Insurance for Dummies author Jack Hungelmann describes the process he goes through with a new client to audit their personal insurance program. This article is a follow-up to "Personal Risk Management: An Overview," in which he lists 16 value-added commitments he makes to his personal lines clients as part of his personal risk management services.
I am a personal risk manager. In consumer-ese, that means I oversee people's insurance programs. Most people buy insurance rather hodgepodge. They buy a little of this here and a little of that there. With some of the insurance they buy, they have an agent; with other policies, they don't. But the one thing nearly everyone has in common is the lack of a risk manager, an overseer, someone who is an expert in every type of personal and small business policy.
The consequence of not having an overseer is almost always an insurance program out of balance and full of coverage gaps. I have audited more than 200 insurance programs over the years, and virtually everyone has 15 to 30 major coverage gaps or inconsistencies.
First, Examine Current Insurance Program
The first thing I do with a new prospective client is audit their current personal insurance program. I want to find out what kinds of risks they face that aren't covered by their current insurance program, where their coverages are out of balance, and where their insurance dollars are not being well spent.
The three goals of my personal risk management practice with my clients are:
Coverage gaps are identified and plugged or, if not, the risk is reduced to manageable levels (i.e., the risk of basement water problems being reduced by installing a sump pump and then buying sump pump failure coverage).
Coverage limits are high enough and balanced in all six major risk areas: lawsuits, major medical, death, long-term disability, long-term care, and the destruction of or major damage to their residence.
Insurance premiums on all policies are competitive and judiciously spent.
The goals of my audit are the same. The end result of my audit is a written report showing the client where the program is out of alignment with these three goals. I identify each of the problems and how the problem can best be fixed—my recommendations. The following is the five-step process I go through when auditing someone's program, including the estimated time I spend.
Step 1—Conduct a Personal Interview (1.5–2 hours)
The goal here is to talk to the clients about their lives in order to identify property, liability, life, health, and disability risks, especially those risks not typically covered by off-the-shelf policies that will require special treatment—that is, a home business, a detached garage used for storing business files, domestic workers/nannies, vacation boat rentals, travel abroad and renting cars, trust ownership of residences or personal property, etc.
Step 2—Review Personal Insurance Policies and Contracts (2–3 hours)
This step includes reviewing every policy the client currently has in force—both personal and group. The goal of this step is to identify what risks identified in the personal interview are not covered properly or at all. Another goal is to identify risks in contracts (condo association agreements, apartment leases for college students signed by parents, boat rental agreements). In the contracts, I am looking for risks that have been assumed that need special coverage, like the condo association agreement requiring the unit owner to insure everything structural inside the bare walls and bare floor of the unit, or the college apartment lease in which the parent has unknowingly agreed to be responsible for all injuries or property damage (i.e., injury or property damage at a college party), or a boat rental agreement where the clients agreed to be responsible for all damage done to a $30,000 boat being rented—even if they didn't cause the damage, such as a storm sinking the boat.
When reviewing policies, I make a note of any missing policies, such as long-term disability or long-term care. I look for excessive or unnecessary coverages, such as increased automobile personal injury protection or med pay that duplicates health and disability insurance, or excess group life insurance purchased through work. The price is often twice the market price if the client is in good health. Plus, if the client leaves the job, he or she often loses the group excess coverage.
I also look at the deductibles and whether there is an adequate premium discount being given for the extra risk. Are the group long-term disability benefits taxable? If so, is there a way to make them nontaxable, or will the client need a tax-free supplement? Is the current group health insurance coverage for the family the best option? If there are two parents with group health coverage available, are the kids covered under the plan that has the best coverage for them for the money? Are the umbrella limits high enough, considering the income and asset positions for the client? Does the umbrella cover liability risks not covered by "underlying policies"? Are there other issues, such as renting boats on vacation; renting cars abroad; serving on nonprofit boards; racing 30-foot sailboats? Are the home, garage, and contents limits high enough to fully replace in the event of a total loss? Are the life insurance limits high enough (i.e., 10 times income)? Are the beneficiaries on individual and group life policies correct and consistent? Is a workers compensation policy required for the nanny or domestic worker? Is there a need for a small business policy? Is there a residential trust that owns the home not currently covered as a co-named insured by both the homeowners and umbrella policies?
Step 3—Produce a Risk Management Audit Report (3–4 hours including edits)
Here I list all the problem areas and recommended solutions. Examples include a college student away at college having occasional use of his roommate's vehicle. Such risk may not be covered under a personal auto policy because the roommate's car is "available for regular use." Adding the extended nonowned endorsement to the personal auto policy will solve the problem.
The report includes loss reduction tips as well, such as doing a photographic inventory to improve your claim settlements and simplify the process, installing a sump pump to solve some basement water problems, and getting sump pump failure coverage. Here is a sample of what my risk management audit looks like when finished.
Step 4—Review the Results with the Client (1.5–2 hours)
This includes going through the audit report, discussing strategies, answering questions, clarifying recommendations, and making to-do lists. Based on the results of this meeting, I tweak the report and give the final version to the client.
Step 5—Implement and Monitor the Changes for Accuracy (optional step—up to 2 hours)
In this step, I help the client implement the changes. Talk to his or her agent, if the client prefers, to answer whatever questions he or she may have, and review the various policies and endorsements that come back as a result of the audit to make sure they were done correctly. In this step, I suggest that the client consider hiring us for ongoing risk management including setting up the necessary policies with the changes I recommend and monitoring the policy placements and the group changes (life, disability, etc.).
Charging for the Audit
The audit is self-contained. There is no obligation beyond the audit that the client do any business with us. The majority of the time, however, after seeing the report, clients usually do engage our services on an ongoing basis. The audit takes me 8 to 10 hours, at least. I charge typically about $1,200 for a personal audit and $2,000 for a combined personal and business audit. For those who want an audit of their program but need to spend less and are willing to forgo the written report, I charge $600 for what I call a "mini-audit." The "mini" is more of an overview without the detail of the full audit. For most clients, I do recommend the full audit.
After all the recommended changes have been implemented, our clients end up with a great insurance program at a competitive price that is very balanced in all major loss coverages. Underlying insurance gaps are closed. High limits are obtained for every type of major loss exposure. And, most important of all, real peace of mind is achieved along with an understanding of their insurance program that they have never had before. That's the real payoff for me in doing these. I get the satisfaction of making a real difference in someone's life.
More information on insurance audits and other risk management services can be found at Jack's website.
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