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Top Three Ways Life/Health Agents Get into E&O Trouble

The vast majority of life and health insurance agents are ethical, compliant with industry regulations, and have meticulous business practices. But even the best agents make mistakes, and when this happens, lawsuits often follow.

What are the top three mistakes life and health insurance agents make? Let’s count them down. According to the National Association of Insurance and Financial Advisors (NAIFA), the most common errors that lead to E&O claims include:

  • Misrepresentation. For example, an agent claims a product has a feature it doesn’t actually have. For example, an advisor claims an elderly client can purchase an annuity but get all of his premium back at any time. This misrepresents the surrender-penalty provision, because the person would have to wait seven years to access his money without penalty.
  • Failure to provide. A host of issues might prevent an insured from receiving an expected benefit. For example, a customer requests a review of life insurance needs as part of comprehensive financial planning. While the advisor works on other issues, the client dies, leaving her spouse woefully uninsured. The spouse ends up suing the advisor because he expected to receive a large death benefit when his wife died.
  • Failure to explain. Here, an agent sells a policy or rider, but fails to adequately explain how it works. Case in point: a client likes the idea of combining life insurance and long-term care protection in one contract. So he decides to purchase a hybrid life/LTC policy that provides cash in the event he needs to enter a nursing home. The policy, in effect, pays an early “death benefit” if he can no longer care for himself. When the client develops a chronic, disabling illness and must enter a facility, he begins receiving benefits under the policy, but dies two years later. His wife files a death claim, but learns her payment will be much lower than expected because of the prior payments. She claims to never have heard of this and files suit against the insurer and advisor. This is a classic “failure to explain” situation, since the agent either failed to describe the policy’s features or explained them so poorly the wife had no idea what her husband purchased.

So there you have it: the top three most common E&O mistakes. But there are many other mistakes that trip up life/health agents, including:

  • Selling an unsuitable product to a prospect.
  • Botching a client’s policy-change request, resulting in lower or non-existent benefits.
  • Making clerical errors that result in lapsed coverage and non-payment of benefits at claim time.
  • Sloppily handling life insurance policy applications, resulting in medical conditions not being disclosed to the insurer (and benefits denied at claim time)
  • Advising a client to replace a life insurance policy without explaining that this will reset the two-year contestability period, which in turn results in claim denial similar to the prior scenario.

In short, the common theme behind most E&O insurance disputes is customers failing to receive the benefits they expected, either because the agent processed the business incorrectly, failed to explain contract features, or deliberately misrepresented contract features. Put another way, whenever there’s a gap between expectation and reality in a client’s mind, the risk of getting sued is high.

How E&O Insurance Protects You from Mistakes

As you can imagine, any one of the mistakes just discussed could lead to a five- or six-figure legal judgment. Based on your personal financial resources, losing in court could wipe you out financially, jeopardizing your ability to pay for your children’s education or adequately funding your own retirement.

Faced with such risks, many agents elect to put their heads in the sand. They figure they’ll never make a mistake or that if they do, their clients will forgive them. Clearly, this is flawed logic, since being human means you’re not perfect. Mistakes come with the territory. And since clients are also human, forgiveness may not come as naturally to them as vengeance does.

The better approach is to protect yourself with E&O insurance. But not just any E&O policy . . . one that’s:

  1. Affordable and comprehensive,
  2. Designed specifically for your license type,
  3. Provided by an A rated insurer, and
  4. Easy and convenient to buy from an online platform such as EOforLess.com.

In summary, life and health insurance agents should strive to avoid the most common E&O mistakes, but also prepare themselves should they end up making one. The best solution: purchase high-quality E&O insurance from a marketing firm, insurer, and administrator they trust. To get started, please visit EOforLess.com today.

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E&O Insurance: What It Is and Isn’t

In pondering potential actions or decisions in life, it’s always beneficial to ask yourself two questions:

Does your action represent its core?

What doesn’t it represent?

In other words, get clear in your own mind about the essential significance of a potential decision and then filter out secondary or less essential or even contradictory impacts.

The same line of reasoning applies to your decision to buy E&O insurance, an important form of professional liability insurance for financial professionals of various types. Before purchasing E&O insurance, you want to know what it is and what it isn’t. You also want to know what it does and what it doesn’t do. Unless you know exactly what you’re getting from your E&O purchase—and not getting—it will be hard to understand its true value.

