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Fautores Family Offices

Property and Casualty Risks for an Affluent Client

Michael Chindamo

Published on March 8, 2015

At the end of 1990, I sold my interest in a specialized multi-family office financial organization that I founded with a partner. Although still maintaining a small financial clientele, I chose to take a hiatus and diversify most my attention to another business.

During the years 1991 through 1997, I owned a Paul Davis Systems Property Restoration Franchise. Paul Davis Restoration specialized in the settlement of property claims for the insurance industry. The responsibilities were to photograph, estimate and most often proceed with the restoration and reconstruction.

Having a construction background within my family and having turned around health spa organizations in a number of different states during the 70’s required not only financial business turn-around skills but also often included construction restoration as well. Very often the buildings suffered from water damage, fires, storm damage, lack of maintenance, and damage created by vehicles crashing through buildings, vandalism and more. I felt that the Paul Davis Restoration concept was not totally foreign. I also felt that having negotiated new construction home purchases for some of our professional athlete clients and being heavily involved in their construction disputes gave me a leg up in understanding the business. I knew that my CFP® training would offer additional backup as well.

It wasn’t long before I figured out that Northern NJ, populated by lots of historic and very expensive housing and commercial buildings would require a special expertise to settle those claims. I knew that I needed a diversified world class construction team that required some very old world trade skills that are very difficult to find. The insurance industry did not have that many skilled artisans that could handle all the steps that were needed to settle and restore historic properties. I knew that we needed to have a strong property and casualty claim background, construction ability at an artisan level, understand the legal and financial issues, unique construction methods and finally the ability to communicate a settlement that could be agreed upon by the property owner, the insurer and the construction team. Fortunately, we were able to offer these services very successfully. We settled well over 1,000 claims. We were also on call as an expert witness for the occasional cases that were court bound. Most often, those were settled before we got there.

Along the way, I learned some very important factors that all wealthy property owners should know about how to facilitate the property claim process and the importance of having property ownership coordinated with their estate plans.

Affluent clients face greater risk and complexity when it comes to insuring their property and personal liability. 

With affluence comes a greater chance of being sued because you are a target, a deep pocket. Future income could be at risk. Wealthy clients often live in areas that present a greater likelihood of insurable perils and hazards to occur. For example, there is a greater chance of having storm damage if one lives near the coast. With that come the expensive contents of those homes that could include valuable collections and historic designations.

You might be thinking “Why should I worry about this. My agent will take care of my best interests, I am sure that I have the best policy right? Mostly wrong is the correct answer. Some agencies are adept at proper titling as well as the claims process. Some agents through pressure from their clients just shop for the most inexpensive policy. Some write within the range of companies that they are approved for. As a result, you may not have the best policy for you. Price does not equal the best value or the right coverage.

I can tell you this. With over 1,000 claims that we settled, only one time did an agent show up at a loss. In defense of your agent, the insurance industry discourages that contact and prefers to have their claims adjusters handle claims matters. Maybe that is a good idea. Claims adjusters are better trained to handle claims issues. It makes sense. It saves time and helps prevent any misstatements. Again, there are some very good agencies that really care about their clients and offer a helping hand. At the end of the day, it really makes a difference to the insured to have a positive interaction with their agent during a crisis.

So, if your agent who sold you the policy is disengaged, who do you talk to? The answer is the claims department. Their goal is to settle the claim for the least amount of money possible. As such, that may not always be in your best interests.

Here are some examples of what I experienced during my time in the business. I witnessed claims that were denied for the following reasons:

In cold weather climates, property owners had left their homes vacant or unattended during a warm weather vacation. They left the thermostats off during a cold snap. Some flooding occurred from broken pipes that were frozen. As you could imagine, a tremendous amount of water damage occurred from running water. The insurer denied the claim because the heat was off and house left unattended. The owner should have had the thermostat set at 65 degrees, had the home periodically checked on while away and should have disconnected the hot and cold washer hoses or at least turned those valves on off. Was the insurer unreasonable? Probably not! Was the insured aware of what to do when leaving their home for an extended stay? No. After all, who reads the fine print in those policies? The damages exceeded $100,000. Eventually, the insurer offered a settlement that was less than the cost of repairs.

By the way, what if the home was owned by a Qualified Personal Residence Trust (QPRT)? If the insured’s used a QPRT to transfer ownership of their residence to a trust they would no longer have an insurable interest in the property. This could offer leverage in favor of the insurance company denial of the claim. Remember, in your policy, it states that you must have an insurable interest.

What is the solution? Here are some ideas: Your attorney will probably advise that you need to create a separation. You need to place home owner’s coverage showing the QPRT as the sole named insured. If you still intend to live at the residence, you would need to secure separate coverage, in your own name, for your personal property, liability and umbrella exposures. A very good rental policy might suffice. In certain cases, the insurer may allow adding the QPRT as an additional insured to the existing home owner’s policy as well as the umbrella policy.

Another consistent source of denial of claims was a lack of maintenance. Lack of maintenance of your property does not entitle you to a total replacement when an insurable incident occurs. A good example that is very common would be roof leaks. If you have not maintained that roof, the shingles are very old, and there is evidence of previous leaks, it is not realistic but very common for a property owner to expect an entire roof replacement. Many claims are denied on this basis alone. Imagine the amount of damage that will occur to the roof as well as your personal belongings when a severe storm happens. Again, what if the titling of your home is not accurate? You can see where this type of situation lends itself to controversy.

Let me further complicate the matter. What if you are upside down on your property like many are these days? You are behind on your mortgage payments because you feel that you are throwing good money after bad. Your homeowner's insurance has been paid. Now you have a storm, you have damage and you want to file a claim. Technically, you owe the payment(s) on your mortgage. The insurance provider will settle the claim. The check has the mortgage company name on the check as well as yours. The mortgage company can refuse to sign the check until you pay the mortgage payments. That payment can be deducted from the settlement.

I distinctly recall a situation where a homeowner owed more than $30,000 in back payments to his mortgage holder. The cost of the repairs would be $27,000. In order for the restoration to be completed, we had to have a signed agreement with a large down payment from the mortgage holder stating that they would not withhold any mortgage payments. We also requested payments as work was completed before we would start the next stage.

You might be thinking that this study is primarily focused on a wealthy clientele, so why would there be a payment problem? The answer is that you might be surprised to find how many upscale homes are in some kind of financial distress.

Here is a good solution. Have your agent, your attorney, CPA or a good family office that advises you involved in the process. Remember we are here to help. Your advisory team may be able to intervene and help come up with strategies that can alleviate the problem. Remember we are trained to do this. Life transition events occur and affect all of us.

There are certainly many more examples that I can give you, but I think you get the message. The right coverages do not always mean it will cost you more. Your financial and legal team should be involved with coordinating all titling of properties with your estate plan.

Janet Banderas, JD of The Banderas Law firm located in Tampa, counsels that “because of the cost and complexity of probate and the uncertainty about estate tax laws, the use of revocable and irrevocable trusts is on the rise. Often the asset used to fund the trust is real property. Unfortunately, there is often a lack of understanding of the implications and coordination between the property owner (both old and new), the estate planning attorney, the property and casualty insurance advisor and the mortgage holder”.