Personal Risk Management: The Insurance Audit

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.).