So let’s explain these distinctions a bit further.

To begin with, what is E&O insurance? Simply put, it’s a form of insurance that protects you in the event you make a mistake or overlook something that hurts a client financially. If the client sues you because of your error and/or omission and wins, your E&O coverage will pay for any financial judgments a court places upon you, up to your policy’s limits. The policy will also pay for your legal fees and court costs.

At its core, E&O insurance is a way of transferring an unknown, but potentially devastating, loss to an insurance company. By paying an E&O insurance premium, you convert this unknown into a known risk with a fixed expense attached —an annual, quarterly, or monthly insurance premium. Unless you are wealthy enough to self-insure against your liability risks, the ability to “sub-contract” them to an insurer is generally considered to be a sensible business decision, which is why financial professionals view E&O insurance as one of the most important forms of insurance to buy for their business.

If E&O insurance is a way to transfer risk to an insurer, what isn’t it?  Well, for one thing, it isn’t a pass to run your business in violation of ethical and compliant business practices. For another, it doesn’t absolve you of accountability and responsibility for your actions. Being insured just means you have a financial backstop in the event you do something wrong. This protection helps you make clients whole without going personally bankrupt. In this sense, owning E&O insurance is the ultimate win-win for both the financial professionals who purchase it and the clients who received payments under it. The former is able to do the right thing for their customers, and the latter can get on with their lives without having a financial cloud hovering above them. Everyone wins!

Drilling down further leads us to the questions of what E&O insurance does and doesn’t do. The answer to the first lies in how an E&O contract’s insuring clause is written. This clause is literally the heart of every E&O insurance policy because it defines the scope of protection offered. Take a look at the following insuring clause, whose essential elements are in bold:

“The Insurer shall pay on behalf of the Insureds, excess of the applicable Retention and within the Limits of Liability as stated in the applicable Certificate of Insurance that Loss which the Insureds become legally obligated to pay resulting from a Claim for a Wrongful Act solely in rendering or failing to render Professional Services.”

So the first thing to remember about what E&O insurance does is it benefits only the insured or the person who purchased the policy. But, most policies’ insuring clauses define “insured” somewhat broadly to include people who work (or have worked) for the covered financial professional. But their employees will only be covered for actions (or omissions) performed during the course of their normal duties for their employer. Plus those actions must not involve duties for which they received commissions as a licensed agent.

As for “loss,” it’s important to know how the insurer defines it. A typical definition reads like this: “monetary settlements or monetary judgments (including any aware of pre-judgment and post-judgment interest) and defense costs for which the insured is legally obligated to pay on account of a covered claim.”

A “claim” is typically a “written demand for monetary damages or a civil adjudicatory or arbitration proceeding for monetary damages, against an insured for a wrongful act, including any appeal thereof, brought by or on behalf of or for the benefit of any client”.

“Wrongful act” is defined as “any negligent act, error, or omission of, or personal injury caused by the insured in rendering or failing to render professional service”. Some policies don’t require financial advisors to be negligent in order to receive benefits, so make sure you know how your policy works in this regard.

Next comes “professional services,” a term that defines the nature and scope of the financial professional’s duties. Policies generally require the insured to be either agents or general agents, properly licensed in the client’s state or jurisdiction as well as in their own state (if different) who sells and services certain pre-defined products, including life, accident, health, disability, and indexed or fixed annuities. If the financial also sells variable insurance products or securities, then the policy’s definition of professional services must list those products, as well.

E&O insuring clauses also define other elements. But the ones we just discussed are the most important. So before you purchase an E&O insurance policy, get clear on what it does. The way to do this is to carefully study its insuring clause.

E&O Insurance and What It Doesn’t Do

Now, since no insurance policy can provide unlimited protection against all risks, it’s important to understand what your policy doesn’t do; i.e., what it doesn’t cover. The way to do that is to read its list of exclusions. For example, here are five things for which there is no coverage in typical E&O insurance policies:

  • Settled or pending litigation at the E&O policy’s inception date.
  • E&O claims that benefit a family member of the insured.
  • Fines from financial regulatory agencies, either state or federal.
  • Dishonest, fraudulent, criminal, or malicious intentional acts.
  • Insolvency of an insurer or other financial institution.

