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Individual's risk management.

The surest way to wipe out years of hard-earned savings is to sustain an uninsured loss. To prevent this, CPAs should begin the risk management process for their clients by identifying risk exposures. The solutions for clients' individual insurance needs will be dictated by their age, stage of life, net worth and risk tolerance. Less-typical risk exposures--often based on occupation--require more specialized solutions, using insurance or other means.

In deciding which insurance should be dealt with first, the following recommended ranking may be helpful:

* Property.

* Professional liability.

* Personal liability (umbrella).

* Health.

* Disability.

* Life.

Based on current insurance information, CPAs may need to recommend that clients avoid or reduce risk, make changes in existing policies for improved coverage and cost-effectiveness and locate additional insurance coverage to fill gaps. The purpose of insurance is to provide protection from financial risk. In making their analysis, CPAs must ask themselves if, the client has a risk that needs to be protected.

While each person's insurance portfolio should be tailored to his or her needs, some generalizations can be made. For example, policies should be evaluated at least every other year. Clients should understand what the policies do and do not cover. Most CPAs will know when their client buys a new home or other property, such as a car or boat, and can advise the client to inform his or her insurance agent. Clients should be advised to get insurance when they can, before a risk becomes uninsurable.

What help can CPAs offer clients in dealing with specific property, professional and personal liability insurance needs?

Professional liability insurance. The escalating occurrence and size of professional liability claims have increased the need for coverage. The adequacy of coverage should be reviewed. Errors-and-omissions (malpractice) insurance may be appropriate to recover losses resulting from a negligent act, error or omission. In conjunction with reviewing such coverage, ownership of assets should be examined to protect both client and spouse in the event of a personal lawsuit.

Property insurance. CPAs can help clients review the adequacy of property coverage and the deductibles for homeowners, renters, condominium owners and similar policies. Property coverage should include the home, its contents (furniture and personal property), any other structures on the property (such as a separate garage) and the loss of the property's use due to fire or storm, for example. Certain personal property items such as jewelry have coverage limits and separate floaters may be required. It is highly recommended all property be insured for its replacement cost.

Personal liability coverage. Many people lack an "umbrella" or personal liability policy, which means they are jeopardizing assets and perhaps even future earnings. Individuals can be ordered to pay damages for physical injury, character defamation and even mental anguish. If existing assets are insufficient, the court may award the plaintiff a portion of future earnings. Umbrella insurance can protect family members against such claims. Normally, all liability losses not related to an occupation are covered, including legal defense costs. However, exclusions on individual policies will vary; therefore, it is important to understand all policy provisions.

Umbrella policies provide liability coverage beginning at $1 million at costs of $100 to $500 per $1 million of coverage. Umbrella coverage does not cover all risks. It covers the range between the maximum coverage in a basic policy and the specific amount of the umbrella coverage. No gap should exist between the basic policy and the extended umbrella coverage. If homeowners' insurance policy coverage is $300,000 and someone suffers a severe injury on the insured's sidewalk and obtains a $1 million judgment, the homeowners' policy covers the first $300,000 and the umbrella policy should cover the remaining $700,000.

--Phyllis Bernstein, CPA, director of the American Institute of CPAs personal financial planning division. Ms. Bernstein is an employee of the American Institute of CPAs and her 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:Bernstein, Phyllis J.
Publication:Journal of Accountancy
Date:Jan 1, 1996
Words:668
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Next Article:Insurance for business needs.
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