How to Avoid E&O Time Bombs
Have you ever forgotten to renew your errors and omissions (E&O) insurance? Guess what . . . you created a ticking time bomb: an E&O coverage lapse.
If you have an E&O insurance policy, you already know what it does. It will protect you financially in the event an error or omission on your part triggers what could become costly accusations from clients (or their attorneys). It also helps with settlements and court costs, saving you time and money. 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, even though you currently have E&O insurance.
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 maintain continuous coverage (i.e., with no lapses), insurers cover claims that are made against you during the policy period, even if the original event happened when you were insured elsewhere. But watch out. If you lapse your coverage, and have not previously reported the circumstances, then no insurer is responsible for claims that arose before and during the lapse . Result: you will be completely uninsured for past acts, which can destroy your business should you get sued down the road.
A hypothetical case in point: Bob Jameson is a highly experienced retirement planner. He’s proud of doing everything “by the book,” including keeping his E&O policy in force for 10 years. But in his 11th year, he moved offices and forgot to renew his policy. By the time he resurfaced, six months went by. “No problem,” he says to himself. He asks the insurer to reinstate him, which the company does. Problem solved, right? Wrong!
A year later, Bob receives a letter from an attorney representing a former client. Apparently, the client is very unhappy with a product Bob sold her eight years ago, which recently declined sharply in value. She is now alleging Bob misled her and is suing him for $250,000, her full capital loss.
“Good thing I got her to sign my proposal and suitability form,” Bob tells himself. “I’ll just report this to my E&O carrier and let them handle it.”
In a few days, Bob gets a call from his E&O claims representative. Bad news: There is no coverage for this incident. Bob is shocked. “You’ve got to be kidding me,” he tells the rep. “I just paid a lot of money for this supposedly comprehensive policy. I thought I was protected, and now you’re telling me I have no coverage? How did this happen?”
What happened is that Bob inadvertently created an E&O coverage gap and then fell headfirst into it. With no E&O safety net, he is now potentially liable for a $250,000 judgment plus legal fees. Ouch!
Failing to prevent a lapse in coverage is a major mistake. It could happen to you and unfortunately you could pay the ultimate price—huge judgments, the loss of their business, and even personal bankruptcy. But there’s a silver lining. You can protect yourself by keeping your E&O policy in continuous force at all costs.
In today’s environment, however, advisors may be time constrained or change addresses like Bob and forget to pay their premium. In addition, some may be cash strapped and are looking for the most affordable E&O coverage available. But now there’s help. The National Ethics Association is sponsoring a free automated E&O Renewal Reminder that will prompt you to pay your premium on time. Go here now to sign up for this no-obligation service.