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Helping clients protect against risk.

Financial planners agree that a comprehensive financial plan should include an assessment of individual insurance needs, which would naturally include threats to property or exposure to personal liability. But how extensive is the property and casualty insurance planning that CPAs are doing? How much should they do? And where can they gain the basic knowledge they need to help clients develop strategies to protect against risks through insurance or other means?

Protecting a business or individual client's property against damage or destruction and his or her financial well-being from claims resulting from legal actions is a less conspicuous aspect of risk management for CPAs who do personal financial planning. In this section, several CPAs share their experiences in working with clients to meet property and casualty insurance needs.


Some CPAs learn of the importance of adequate property and casualty coverage through hard experience. Mitchell Freedman is a CPA and personal financial specialist in Sherman Oaks, California. For Freedman and his wife, property and casualty insurance needs hit home when their house sustained $105,000 of damage in the January 1994 earthquake that devastated southern California.

Freedman's homeowners' insurance did not cover earthquakes, and he did not have separate earthquake protection. He found the 10% to 15% deductibles "discouraging" and had figured that if damage exceeded the deductible, "the house probably would be unsalvageable." Hindsight changed Freedman's opinion. Friends, neighbors and clients suffered "minor" damage that far exceeded their deductibles. Today, Freedman has earthquake insurance, picking it up when his carrier offered it the next year.

Freedman has always made certain his clients had earthquake coverage since high premiums were not a factor for his mostly high-net-worth clients. "The biggest problem we've had to: deal with is the withdrawal of many companies from the market," he said. And they are using almost any excuse to get out. One of Freedman's clients had his homeowners' carrier threaten to drop coverage on his Palm Springs home if the entire plumbing system was not replaced following a flood claim for a broken pipe. The alternative was much more expensive (yet inferior) coverage through the California FAIR Plan, a government insurance program funded by companies doing business in the state. "We evaluated the additional premium versus the cost of replacing the plumbing," Freedman said, "and decided it was cheaper in the intermediate term--five years--to replumb the house."

Freedman's client base is composed largely of people in the entertainment field and his firm is involved in almost every aspect of their financial lives, including helping them get the right property and casualty insurance coverage. "We network with a number of insurance brokers who are entertainment industry experts. Every few years we have an independent broker look at each client's insurance portfolio and make recommendations about coverage and premiums to keep our brokers on their toes: We have found this to be a useful tool. We want to make sure coverage is adequate and appropriate, that there is sufficient disclosure so clients can make informed decisions and that premiums are negotiated."

Here are some steps Freedman recommends to help clients undergo a risk management analysis:

1. Have an insurance broker prepare a detailed schedule of current coverage including company name, policy number, expiration date, premium and coverages--including deductibles.

2. Ask the broker to a coverage recommendation letter detailing suggested changes, if any.

3. Insist the broker shop around to find the best premiums and coverages from the best companies.

4. Recommend the client periodically allow an independent review of his or her insurance portfolio.

5. Apply sound professional judgment in helping clients make risk management decisions.

Freedman believes CPA-financial planners who claim to do risk management and do not address property and casualty insurance issues may be exposed to professional liability concerns. And he thinks they are losing potentially lucrative business. "This is a wide open area," he said. The insurance industry is changing and Freedman offers ample reason for CPAs to fear that they might be left behind. A simple insurance review engagement, he said, could lead to other work.

Freedman was approached by an attorney and asked to review a new widow's property and casualty portfolio. She had sold her home and purchased a Los Angeles-area condominium and an apartment in New York City Freedman discovered neither property was insured; she had paid cash for both and there had been no bank to insist on homeowners' insurance. Despite her substantial net worth, she also had no liability insurance. And personal property, including rare books and antique glass, also was uninsured.

The woman asked Freedman to help implement the insurance recommendations he made. At this point a $1,500 engagement suddenly became a $5,000 engagement. The client was so pleased she eventually turned over all of her tax return preparation business for herself and related trusts and foundations. In time, Freedman was billing the client about $50,000 in fees annually.


Ann D. Jevne, CPA, PFS, and a partner of Schwartz & Hofflich in Norwalk, Connecticut, believes all CPAs should have some property and casualty insurance knowledge. Her own came from the courses she took while studying for the certified financial planner designation. "When I was taking the courses I looked at all of my own policies to see the different types of coverage. I wanted to understand what I had and was pleased I found no gaps."

Based on her own experience, Jevne offered these suggestions on risk management issues with which CPAs can help:

* All clients should have an umbrella liability policy of $1 million or more.

* Home and auto liability coverage should be coordinated with the umbrella policy so there are no holes. If the umbrella policy specifies minimum home and auto limits, check home and auto policies to make sure they comply.

* Policies should be reviewed annually for changes in state laws. Connecticut, for example, is no longer a no-fault auto insurance state.

* The client's homeowners' policy should have an inflation guard; if not, make certain the company and the client review the coverage periodically. Also, in the event of a loss, settlement should be based on replication rather than just replacement.

* There should be current appraisals on items such as jewelry, silver and fine art.

* See if the insurer is stable by. checking its financial rating with a recognized rating service such as A.M. Best or Moody's.

