Beware the ticking E&O time bomb
By Steven McCarty
The National Ethics Association
Full Disclosure: Since 2008, National Ethics Bureau (NEB) has been sponsoring affordable E&O insurance for low-risk advisors. And this experience has alerted us to the following time bomb that may be lurking in your business and could be fatal to your finances.
If you have an E&O insurance policy, you already know what it does. But here's what you might not know: Even lapsing your policy for as little as one day can leave you open to a financially devastating lawsuit down the road, even though you currently have coverage.
Here's the problem. Most E&O insurance policies are written on a "claims made and reported" basis. This means they cover claims that are "reported" during the current policy period even if acts or omissions giving rise to the claim happened in the past.
In other words, as long as you don't lapse, your most current insurer covers claims that are made against you now, even if the original deed happened in the past, when you were insured elsewhere. But if you lapse your coverage, no insurer is responsible for your past deeds.
A hypothetical case in point: Will B. Ruined is an experienced advisor, and proud of doing everything "by the book," including keeping his E&O policy in force for 10 years. But in his 11th year, money was tight and he didn't renew. Six months later, he asked his insurer to reinstate him, which the company did. Problem solved, right? Wrong!
A year later, Will receives a letter from an attorney representing a former client. Apparently, the client is very unhappy with a product Will sold her eight years ago. She now claims Will misled her and is suing him for $250,000, her full capital loss.
Will then gets the devastating news from his E&O claims rep: no coverage. Will is shocked. "You've got to be kidding me," he tells the rep. "What happened?"
What happened is that Will's lapse inadvertently created an E&O coverage gap, and the current insurer is not liable for his past deeds. Now it's just Will and his spouse who are liable for a $250,000 judgment plus legal fees.
So here's how to defuse the E&O time bomb:
- Do not allow your E&O policy to lapse. Without sacrificing quality, comparison shop for a premium you can live with. Lower prices are available for advisors that qualify for "group status," "preferred-risk status," or, optimally, both.
- Know your annual renewal date, and institute a payment reminder system. Sign up now for a free, no obligation reminder from NEB. Go to ethicscheck.com and look for the "E&O Renewal Reminder" button.
- If you have lapsed, buy special "lapse coverage" E&O insurance. This policy is specifically designed to provide coverage for all your current, lapse-gap, and past deeds.
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