Insurance Concerns For Wealthy Families Heightened By Rising Risks, Complexity And Cyber Exposure

Charles Paikert

19 February 2013

Increasing risk, complexity and internet exposure are prompting wealthy families and family offices to pay more attention to their insurance coverage this year, according to industry executives.

Areas being scrutinized include cyber security, social media, coverage for directors and trustees, collectibles, yachts, homes - and even kidnapping and ransoms.

The now ubiquitous nature and transparency of the internet and cyberspace in all its forms, particularly social media, data storage and viral photographs, are heightening security concerns and have resulted in more insurance options.

“The exposure of wealthy families to security vulnerabilities from the internet and social media is definitely a rising concern,” said Joe Calabrese, president, Harris myCFO, a division of BMO Harris Bank. “We’re exploring all options to make sure our clients are protected.”

Both policies and precautions are critical, say insurance company executives and consultants.

Family offices should consider new forms of cyber-security insurance being introduced to the market, said Pamela Radsch, senior vice president for Marsh Private Client Services’ family office practice.

“We worked with a family office that had their server in an off-site industrial park,” Radsch said. “One day they discovered that their server – and all their data – was gone. We’re recommending that family offices now make sure to buy insurance so they are indemnified against the financial consequences of this kind of event.”

Cyber-security concerns

Insurance products are less important than prevention when it comes to cyber security, said James Kane, president, HUB International Personal Insurance. “You want to insure any equipment purchased by a family office, but you also want to be sure and train employees properly when it comes to having any kind of sensitive information on the internet. There’s just too much data out there and too little oversight.”

Children – and young adults – in a wealthy family are particularly vulnerable to breaching security, experts say.

“The ubiquitous nature of social media and the ubiquitous way young people use it means there’s now a greater potential for a breach of data and information, ranging from financial accounts to the physical location of members of the family.”

Affluent children need to be more aware of privacy concerns in the physical world as well, Radsch observed.

“When children and young adults are away from home and traveling or in college they are more exposed,” she said. “Roommates may have access to their computer in a dorm room, and strangers they befriend while traveling may have ulterior motives. It’s imperative that family offices have discussions with heirs living away from home about privacy issues.”

Trustees, directors and officers vulnerable

Insurance for family members who serve as trustees, directors and officers on boards of directors is also becoming a bigger priority for family offices.

“When it comes to professional liability for trustees and directors and officers, the problem is that many family offices don’t realize the magnitude of what they’re assuming,” said Ken Butler, chief executive of Legacy Risk Solutions, an industry consultant. “For example, if a family member made a decision that was effectively outsourced and affected a third party in a negative way, causing them a financial loss, they could be sued. If there isn’t a policy in place that protects the family, the entire family could be exposed.”

Family offices also often overlook problems associated with “cross-trusteeship,” where, for example, a family member is trustee for his nephews and nieces, and his brother or sister in turn is the trustee for his children.

“No one thinks any thing will go wrong, but things can go wrong, and the family needs insurance for that possibility,” Butler said.

The increasing popularity of non-profits has also made directors and officers’ coverage more critical, Radsch said. “There is also liability associated with non-profits,” she noted, “and family offices need to make sure their D&O policy covers non-profits.”

Art advice

The soaring value of collectibles has also made insurance more important than ever, experts say.

“We’re seeing an increase in collections of art, wine, coins and other collectables,” said David Hubbard, vice president of sales and marketing for AIG’s Private Client Group. “We have a dedicated service to help clients manage art collections, and we’re seeing a growing need to have art properly valued and appraised, as well as a need to have art properly cared for in transit.”

Insurance for art restoration is also becoming more prominent.

“Most people assume their insurance policy covers their art while it’s being restored, but that’s an incorrect assumption,” Radsch said. “The restorer has their own policy, and the owner needs to get extended protection on their existing policy to cover any liabilities when the painting is not in their possession.”

Owners often don’t realize that if a painting is damaged, the cost of the repair becomes the new valuation, Butler pointed out. “If a painting that is valued at $250,000 gets ripped, and the cost of repairing a one-and-a-half-inch rip is $60,000, the new value of a painting is $60,000,” he said. “Owners should demand a policy that covers that loss in value if there is damage to a painting.”

Yachts and homes

Other big ticket assets that need more insurance policy scrutiny include yachts and homes.

Broad pollution coverage is often overlooked on policies covering yachts, according to Radsch. “There are a wide range of local, state, federal and international laws covering marine environment protection,” she said. “Yachts are constantly on the move. So owners need to make sure they have inclusive coverage.”

Yachts also often have international crews, AIG’s Hubbard points out, and owners need to conduct background checks and make sure their coverage includes protection from liabilities such as accidents, storm-related damage – and even pirates.

While home owners’ insurance is often seen as a standard-issue item, Hubbard said wealthy families often aren’t aware they may need additional coverage when a house is being built or restored.

“Wealthy families are often constructing or renovating large houses that can be 30,000 or 50,000 square feet, and things can go wrong which won’t be covered in a standard policy,” he noted.

Kidnap protection

Another security issue most people don’t have to worry about, but wealthy families do, especially as international travel is now common: kidnap and ransom insurance.

Just as important as the actual coverage is having a plan in place if there is an incident, said HUB’s Kane. “The top priority is to have a phone number for a professional who can do an immediate assessment of the situation,” he said. “If a family member is in a remote or dangerous part of the world, you need someone who knows that area intimately and can act quickly.”

Making sure a plan and a team are in place and can be activated immediately is critical, Kane emphasized. “The wrong time to plan a fire escape is when smoke is in the living room,” he said.