According to Jevne, people who pay less for insurance may get less. But if they pay more, it doesn't necessarily mean they will get more. Financial strength, reputation and claims-paying ability are important. At least one of her insurance reviews found a client's coverage to be seriously lacking. "The client owned a $1 million property that included the main house and a gatehouse. The gatehouse was rented on an annual basis to a teacher, who lived there for nine months and sublet for the remaining three. The client's insurance specifically covered the tenant, but our review showed he was not covered for the subtenant." The client had a substantial net worth and if there had been a claim, he could have lost everything, Jevne noted.

Jevne also works with some of her clients on business insurance problems. One client has more than 20 different pieces of farm equipment with a total value of over $300,000. Jevne works closely with that client to coordinate insurance coverage while juggling depreciation schedules and equipment constantly being bought, sold or retired. She said that changes must be reflected in the policy. "We keep a detailed schedule of the equipment. Every month I get copies of the insurance companies' statements indicating what is being covered and for how much. It takes a lot of time to make sure everything is properly covered."


Many firms typically include a review of basic property and casualty insurance needs in a comprehensive financial planning engagement. Carol G. Warley, CPA, is a partner in the Houston office of KPMG Peat Marwick. "In a comprehensive plan we typically look at homeowners' insurance to make sure it is adequate--that the client has at least 80% coverage (so he or she doesn't become a coinsurer) as well as sufficient liability insurance." The firm also includes a section on risk management in the financial planning seminars it does for executives or employee groups.

Here are some other recommendations Warley makes to her clients:

* Buy a policy that provides guaranteed replacement cost. Don't settle for coverage that might pay only for the current, perhaps depreciated, market value of a home or its contents.

* Consider buying "code and ordinance or law" coverage. This added protection covers the extra costs incurred to rebuild a home according to upgraded building codes.

* Upgrade coverage on personal belongings. A home's contents typically are insured for 50% of the coverage on the house. If needed, additional protection is available.

To supplement formal property and casualty insurance training, Warley said much of her knowledge also came from personal experience. "Many of the concepts are not difficult to understand, and much of it is common sense." Warley's experience includes one client who died in a fire that destroyed her house. "During the administration of her estate I learned about the insurance claims process following a devastating loss." On this particular policy, for example, the client's heirs had to repurchase all of the home's contents or they would not be reimbursed for the full amount.


After a career in public accounting, Robert P. Mucci is now a vice-president of Dwight Pudd & Co. in Boston, where he is responsible for the sales and service of commercial accounts for property and casualty exposures. This encompasses workers' compensation, auto, product liability and specialty coverage.

In his experience, Mucci said many CPAs were not aware of the various exposures that give rise to additional risk for businesses. "Most of the calls I get from CPAs relate to pricing or service."

Identifying business needs. To spot things that are out of the ordinary, Mucci said CPAs needed to focus on basic events that could drive additional exposures. One red flag is a company doing business in new states. "If a company opens an office or hires employees in a new state it may have additional workers' compensation exposure not covered by its home state." Companies doing business in other countries also are subject to additional exposures the typical U.S. contract cannot handle.

Mucci recommended some discussion topics CPAs could raise with business clients. "A big concern today is employer practices--discrimination, sexual harassment, accommodating the disabled. A company needs to look at exposures to those risks." Mucci also cited rapidly changing employee benefit laws. "It's easy to miss notifying an employee of termination of benefits or other changes." One example would be the divorced spouse of an employee suing over not being notified about a change in benefits.

As a CPA working with other CPAs, Mucci has what he called "instant credibility" in an often misunderstood profession. Being a CPA also helps him examine risk versus cost. "You don't want to protect yourself against everything, but you don't want to suffer something you can't afford."

Working with insurance brokers. When CPAs do identify potential risks, the next step typically will be bringing them to the attention of a broker who can assess the need for insurance coverage. Mucci said a CPA would find working with a broker easier if the CPA could explain why he or she thought a risk existed--for example, in the introduction of a new product. Mucci advised that getting a favorable premium quote depends a great deal on the presentation the client company--and its CPA--makes to the underwriter. "There is no real magic to property and casualty insurance. You have to convince an underwriter that the premium being charged is high enough to make the insurance company a profit but low enough to attract the client. What you end up with is a fair price, not necessarily the cheapest." In making the presentation, Mucci said, "The more positive information you can present to an underwriter, the better the experience will be." This includes company marketing materials, articles in local and national publications and financial statements. "Show an underwriter the company is well run, secure, financially stable with few losses, well recognized and a leader in its field and you are going to get a favorable premium quote."


As tax simplification looms, some CPAs will find themselves seeking new practice expansion opportunities. If they follow Mitch Freedman's suggestion to consider advising on property and casualty insurance, CPAs could in fact become nationally known experts as he predicted. By taking time now to obtain the necessary knowledge and establish relationships with insurance companies and brokers, CPAs will be able to meet the needs of a diverse client base--individuals and businesses big and small--and expand their own business options.

--Peter D. Fleming, CFP, Journal senior editor. Mr. Fleming is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
COPYRIGHT 1996 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Meeting Property and Casualty Insurance Needs
Author:Fleming, Peter D.
Publication:Journal of Accountancy
Date:Jan 1, 1996
Previous Article:Insurance for business needs.
Next Article:Consider the CPCU designation.

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