When it comes to E&O insurance, surprises are the last thing you need. For example, if a client begins to threaten you with a lawsuit, you want to know your E&O insurer will stand behind you, not that there isn’t enough coverage left in the policy to protect you. Similarly, there are many nuances in E&O policies that may catch you by surprise if you haven’t uncovered them ahead of time. Here are seven common examples.

  1. Did you know that all “claims made” policies aren’t made equal? Some policy forms are a purely claims made design, while others are “claims made and reported.” The difference? The latter provide coverage only if you file a claim within the policy term or within a short period thereafter. If you try to file the claim after either of those two-time frames, you may find yourself without coverage. Solution: read your policy to confirm which type you have.
  2. Does your policy cover your specific duties? To find out, read your policy’s insuring agreement to see how it defines professional services. It will typically be quite explicit about whom and what it covers. For example, one life insurance agent E&O policy has this definition: “Coverage is limited to general agents or agents with valid licenses in a client’s state or jurisdiction, as well as the general agent’s or agent’s state or jurisdiction, and who are involved in the sale or servicing of life, accident, and health insurance, disability insurance, and indexed or fixed annuities. Covered duties also include financial planning and supervision and training of agents.” The key point? Your actual duties must align precisely with the policy language in order for you to have coverage under the policy. For example, if you have a sideline real estate business, you will not be covered under this policy because those activities aren’t listed in the insuring clause.
  3. Are you familiar with your policy’s exclusions? One of the most common ways E&O policies surprise agents is when they file a claim and the insurer tells them an exclusion applies. If this has ever happened to you, you know how infuriating it can be. Solution? Whenever you purchase a new E&O insurance policy, immediately read the exclusions list. Doing so, for example, will show you’ll have no coverage for claims arising out of litigation that occurred before the policy’s effective date or were in process on that date. Or that E&O claim payments that benefit a family member won’t be covered. Or that financial advisors will not be covered for E&O losses if they use or disclose confidential client information or non-public information. There will be a dozen or more scenarios in which you might assume coverage, but that your policy, in fact, excludes. Study your contract so you know exactly what exclusions apply.
  4. Are you aware of the nuances of coverage limits? The first is the difference between per-claim and aggregate limits. As its name suggests, the former establishes a maximum dollar amount that can be paid on a given claim from an insured. The aggregate limit refers to how much coverage is available for multiple claims from one insured in a given year. However, shared limits introduce a further complexity. Here multiple people within a firm may be covered under one master policy with a limit that applies to every agent and/or advisor insured under the policy. So if the firm suffers a large number of E&O insurance claims in a year, which consumes the entire shared limit, you will be out of luck if you need to file a claim later.
  5. Did you know that some E&O insurance policies apply the stated deductible for all claims filed in a policy period? So if you have five claims and your deductible is $1,000, you will be on the hook for $5,000. Other policies provide for an aggregate deductible for multiple claims. In the example given, this might limit your deductible to only $2,000 in E&O claim outlays in a given year.
  6. Have you heard of E&O policies that apply your deductible to legal fees as well as to claim payouts? Policies with so-called defense-and-loss deductibles make you pay for legal fees up to the deductible amount even if the claim is ultimately proved groundless. Compare that to E&O insurance policies with first-dollar deductibles, which only require you to pay if you’re found liable and a claim payout is required. Obviously, the latter type is more appealing.
  7. Finally, does your claims made E&O policy have an extended reporting period or “tail” provision? This will allow you to file a claim even after your policy expires, as long as the wrongful act happened prior to the end of the policy period. Although most E&O policies have this feature, the length of the period can vary. EOforLess’ life/health agent E&O policy has an unlimited extended reporting period. This can be important if you are planning to sell your business.

E&O insurance policies for life and health insurance agents, P&C agents, registered investment advisors, and real estate agents and broker/owners have many other nuances. To make sure your business is fully protected, carefully read your policy’s fine print. This way, in the unfortunate event you need to file a claim, you will avoid nasty surprises that put you at risk.

But here’s the good news. Many of these surprises can be avoided entirely by purchasing the right policy in the first place. By reading specimen policies before you buy, you can select one from a company that doesn’t impose restrictive provisions. Shopping carefully can literally save you tens of thousands of dollars or more at claim time. Worth the extra work? You bet!

