Asset Protection Planning – The First Step is Liability Insurance

I have been approached several times by clients who are seeking asset protection planning for their businesses and investments where the client is most interested in talking about the “interesting” things, such as foreign asset protection trusts, cross-collateral agreements, and other esoteric techniques of asset protection. Specialist attorneys love to talk about these sorts of things, also.

But the first topic of asset protection planning, as always, is liability insurance. Comprehensive General Liability (“CGL”) insurance coupled with a large Umbrella Policy, is the primary means of protecting any estate from catastrophic losses.

About a year ago, I was counseling a young client, whose real estate investments were starting to “take off.” I asked her why she had only $2 million worth of liability insurance. She replied that her entire net worth was still less than $2 million, and she said she did not wish to have more insurance coverage than the amount that she was “at risk.”

So I asked her, “What do you suppose would happen, if a 32-year-old neurosurgeon, making $175,000 a year, and who has a wife and three young children, were to trip on the stairs of one of your investment properties (due to a loose floorboard) and because of his very serious injuries, he would need round-the-clock nursing care for the rest of his life?” In other words, if you were sued for $15 million or more (which I call, “winning the Negative Lottery”). After being forced through major litigation and bankruptcy,  would there be anything left of your business, your estate, your spouse’s estate or your children’s estate?

In my view, any client who engages in a high-risk business (such as real estate investing), should never have less than $3 million in liability insurance. For our wealthier clients, the aggregate coverage amount should normally be between $5 million and $20 million. If you were ever involved in a difficult, 2-day mediation, or a complex settlement conference (as many of my clients were, during my litigation days), or in other words, if you ever got caught by the “Negative Lottery,” you would never wish to “go to the table“ without a very large “carrot” of at least several million dollars. Other forms of asset protection planning will be much less effective, if not useless, unless you are in a position to bring enough cash to the table that will allow you, in conjunction with other forms of asset protection, to settle virtually any case on the best possible terms.

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