new map revision, by itself, would raise your
Owners of properties that move from a high-risk
zone to a low- or moderate-risk zone may be
Willis HRH, the North American arm
eligible for reduced insurance rates by converting
of Willis Group Holdings, came into
to a Preferred Risk Policy. This policy covers both
being in October 2008 after the
a structure and its contents and offers substantial
transformational $2.1 billion
savings. A PRP can be obtained for as little as $112
combination of Willis and HRH.
The deal doubled Willis’ North
The NFIP flood policy provides the basic
America revenues and enhanced its
protection needed for homes valued up to
leadership in attractive growth
$250,000 and containing possessions with a value
markets. It more than doubled Willis’
up to $100,000. Since floods in fact frequently
high-growth Employee Benefits
cause total losses, and recognizing that many
business in North America while
homes today have values substantially greater
strengthening Willis’ middle-market
than the highest limits available through the flood
program, some insurance companies offer Excess
Flood insurance to meet the need for additional
Willis HRH is now among the top
coverage. Even if you live in a high-risk flood
three brokers in 15 of the 20 largest
hazard zone you can still obtain the needed
U.S. markets – and number one in
coverage. Like the NFIP policy, your rate is based
Chicago, Philadelphia, Phoenix and
upon the flood zone, the age and type of home and
seven other major U.S. markets. All
the amount of coverage you choose. Policies are
told, the combined company is in 210
available to homeowners, condominium owners
locations in North America, up from
and renters. You may be eligible for a preferred
Willis’ 70 locations previously.
risk policy if your home is in a low flood hazard
zone and has limited flood loss history. This is a
simple, straightforward and very affordable
coverage. Deductible options further reduce your
costs. Loss control measures can be taken to
mitigate the damage caused by floods.
Contact your Willis HRH Client Advocate for
information on how you can control the cost of
protecting your property from flood losses. Also
be sure to check out the FEMA website at
www.fema.gov/business/nfip for additional
4 Willis HRH • 03/09
AN EXAMPLE OF AN
A trusted assistant, responsible
By Marnie Everline
for paying bills for their
employer also writes checks out
Most of us think we are smart enough and financially sophisticated
to “cash” and transfers monies
enough to avoid becoming victims of fraud or embezzlement. But,
into their own personal bank
sadly, the rash of recent Ponzi schemes and other fraudulent
account. By the time the
activities that have been uncovered have substantially diminished, if
employer discovers the crime,
not totally destroyed, the assets of many of even the wealthiest
the assistant has embezzled a
individuals and some of world’s largest charitable organizations.
total of $50,000.
What constitutes fraud and embezzlement and is there any way to
protect yourself from these crimes?
WHAT IS FRAUD?
Embezzlement can be small or large; as
In criminal law, fraud is a crime or offence of deliberately deceiving
minor as a retail store clerk pocketing a few
another in order to damage them, usually to obtain property or services
extra dollars from the cash register or as
unjustly. Fraud can be committed through many methods, including
major as an executive of a large company
mail, wire, phone and the internet (computer crime and internet fraud).
illegally transferring managed money into a
WHAT IS EMBEZZLEMENT? personal account.
Embezzlement, considered a white-collar crime, is a type of fraud
where a person misappropriates the assets entrusted to them. Assets
Some Homeowners policies can be endorsed
are held lawfully but used for an unintended purpose. Embezzlement
with supplemental coverage options that
is a breach of the fiduciary responsibilities placed upon a person and
address embezzlement and fraud crimes and
can adversely affect individuals and corporations.
respond to the loss of money, securities and
Methodical and systematic, the embezzler conceals his or her actions,
which of course are done without the consent or knowledge of the
Check your Homeowners policy to see if such
wronged party. Often it involves the trusted person embezzling only
coverage is afforded or contact your Client
a fraction of the funds received to minimize detection. If successful,
Advocate for further assistance and
this crime can continue for years undetected and is most likely
discovered only when the funds are requested or needed and they are
no longer available.
5 Willis HRH • 03/09
THE VALUE Q. WHAT ARE THE MOST LIKELY AND
OF FINE ARTS
COSTLY EXPOSURES THAT
By Wayne Wiedenbeck A. The single most frequent case of Fine Arts
Vice President losses are transit related. Consider for a
moment the entire process of moving a piece
Did you know that over the past three years the number of active or a collection of artwork. The planning,
collectors of Fine Arts tripled? This resulted in large general pricing packaging, the physical transportation,
increases in the Fine Arts marketplace. Many collectors bought and unpacking and hanging. It’s all a chain of
sold items frequently and many realized a gain in value. related events with so many opportunities for
losses or damage to occur. Think of art
In the last quarter’s volatile economy, many collectors are wondering transport like a chain that is only as strong as
if their collections have retained, gained or decreased in value. its weakest link. A piece of artwork will pass
Because every collection and art piece is different, no one broad through many hands and you need to test the
answer can be given. strength of every link in the chain before a
piece starts its journey.
Recently, I spoke with Claire Marmion, a highly respected private
curator and consultant who owns Marmion Advisory, LLC. Claire has Catastrophic exposures are another peril. A
tremendous experience in the fine arts market, having worked for collector purchases an item at auction in New
both the AIG Private Client Group and Chubb as Director of Fine York only to have it shipped to their home in
Arts Services. What follows is a brief excerpt of our discussion. Florida. Did the collector consider that there
is a loss potential due to wind or flood? The
Q. WHAT HAS BEEN THE FASTEST GROWING SEGMENT OF same could be said for a piece of artwork in a
THE FINE ARTS MARKET? home located in a wildfire zone. Collectors
must be proactive to preserve their art and
A. Over the last three years we have witnessed a revolution in the that begins in where the art will be housed.
contemporary art market. Never before have so many collectors been
Q. ARE COLLECTORS STILL
drawn to art that is so difficult to look after – the most fragile of
PURCHASING AND SELLING AT THE
pieces in the most volatile market.
SAME FRANTIC PACE AS IN PREVIOUS
Q. WITH REAL ESTATE VALUES DECLINING IN MANY YEARS?
LOCATIONS, COULD THE SAME BE SAID FOR FINE ARTS?
A. Today many collectors may find it
A. Many collectors mistakenly assume that because real estate values necessary to hold on to an item for a period of
have generally fallen that the same must be also true for their time before the right opportunity arises to sell.
collection. Not necessarily so. Some homes have held their values. Whether they are purchasing to enjoy or to sell,
The same could be said with Fine Arts. Some artist’s pieces still hold collectors must safeguard their collections.
excellent value while others may not.
Collectors with well prepared collections schedules should look into Marmion Advisory, LLC
having a qualified appraiser conduct a “Schedule Review.” The 312 375 3807
appraiser will review and identify those specific items which may email@example.com
have gained or lost value and offer updated values. This saves the
collector significant appraisal fees while at the same time keeping
their values current.
6 Willis HRH • 03/09
FOR FURTHER INFORMATION, PLEASE CONTACT:
New York, NY
212 915 8212
212 915 8019
610 254 2664
602 787 6307
San Francisco, CA
865 583 3769
415 955 0242
972 715 6265
303 765 1561
206 386 7404
860 756 7343
Robert J. Clark
813 490 6811
416 216 0775
Vero Beach, FL
772 469 2864
604 605 3692
301 527 7255
Hunt Valley, MD
410 584 8623
Wealthy & Wise provides a general overview and discussion on a wide range of topics. It is not intended, and should not be used, as a substitute for
professional advice in any specific situation.
7 Willis HRH • 03/09