If you’re like most people, your old habits may die hard. For example, you may have started buying E&O insurance decades ago in the usual fashion . . . shopping for an agent, requesting a quotation, filling out a paper application, then waiting days or weeks for your E&O policy to arrive in the mail.

That process served its purpose for a long time. But thanks to the advent of new technology, it’s no longer the best way to buy E&O insurance. Instead, many financial professionals today shop for and buy their professional liability insurance online. Tens of thousands of them each year would do it no other way.

It’s not hard to see why. Consider the disadvantages of buying it the old-fashioned way:

  • It’s harder to identify providers of E&O insurance. Without the Internet, you’d be forced to ask friends and colleagues for referrals. Depending on their experience, you might end up with only one or several buying options.
  • Your ability to shop for the best features will depend on your agent’s knowledge. If the person lacks awareness of certain key features, then he or she might not bring them to your attention.
  • Your agent might discourage you from running “what if” scenarios, which can have a big impact on pricing, because they can be time-intensive to complete.
  • Once you select an E&O insurer and your desired coverage amounts and other policy options, you request a formal quotation from your agent who decides which carrier(s) to submit it to. This might take days or weeks based on how busy the agent is.
  • Once you receive several price quotes from different insurers, you select one and then submit a paper application to that firm. Hearing the underwriting results might take days or weeks.
  • Once you hear your policy has been approved, you pay for it, typically by sending a paper check to your agent or insurer. Postage will be on you.
  • Days or weeks later, you will receive your policy and proof of insurance. If you need additional coverage certificates, you’ll have to ask your agent or insurer for them.

If that sounds complicated, it’s because it is. Complicated and time-consuming. Using an analog process, it often took days or longer to shop for and purchase E&O insurance. In light of this burden, is it any wonder so many agents went uninsured?

Now, let’s consider the contemporary online alternative:

  • To shop for E&O insurance, you simply enter an appropriate search term into your Internet browser application. The leading online E&O providers generally appear on page one of your search engine results. Click on the ones that interest you to learn more about their firms and offers.
  • Based on your needs, click on the type of E&O protection you’re interested in. For example, if you’re a life agent, select the coverage for life and health insurance professionals. If you’re a P&C insurance agent, RIA, or real estate agent or broker-owner, select the coverage that fits your license and professional duties.
  • Once you’ve drilled down on coverage type, take a look at the pricing and read the provider’s explanations and disclosures. Most will have specimen policies available for downloading, so you can carefully check specific provisions.
  • If the policy meets your needs, provide the firm with your personal and firm information, answer the underwriting questions, and decide on how you’ll pay for the policy. You’ll provide all of this information via online forms that are easy and quick to fill out.
  • After you’ve submitted your electronic application and payment information, wait a minute or two for the provider’s e-commerce platform to process your personal and payment information and then provide your insurance certificate.
  • Finally, print out your certificate for your files and for any insurance FMOs, securities broker-dealers, or registered investment advisors you work with, now or in the future.
  • Depending on the payment method you select, your checking account or credit card will be billed automatically. And when your policy period expires, you’ll be reminded to renew your policy, typically via an e-mail.

Bottom line? The old-fashioned method is more complicated and takes a lot longer than the online method. In this day and age, when time is at a premium, it no longer makes sense to shop the old way. Savvy financial professionals use the Internet to buy E&O insurance because it’s the quickest, most efficient, and easiest method available. If you’re not among them, ask yourself why and consider becoming a modern shopper next time.

When you’re ready to make your move, visit EOforLess.com, sponsor of E&O insurance for financial professionals since 2008. We’ll lay out all your options, walk you through the buying process, and generate your coverage certificate in just a few minutes, not days or weeks. Isn’t it time you bought your E&O insurance the contemporary way from the firm that invented online E&O buying . . . EOforLess.com!

A Contrarian View: Top Ten Reasons NOT to Buy E&O Insurance

On most days, you’re likely to hear us speak of the benefits of owning E&O insurance. But today, we’d like to take a contrarian (and somewhat lighthearted) view. To that end, here are 10 reasons why financial professionals should avoid buying E&O insurance. Ready?

Reason #1. You’re tired of being a life insurance agent, investment advisor, P&C insurance agent, or a real estate agent or broker/owner. You want out of your career, but can’t quite figure out how to extricate yourself.

