The rapid growth of family assets and the drive to preserve wealth for future generations has led to a proliferation of family offices across the country. According to Ernst & Young, the number of family offices has more than doubled over the last 15 years.
The risks these affluent families face are rapidly evolving, heightening the possibility of loss of financial assets and challenging their privacy and physical security. Aon Private Risk Management’s recently released a Family Office Benchmarking report analyzed insurance programs and losses from 130 family offices. The report uncovered several positive trends and some key challenges that family offices should address.
The report revealed significant progress in three areas:
- Art & Collections
Eighty-one percent of all family members elect to carry a collections policy for art, jewelry and other types of collectibles. Protecting valuable items under a specialized policy offers benefits that are not afforded if insured as general contents under a homeowners policy. While each insurer’s terms may vary, most collections contracts offer enhanced coverage, such as breakage of fragile items, a broadened valuation settlement clause, extended coverage for newly acquired items and the elimination of deductibles.
As hurricanes become more prevalent along the Gulf and Atlantic coasts, the households in this study are insuring their property against wind damage. Ninety-five percent of all properties located in hurricane-prone areas are insured against damaging hurricane winds. The percentage of properties insured in Florida, Hawaii, Massachusetts and New York are covered at 96%, 95%, 73% and 94%, respectively. Considering wind and hail represent the second-highest cause of property loss, windstorm coverage is a prudent investment.
- Excess Liability
One hundred percent of family members carry excess liability coverage, with 93% also electing excess uninsured and underinsured motorist coverage. On average, one in eight drivers on the road is uninsured. To reduce their costs, many drivers on the road elect to carry only the minimum limits required by their state. Excess uninsured and underinsured motorist coverage pays for bodily injury an insured and their passengers suffer in an automobile accident in the event the other driver does not have insurance or does not have enough insurance. This coverage is an important supplement as victims can suffer long-term injuries requiring lifetime care and will not be able to recover damages from an at-fault uninsured or underinsured driver.
With the heightening risk of prominent families being targeted for liability lawsuits, the benchmarking report revealed that these coverage options continue to be overlooked by families:
Family offices have a unique exposure, as the privacy and financial information of both the family office and family members are in jeopardy. Only 2% of family offices carry comprehensive cyber liability coverage, and very few individual households elect cyber coverage. UBS reported that approximately 22% of family offices in North America know they experienced a cyberattack in 2019. The most common forms of attack resulted from phishing, malware and social engineering. Protecting against cybercrime is a necessity for family offices, and the risks should not be underestimated.
- Non-Profit Directors and Officers Liability
Serving on nonprofit boards is a frequent activity for family members, but only 15% of families carry directors & officers (D&O) coverage. Lack of coverage leaves family members solely dependent on a board’s policy for damages and defense, which may require them to pay expenses out of pocket if the coverage is insufficient. On average, 4% of nonprofits will have a D&O claim brought against them in any given year, according to the Nonprofits Insurance Alliance Group. Nonprofits are sued for a variety of reasons, including wrongful acts of board members and breach of fiduciary duties. It is important for family members serving on these boards to understand the risks involved and to be provided the opportunity to purchase their own coverage to help protect their personal assets.
- Employment Practices Liability
Only 48% of Aon’s family office households carrying workers compensation purchase employment practices liability coverage. Employment practice complaints stemming from accusations of wrongful termination, defamation, sexual harassment, and discrimination have been filed by domestic employees performing a variety of roles. Families need to take precautionary measures when both hiring employees and throughout the course of employment. Employment practices liability policies provide both defense costs and coverage for damages that arise out of these employee lawsuits.
Family offices face increasing threats to their assets, reputation and physical security. These accomplished families need to consult experts that can identify and help them manage risks. The consequences can be severe if risk barriers are not built. Developing a strategy will help each family preserve and continue to grow their wealth.