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By Ralph Bovitz, CPA, PFS
Are your investments at risk due to items seemingly unrelated to investment
planning? Before you start investing, or even if you are investing already,
take time out to see if you have any risks that you should lay-off on an
insurance company. Nothing will undermine a good investment plan like a
loss from an auto accident or damage to your home not covered by adequate
insurance. Let’s focus on insurable risks often not covered in auto,
personal liability and homeowner insurance.
Starting with auto insurance, California requires a minimum of
$15,000/$30,000 in liability coverage, just to get on the road legally.
That means, in the event of an accident, the insurance company will pay up
to $15,000 to each person you have injured in an auto accident and up to
$30,000 for that particular accident. For an attorney with significant
investments, that would be disastrous because those assets would be at risk,
if the damages to the other party exceed the policy limits. Even an
attorney without significant assets could saddle future earnings to pay the
claim. So, for an attorney, basic auto liability coverage should start at
$100,000/$300,000 or even $250,000/$500,000.
But that’s only the beginning. With the reportedly large number of
uninsured motorists on California roads, you have a pretty good chance of
being hit by an uninsured or underinsured motorist, some day. You are
unlikely to collect from an uninsured motorist. And, if the other motorist
has minimum liability insurance coverage, $15,000/$30,000, rather than none,
you will only be compensated for your losses at those low limits. If you
cannot practice law, due to your injuries from that accident, so that your
income declines or dries-up, it’s also unlikely you will recover damages
beyond the other person’s policy liability limits.
The solution is buying uninsured/underinsured liability coverage with the
carrier of your own auto liability coverage. Then, your own company
picks-up the slack, if you cannot practice law for a period of time, due to
an accident with an uninsured/underinsured motorist. To protect against the
risk of loss from an uninsured/underinsured motorist accident, you should
opt for the same coverage levels as your own liability protection affords,
$250,000/$500,000, for example. Look at your auto policy tonight and you
may find your uninsured motorist coverage is only $15,000/$30,000. This is
one of the ways an insurance company holds down your premium, but to your
potential detriment. For an attorney with significant assets or an income
stream to protect, an auto accident with an uninsured/underinsured motorist
poses a real risk to an investment plan.
A necessary companion to high-limit auto liability protection is a personal
liability policy that provides additional coverage beyond the basic auto
policy limits. The personal liability policy is often called an umbrella
policy because it provides liability coverage on top of liability coverage
you have in your underlying auto policy. Umbrella policy coverage usually
starts at $1 million and goes up from there, to as much as $5 million and
more. These policies provide substantial additional coverage for a
comparatively nominal cost. It is usually a good idea to get your umbrella
policy from the same carrier that supplies your underlying auto liability
coverage. It minimizes the chances of agents from different companies
claiming the other one did not fulfill the terms of the umbrella policy.
Ideally, the umbrella policy should provide excess liability coverage
against uninsured/underinsured driver liability, too. However, some
carriers do not offer such coverage. So you may have to do a little legwork
to find the right policy.
While every attorney should have adequate auto insurance and umbrella
coverage to protect against the risk of auto accident liability, an equally
important form of risk management is homeowner insurance coverage. Again,
having homeowner liability coverage is essential for an attorney with
significant investments or one with a promising or currently profitable
income stream. The same umbrella policy that covers your liability for auto
accidents should also cover your liability for injuries to others that occur
at your home, or from your recreational vehicle or boat. If you rent,
rather than own your home, be sure to get liability coverage, to protect
yourself against injuries occurring in your rented home.
Having adequate insurance on the bricks and mortar of your house is another
important step to take in protecting your investments. You don’t want to
liquidate an investment to pay for damage to your home that could have been
covered by insurance. Let’s look at a couple of considerations, as you
decide how to insure your home.
With the rising values of homes in California, particularly in Los Angeles,
attorneys should insure for the home’s replacement value. Homeowner
policies carry a coinsurance clause that limits reimbursement to the portion
of the loss that the insurance amount is to the property value. If that
ratio is less than 80%, you are deemed to assume part of the risk of loss.
Thus, if your home is worth $500,000 and your insurance is only for
$300,000, you would not get full recovery for a partial loss. For
instance, if your home sustains a $100,000 loss, you might receive only
$75,000, if the coinsurance clause kicks-in. So, having a policy with
replacement cost coverage is essential for an attorney.
In addition to making sure the property value is adequately covered,
attorneys should consider getting coverage to meet the added costs from
existing building code requirements at the time damage is repaired. Your
carrier’s liability is limited to the cost of restoring the home to its
former self, unless you have building code protection.
Adequate auto insurance, although not cheap, accompanied by an umbrella
policy will protect existing investments and earnings in the event you are
involved in an auto accident. Where the accident is with an uninsured or
underinsured motorist, having coverage for this contingency makes additional
good sense. To shield your investment plan further, be sure to have
appropriate amounts of insurance to protect against physical damage to your
home and sufficient liability protection, in the event of injury to persons
on your property. By having the insurance company’s prescribed amount of
homeowner liability coverage you will also be covered under the umbrella
policy.
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