10 tips about E&O insurance for new advisors
By Steven McCarty
The National Ethics Association
Buying errors-and-omissions insurance can be complex, even for an experienced advisor. Here are 10 pointers that will get you started.
Q: I’m a brand-new financial advisor who’s never bought errors-and-omissions insurance before. What are the most important things I should know before buying a policy?
#1: You need it.
In today’s economy, it’s just too risky to do business without errors and omissions insurance. If you’re ill equipped to absorb $20,000 or more to settle a customer claim or spend $20,000 to $100,000+ to fight it, you definitely need errors-and-omissions insurance.
#2: You’re probably paying too much for it.
Problem is, most carriers charge a one-size-fits-all premium. That means low-risk financial professionals pay the same premium as higher-risk ones.
#3: You can pay less for it.
At least one insurance company rewards low-risk financial professionals by charging lower premiums. In return for proving they adhere to responsible business practices, such individuals can save 20 percent to 50 percent on their errors-and-omissions insurance premiums.
#4: Your policy must have these two features.
Your errors and omissions policy should provide retroactive coverage, as well as an extended reporting period. The former means you’ll be protected going back to your first continuous period of E&O. The latter means you (or your heirs) will be covered for errors and omissions while you are working, and even after you retire, change careers, become disabled or die.
#5: You should customize your policy.
Make sure your errors-and-omissions policy covers your specific job activities. For example, if you are an investment advisor representative, then a standard life and health agent policy won’t do. In addition, know the specific limits of liability for each claim, as well as your annual aggregate and total aggregate for all advisors in the program.
#6: You should always buy errors-and-omissions insurance from a top rated insurance carrier.
Avoid insurers with low marks from the various rating agencies. Also watch out for so-called risk-sharing plans. No state insurance departments check their books or require them to hold minimum reserves. If such a plan fails, you will be left holding the bag.
#7: Your policy should be free of handcuffs.
Be careful when considering FMO-sponsored E&O insurance. It may lock you into the FMO by making your coverage contingent on staying with them or on writing a certain level of business with one of their carriers. Also, watch for coverage exclusions when you sell products outside the FMO.
#8: You should ask about post-sale service.
Having a properly designed policy is the starting point. Also ask about who will provide post-sale service. Make sure the administrator is equipped to handle various payment options, has a responsive call center and is committed to prompt claims processing.
#9: You should revisit your needs periodically.
Errors-and-omissions insurance isn’t something to buy and put in the drawer until you need it. Every year or two, revisit your needs to make sure the policy is still appropriate.
#10: You should work hard to prevent errors-and-omissions claims.
Once you purchase an errors and omissions policy, get serious about preventing future claims. Three main strategies: recommit to high standards of ethics, make sure your office is well managed and resolve complaints promptly.