There are many other important exclusions to be aware of. Consequently, always check your policy’s language to see what’s not included in terms of coverage.

In summary, as with all things in life, buy E&O insurance with full understanding of its core concepts—of what it is and isn’t as well as what it does and doesn’t do. This will not only help you avoid buying something that doesn’t fit your needs or that might leave you in the lurch at claim time, but also remind you of what exactly you’ll receive in return for your premiums. Pondering these questions will hopefully persuade you that E&O insurance will serve you well as a financial professional.

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Required E&O Insurance for Life Agents

It’s a truism today that E&O insurance is required for life agents. But let’s explore this notion a bit further. Where does this requirement come from and how important is it for agents to have E&O insurance to protect their businesses?

Let’s start with the fact that working as a life insurance agent is a fundamentally risky proposition. Why? First, life agents often deal with high-value insurance purchases, often designed to fund estate transfers between generations or to facilitate a surviving business partner buying the ownership share of a deceased partner. Such transactions can literally be worth millions of dollars. So it’s not surprising that a life agent’s mistake in setting up these specialized deals can result in substantial client losses and ultimately large E&O insurance judgments. Even smaller life insurance sales to middle-income clients can go awry, leading unhappy clients to file suit and demand restitution.

A second factor is that life agents often serve parents who make financial decisions that displease their children. Or they might have cognitive impairments that lead their children to second-guess their parents’ decisions. In either case, a life agent’s recommendations can lead the second generation to bring legal action against agents. The court battles that  ensue aren’t pretty to watch.

A third is that the current legal and regulatory environment is in flux. With ongoing questions about whether agents in the retirement arena are or aren’t fiduciaries, attorneys will likely be looking for test cases in which they can pin liability on agents who they believe violated their fiduciary duty to their clients.

A final factor is that more agents are setting up their own shops or are working in agencies with less administrative support than ever before. This means they are often required to fill out their own paperwork. Sadly, since agents are better at sales than at administration, they often make sloppy mistakes that can lead to delays in coverage or other problems that harm clients financially. In many cases, when clients lose money, they often turn to the courts for restitution.

Add these factors together and you can understand why E&O insurance for life agents is a requirement today. Because the risks are so large, a responsible agent must protect him or herself against the possibility of getting sued, which can lead to settlements and judgments larger than their total net worth. Without insurance, agents are left with only one option: declare bankruptcy and deal with the life-changing consequences of that decision.

Meeting Your Business Partners’ E&O Requirements

But this addresses only one side of the E&O requirement. The other is the expectations and needs of a life agent’s business partners: insurance carriers, field marketing organizations (FMOs), insurance marketing organizations (IMOs), and managing general agents (MGAs). Each of these recognizes that selling insurance can be risky. So they want to make sure that every agent they appoint has responsible business practices, which includes having high-quality E&O insurance. But they also have a more selfish concern. They want to be sure that clients who’ve suffered a financial loss at the hands of one of their appointed agents don’t seek redress from them rather than from the writing agent. Not surprisingly, as a result, they mandate that all their life agents have E&O insurance to prevent losses from migrating upstream to their “big pockets”.

Consequently, with E&O insurance for life agents becoming a requirement instead of a luxury today, it’s important to purchase and keep in force a good E&O insurance policy that addresses the risks posed by the products they sell. It should also be offered by a high-quality underwriter and supported by a professional administration firm that will provide service after the sale. Finally, they should strive to find an E&O provider that delivers value-added benefits such as free ethics/compliance guidance, free CE courses, free branding tools to increase trust-building in the sales process, and discounts on the purchase of hundreds of products and services for their businesses.

There are many sources in the marketplace today for E&O insurance for life agents. But none that puts all the above pieces together like National Ethics Association-sponsored EOforLess. By visiting EOforLess.com, you can find E&O insurance customized to your specific business practices. Once you’ve made your selection, you can then enroll, apply, and bind you policy in just a few minutes.

Thanks to the power of technology and EOforLess’ innovative process design, life agents can satisfy all their E&O requirements in literally five minutes or less. With this crucial task out of the way, they can focus on doing what they do best—finding prospects for life insurance, assessing client needs, and recommending appropriate solutions. Most importantly, they can go about their business with the knowledge that a litigious client won’t take everything they’ve worked so hard for in a court settlement.

