Living in California, New York, Oregon, or Washington means navigating a litigious environment with some of the most creditor-friendly laws in the country. For professionals, business owners, and high-net-worth individuals, protecting assets is critical. While insurance and domestic irrevocable trusts are often the first lines of defense, they have significant limitations that can leave your wealth vulnerable.
This article explores why these basic solutions fall short and highlights the Bridge Trust® as the ultimate asset protection strategy.
The Role of Insurance in Asset Protection
Insurance is a foundational cornerstone of financial risk management, offering coverage for negligence, property damage, and certain liability claims. However, relying solely on insurance for asset protection is a recipe for disaster.
What Insurance Covers Well
• Negligence Claims: Covers unintentional actions, such as auto accidents.
• Property Damage: Protects against claims related to accidents on your property.
• Specific Liabilities: Includes coverage up to your policy limits.
Where Insurance Fails
1. Exclusions for Intentional Acts
• Policies often exclude intentional acts, even in cases of self-defense. The False Claims Act (FCA) and 18 U.S.C. § 1033 are laws that allow insurance providers to deny claims for fraud and intentional wrongdoing. In general, insurance law says that intentional acts, like intentional torts, shouldn’t be covered by insurance for several reasons. First, insurance is meant to cover unexpected accidents, not intended actions. Second, most insurance policies clearly state that they won’t cover injuries or damages that the insured person meant to cause. Third, it’s not right to let people benefit from their own wrongdoing by having insurance pay for their intentional actions. Finally, allowing insurance to cover intentional harm goes against public policy, as it could reduce society’s efforts to deter and punish bad behavior.
• Example: If you’re involved in a physical altercation, your insurer may deny coverage, claiming the act was intentional.
2. Coverage Limits
• High-value claims often exceed policy limits, exposing personal assets to creditors.
3. Reservation of Rights Letters
• Insurers frequently reserve the right to deny claims after investigation, even if you’re not at fault.
Real Life Study: Business Owner Facing a Civil Lawsuit
Hassan, a luxury car dealership owner in Washington, discovered the limitations of insurance the hard way.
• The Incident: Hassan a (65 year old African American) defended himself during an unprovoked attack at a restaurant, injuring his aggressor. One evening, he and his wife went out to dinner at a popular restaurant. While waiting at the bar for their table, a group of younger men in their mid 30’s began targeting him and calling him racial slurs. As tensions escalated, one of the men physically assaulted Hassan. In self-defense, Hassan pushed the man away and subdued him to protect himself and his wife.
Although witnesses and security cameras confirmed that Hassan was defending himself, the injured party and his friends saw an opportunity for a Money Grab.
• The Lawsuit: Despite clear evidence of self-defense, Hassan was later sued for damages in civil court.
• Insurance Denial: His liability insurer denied the claim, citing exclusions for intentional acts.
The False Comfort of Insurance
Hassan immediately called his corporate attorneys, who reassured him that his liability insurance and umbrella policy would protect him in the lawsuit. They advised him not to worry and assumed his domestic irrevocable trust would shield his personal assets. However, their advice overlooked critical gaps in his protection:
1. Insurance Exclusions for Intentional Acts
Most liability insurance policies explicitly exclude coverage for intentional acts, including fights—even if they occur in self-defense.
• Policy Exclusion Example: Many insurance contracts include language such as, “This policy does not cover damages arising from intentional acts or wrongdoings, including physical altercations.”
Why Insurance Is Not Asset Protection
Insurance and asset protection are fundamentally different.
1. Insurance Transfers Risk, Asset Protection Shields Wealth
Insurance policies transfer certain risks to the insurance company, but they do not provide a legal barrier between your assets and potential creditors.
2. Insurance Is Reactive, Asset Protection Is Proactive
Insurance responds after an event occurs, while asset protection strategies are designed to prevent creditors from accessing your wealth in the first place.
3. Coverage Limits Leave Gaps
Most insurance policies have coverage limits. High-net-worth individuals with significant assets can easily face claims that exceed these limits, exposing their wealth.
4. No Protection from Legal Challenges
Even a robust insurance policy does not prevent lawsuits. Legal battles can drain resources and expose assets, even if you ultimately prevail.
Hassan’s insurer issued a reservation of rights letter, allowing them to investigate the claim while reserving the right to deny coverage. Ultimately, they refused to defend him in the civil lawsuit, arguing that the incident involved an intentional act, even though it was self-defense.
With no insurance coverage, Hassan faced the prospect of losing personal assets to settle the lawsuit.
Now lets examine two additional samples highlighting how insurance companies can deny claims by citing fraud or intentional wrongdoing:
1. Real Estate Investor Denied Coverage Due to Alleged Fraud
Scenario: Sarah, a seasoned real estate investor, owns multiple rental properties. She carries liability insurance and umbrella coverage to protect against tenant lawsuits. One day, a tenant in one of her properties trips on loose flooring and sues Sarah, claiming negligence.
