Bill Wilson, retired coverage guru and author of the claims book that every insurance professional should have on their desk, “When Words Collide,” posted a fascinating article on LinkedIn where he asked AI the question, “How much insurance do I need?” This was specific to personal auto and was limited to liability.
The response was better than I’ve heard 90% of agents and account managers give. The answer was truly a quality response and had two parts:
First part:
Calculate the value of your assets
Add the value of non-income assets you anticipate acquiring in the next 10-20 years
Add a minimum of 25% of your total expected income over the next 10-20 years
This is truly an objective answer that makes sense. Let’s say you are 30 and have $100,000 in assets. All your real wealth accumulation will happen in the future. Let’s say you buy a house and build equity in the house, retirement accounts, college accounts, and whatever else of $1,000,000. So we are at $1.1 million.
Then add 25% of your expected income. Let’s say for ease of math, that you make $100,000 a year, on average, over the next 15 years, or $1.5 million.
In total then, you need $1.1 million plus 25% of $1.5 million for a total of $1.5 million (rounded). $300,000 does not cut it.
The beauty of this equation is that AI recognized that the values must be calculated on a gross basis, not a net basis. In other words, when a bad accident happens, damages are assessed based on how much value you have in current assets and future values, without including current liabilities. You get stuck with losing assets but keeping your liabilities. Few people think this through.
Second, your E&O exposure does not increase with this response. The answer is this is the minimum the insured should purchase, not how much they should buy. Furthermore, the answer is a reasonable answer that exceeds what most consumers will purchase. Therefore, if you recommend $1.5 million, they only buy $500,000, and have a $2 million loss and sue you for not recommending a high enough limit, you have strong grounds (I’m not an attorney so don’t take this to your legal fund bank) for winning. A great case that supports this position came out of Hurricane Katrina, Isadore Newman School vs J. Everett Eaves.
Second part:
Part two of the AI answer is probably more important. What moral and ethical responsibilities do you have to carry enough insurance in the event you injure someone? Few people have the money to provide enough to the severely injured without high insurance limits. A client once told me about one of his agency’s insureds tragically killing a driver through an absolutely pure accident and how the insured was so thankful she had enough insurance to provide for the driver’s family.
Most E&O instructors and guidebooks skate quality answers to this question. “Never tell anyone how much insurance to buy!” Where’s the exposure of advising someone to buy a minimum of $X? And no coverage classes I’ve attended have expressed the amount in ethical or moral terms.
On the same day I read Bill’s great article, Chubb released a report showing huge gaps in the liability amounts businesses are buying versus how much those businesses most likely need. The gaps are startling. The question is whether agents are offering enough coverage. In the vast majority of my E&O audits, agents offer business owners $1 million. That’s it. They don’t offer higher limits. They don’t offer higher limits because they “know” the insured only wants $1 million, or they don’t want to waste their time because the price for higher limits is too high, or often I find they don’t even know higher limits may be available. Most importantly though, they never ask the insured. They never have the discussion.
If an agent cannot answer a fundamental question about buying insurance as well as AI, much less even ask the insured how much coverage they need, no one needs the agent. Agents need to improve their game if they are to remain relevant.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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