Many high-net-worth individuals and families establish LLCs and trusts as part of their estate planning and asset protection strategies. While these entities can provide valuable protection when properly established and maintained, they aren’t bulletproof shields against liability. In our recent expert panel on excess liability insurance, we explored some dangerous misconceptions about asset protection that could leave you vulnerable.
The LLC Shield: When It Works and When It Fails
Limited Liability Companies (LLCs) can be effective tools for segregating assets and limiting personal liability, but only when they’re properly maintained and respected as separate legal entities. Our guest speaker Ian Chamberlain, a claims adjuster specializing in high-net-worth clients, shared a cautionary tale that perfectly illustrates this risk.
The case involved parents who created an LLC for their son with a poor driving record after their insurer declined to underwrite him directly. They placed both his house and a sports car in this LLC. After the son was involved in a fatal accident, attorneys discovered during the discovery process that the parents had been paying for the house bills and car maintenance using their personal credit cards and checks.
“The LLC was set aside and then the parents were brought in as individuals… They didn’t even pierce the corporate veil. They just utterly destroyed it. Like it didn’t even exist… Burned it to the ground.”
What makes this situation particularly frustrating is how easily it could have been prevented. According to Ian, defense counsel later explained that simply creating and using a dedicated LLC checking account for all related expenses would have maintained the corporate separation and limited liability to just the LLC’s assets.
Ownership Equals Liability
Another common misconception is that lending your vehicle to someone shields you from liability if they’re involved in an accident. Ian was unequivocal on this point:
“With the cars, if you own it, you’re liable. There’s no way out of it. You might be able to go after the driver, but you’re the first in line as the owner in both situations.”
A sobering example from the Detroit area reinforces this warning. An auto executive lent his vehicle to a brother-in-law with a history of DUIs and no license. After the brother-in-law caused a fatal accident, the executive was found liable and sued. His umbrella policy proved insufficient, and now he’s working with a third of his paycheck permanently going toward settling the claim.
The Importance of Proper Coverage Coordination
Even clients who have taken steps to secure umbrella coverage can find themselves with dangerous gaps in protection. This often happens when different insurance policies are managed by different agents who aren’t communicating with each other. If the umbrella isn’t properly aligned to sit over all underlying policies, critical coverage gaps can emerge.
The Value of an Integrated Approach to Risk Management
Our expert panel stressed the importance of having a cohesive team managing your risk profile. Ian emphasized that clients need the right team in place to advise on everything from who’s driving their cars to who owns which assets. Without proper coordination and information sharing, coverage gaps can emerge, potentially leading to devastating consequences.
The outcome of these gaps can be serious. As a claims adjuster, Ian sometimes finds himself in the unfortunate position of having to issue coverage denial letters—essentially telling clients they’re on their own during what is likely one of the most stressful situations of their lives.
The Bottom Line: Transfer Risk Through Proper Insurance
While trusts and LLCs can be valuable tools in your overall risk management strategy, they’re not substitutes for proper insurance coverage. For high-earning clients especially, the time and stress involved in handling lawsuits personally far outweighs the cost of transferring that risk to an insurance company.
A comprehensive umbrella policy provides not just financial protection but also the benefit of professional claims handling and legal defense. Ian highlighted this as one of the greatest values of umbrella coverage:
“One of the greatest values of the umbrella policy and the greatest value of your primary homeowners and auto policy is that unlimited defense. Lawyers are expensive…but they provide value for their skill, but it’s still something that you don’t want to be on your own covering.”
If you have concerns about potential gaps in your asset protection strategy, contact our team for a comprehensive risk assessment.
Protect your assets with a properly structured umbrella policy. Contact our Private Client team at privateclient@brunswickcompanies.com or call 1-800-686-8080 to schedule your risk assessment today.