What Happened:
• Sarah’s insurance company investigates the claim and discovers that she had previously deferred maintenance on the property due to cash flow issues.
• They allege that Sarah “intentionally neglected” the safety of her property, citing this as a breach of her policy’s terms.
Outcome:
The insurer denies the claim, arguing that the unsafe condition of the flooring was the result of Sarah’s intentional decision to defer maintenance, not accidental negligence. Despite having insurance, Sarah is left to cover the legal costs and settlement out of pocket.
2. Venture Capitalist’s Coverage Denied After a Business Lawsuit
Scenario: Michael, a venture capitalist, owns stakes in several startups. One of his portfolio companies fails after a dispute with a supplier. The supplier sues Michael personally, alleging fraudulent misrepresentation in securing a contract.
What Happened:
• Michael’s business liability policy should theoretically cover claims of negligence or business disputes.
• However, the insurer reviews the supplier’s allegations and determines that the claim involves intentional wrongdoing or fraud, both of which are excluded under the policy.
Outcome:
The insurer issues a reservation of rights letter, refusing to cover legal defense or settlements, citing the “intentional fraud” clause in Michael’s policy. Michael now faces personal financial liability, potentially jeopardizing his other investments.
Key Takeaways from these Examples
• Fraud Allegations: Even without a court ruling, the mere allegation of fraud or intentional wrongdoing can be enough for insurers to deny coverage.
• Exclusions in Policies: Insurance policies often contain exclusions for intentional acts, leaving policyholders exposed.
• Proactive Asset Protection Needed: For individuals with significant wealth tied to real estate, startups, or other ventures, relying solely on insurance is insufficient. Incorporating asset protection strategies like The Bridge Trust® creates an added layer of protection when insurance fails.
These examples illustrate why it’s crucial to supplement insurance with robust asset protection strategies to shield your wealth effectively.
The Vulnerabilities of Domestic Irrevocable Trusts
Domestic irrevocable trusts are marketed as asset protection tools, but their effectiveness is limited, especially in states that do not have self settled spendthrift legislation. States like California, New York, Oregon, and Washington do not recognize self-settled spendthrift trusts, leaving assets unprotected.
Why Domestic Trusts Don’t Work
1. No Self-Settled Spendthrift Protections
• A lot of states like California, New York, Oregon, and Washington do not allow grantors to protect assets in self-settled trusts.
2. Fraudulent Transfer Risks
• Courts can invalidate transfers to a trust if they are deemed attempts to evade creditors.
3. Judicial Piercing of Trusts
• A lot of courts frequently pierce domestic trusts based on public policy considerations, leaving assets vulnerable. Even in states that have self-settled spendthrift legislation.
Key Case Law Studies:
1. Kilker v. Stillman (California, 2012)
• A Nevada Asset Protection Trust was invalidated by California courts.
• Lesson: Out-of-state trusts cannot protect assets from California creditors.
2. Dahl v. Dahl (2015)
• Utah courts invalidated a domestic trust, exposing assets due to improper structuring.
• Lesson: Poorly structured trusts are ineffective.
The Bridge Trust®: A Superior Asset Protection Solution
The Bridge Trust® offers a unique combination of domestic flexibility and offshore strength, making it the best choice for asset protection on the West Coast.
What Makes the Bridge Trust® Different?
1. Offshore Strength
• The Bridge Trust® transitions assets to jurisdictions like the Cook Islands, where U.S. judgments are not enforceable.
2. Retained Control
• Until activated, the grantor retains full control over their assets.
3. Fraudulent Transfer Defense
• The Bridge Trust® adheres to strict legal guidelines, minimizing fraudulent transfer risks.
4. Judgment-Proof Shielding
• Offshore jurisdictions provide legal barriers that prevent creditors from seizing assets.
How the Bridge Trust® Would Have Protected Hassan
Had Hassan established a Bridge Trust®, his assets would have been secure:
1. Offshore Activation: Assets could have been transitioned offshore, beyond the reach of Oregon courts.
2. Legal Deterrence: The existence of an offshore trust often deters frivolous lawsuits.
3. Peace of Mind: Hassan would not have to rely on ineffective insurance or vulnerable domestic trusts.
Key Takeaways for Residence in States that do not have asset protection legislation
1. Insurance Alone Is Not Enough
• Policies exclude intentional acts and have limited coverage.
2. Domestic Trusts Are Vulnerable
• California, Oregon, and Washington do not recognize self-settled spendthrift trusts, leaving assets exposed.
3. The Bridge Trust® Offers Comprehensive Protection
• Combining domestic accessibility with offshore strength, the Bridge Trust® ensures robust asset protection.
Conclusion: Protect Your Assets Before It’s Too Late
If you live on the West Coast, relying on insurance or domestic trusts for asset protection is a gamble. The Bridge Trust® provides a proven, comprehensive solution to safeguard your wealth against lawsuits, creditors, and unforeseen risks.
Contact us today (888) 773-9399 to learn how the Bridge Trust® can provide the ultimate protection for your assets.
By: Brian T. Bradley, Esq.