In summary, if you like to sleep well at night, don’t put off buying E&O insurance. It literally can save your business . . . and keep your personal finances intact if you lose a big court battle. Good luck!

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E&O Insurance Builds Trust through Ethical Practices

There is a trust deficit in financial services these days. All the major opinion surveys find that consumers are lacking in trust when it comes to financial institutions and financial advisors. And while statistically, trust increases when they’re asked about their advisor, the industry as a whole must enhance its trustworthiness with the buying public.

How can financial advisors achieve this goal? By committing themselves to being a true professional, especially regarding ethics, compliance, and personal responsibility. Let’s explain each of these items in further detail.

Ethics: This involves always having your heart in the right place. Being ethical means you conduct yourself based on exemplary values such as client loyalty, fair dealing, openness, and quality. It means doing what’s right even when no one is watching. Here are some of the things ethical advisors do:

  • Protect and promote their clients’ best interests, even if it doesn’t serve their own financial interests.
  • Being transparent about their background, professional training, and business practices.
  • Engaging in fact-based selling based on skillful matching of client needs with available solutions.
  • Always being realistic about the possible results of buying a financial product and the potential risks.
  • Safeguarding client confidentiality even when third parties might press for information access.
  • Avoiding deceptive advertising practices that confuse prospects or create fear or doubt.
  • Not selling outside their expertise area just to make more money.
  • Committing themselves to the latest business practices and investment/insurance strategies in order to avoid unforced errors.

Compliance: Obviously, we could add many other items to the ethics list. But the point is this: Being ethical comes from the inside, from the heart. It is values driven, not law-driven.

It also represents a value-add to compliance, which is largely rules-based. So what compliance principles should advisors follow in order to accelerate trust building with consumers? Following are some of the major ones:

  • Follow the product training, carrier appointment, and continuing-education requirements in their state.
  • Adhere to NAIC and FINRA advertising standards, based on their license type.
  • Avoid certain “hot-button” words in sales interviews such as “account” and “deposits” when discussing life insurance and/or annuities.
  • Don’t call prospects who are on the national Do Not Call Registry or relevant state registry.
  • Only buy leads from direct-marketing companies who follow all applicable laws and regulations.
  • Get approvals from their compliance departments before using homegrown solicitation materials.
  • Avoid pursuing professional designations that lack legitimate educational content.
  • Only recommend products that comply with relevant suitability requirements, especially when dealing with senior clients.
  • Complete all required forms when replacing an existing life insurance policy or annuity.
  • Hold themselves out only as insurance sales professionals unless they have the appropriate education and/or license to support claims they are securities representatives or investment advisors.
  • Follow all rules regarding the use of life insurance illustrations.
  • Never give a prospect anything of financial value in return for a commitment to do business.

Personal responsibility: Financial advisors who behave ethically and who comply with the law not only have a leg up competing with other advisors, they also are better able to prevent mistakes that lead to costly, potentially career-ending, E&O insurance disputes. So if you take away nothing else from this article, let it be this: Doing business with your heart (ethics) and your head (compliance) will keep you safe in today’s litigious business. But even the most ethical and compliant advisors can make mistakes—and get hit with nasty legal judgments when they lose in court. This is where personal responsibility comes in.

Financial advisors should accept that one day they, too, might get sued. And that the ethical response to such an event is to protect their practices —their livelihoods—against legal claims, while also making clients whole when their error or omission financially harms a client. In both cases, buying E&O insurance is a necessary solution.

At the end of the day, protecting your business AND owning your mistakes are two sides of the same coin. E&O insurance can help you achieve both if you buy it before you need it. And one last thing. Being fully insured, not just with E&O insurance, but also with other forms of business insurance, is a great way to communicate to prospects and clients that you’re a professional. It shows that you are dedicated to being in business for the long haul and that you have owned up to your responsibilities.

So don’t hesitate to tell your prospects  you are fully insured in the event something goes wrong. There’s no need to get into the details of your E&O insurance because you don’t want to plant ideas. But do explain that you practice what you preach by purchasing insurance  that assures you will be able to serve your clients for years to come.

In summary, don’t let the industry’s anemic trust numbers get you down. Instead, focus on what you alone control . . . your own ethics, compliance, and personal responsibility. If you strive to excel in all three areas, you WILL build trust quickly. You can trust us on that!

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