Have you ever felt trapped in your current career, knowing you’ve had enough, but unsure of how to break free? Well, not buying E&O insurance or failing to keep your policy in force can be a perfect solution. If you get embroiled in a client dispute and end up losing your case without E&O protection, you might end up totally liberated! For example, all of your personal and business assets may need to be liquidated to satisfy court judgments or settlements. With no assets to speak of, including no business resources, you won’t be able to work in financial services or perhaps in any field. In short, you’ll be free of everything you’ve grown tired of and able to try something new . . . or nothing at all!

Reason #2. You have so much debt now that an E&O judgment will likely bring bankruptcy relief.

If you’re like many Americans, you probably carry too much debt, both personally and professionally. Most people soldier on with their heavy debt loads, paying the minimum amount due each month and looking at nothing but years of unrelenting loan payments. However, without E&O insurance, a legal judgment may be a great excuse to file for bankruptcy and get your financial life back.  Also, don’t minimize the personal satisfaction of telling one’s creditors to get lost. Declaring bankruptcy can be worthwhile from this perspective alone!

Reason #3. You’d rather just concede defeat to a client suing you than be forced to participate in a boring court proceeding.

We get this! Having interminable conversations with a lawyer who’s trying to protect your assets is SO boring. And sitting in a courtroom for hours when you could leave work early to play golf or have a beer at the brewpub is SO annoying. For those financial professionals who’d rather hand over everything they own than spend even a minute speaking with their attorney or sitting in a courtroom, this reason is for you!

Reason #4. You believe in the carpe diem philosophy (“seize the day”). In other words, you see no reason to spend money to protect your future security when you can spend it to enhance your current happiness.

In other words, you’re the kind of person who lives for today because who knows what tomorrow will bring. You’re more than happy to go unprotected because chances are nothing bad will happen. Plus, it’s a lot more fun to spend your money on food, drink, and vacations than to make sure your future is safe and secure. Right?

Reason #5. You believe your mistakes are best put behind you, not taken responsibility for.

As part of the human condition, mistakes happen. For this reason, they’re hard to prevent and pointless to get worked up over.  As a result, when you make a mistake, you believe it’s best to move on and let the chips fall where they may. This being true, what’s the point of having E&O insurance, a policy that helps you take full responsibility for your mistakes? Other people can clean up after you so you can just get on with your life. In this regard, paying for E&O insurance is pointless and stupid.

Reason #6. Client disputes are entertaining and best prolonged for maximum enjoyment.

You’re a big fan of Judge Judy. You find human conflict to be fun and love watching courtroom battles on TV. Because of your fascination with legal drama, you’d prefer to prolong the experience if you’re ever sued. You’d do this by defending yourself in court rather than allowing a trained attorney to more efficiently represent you.

Reason #7. Similarly, you believe the only person who can competently defend you in court is you.

In part, you believe this because you have found that the smartest person you know is you. You have also found that no one knows more about winning than you. With bottomless self-confidence, you see no reason to waste money on E&O insurance, which, frankly, will only saddle you with an attorney who’s dumber than you.

Reason #8. It’s best not to have E&O insurance because clients will be motivated to sue you.

It’s a dark view of humanity, but it’s your view. You sincerely believe that everyone is selfish and, given half an opportunity, out to hurt you.  Consequently, you’re convinced that if your clients learn about your E&O coverage, they will ignore your years of service and good advice and contrive a reason to sue you. And all of your clients are like this. 

Reason #9. You’ve never been sued before, and you don’t plan on being sued now.

You’ve been in the industry for decades and have never been sued. Why would clients start suing you now? What could possibly change?

Reason #10. E&O insurance is too expensive for the value received.

Since it’s unlikely you’ll ever get sued, you probably will never use your policy. Paying for a service you’ll never need is a gross extravagance. Why waste the money? And under what scenario would you ever need to use your policy?

With 10 reasons like these, it’s surprising any financial professional buys E&O insurance, ever. They wisely put their money toward more productive uses and let the legal chips fall where they may.  Yet hundreds of thousands do purchase E&O insurance and continue to pay for their E&O premiums year after year, despite never getting sued and having many other legitimate uses for their money.

Hmmm, what do these sensible financial professionals know that the naysayers do not?

Advisor Alert: Sell in New York? A Best-Interest Standard is Coming for You

The state of New York is bucking the federal anti-fiduciary trend by introducing a best-interest standard for life insurance and annuities. The proposal, which was announced on December 27, 2017, would require agents to serve a customer’s best interests first, not their own financial interests.

The measure, from the New York Department of Financial Services, aligns with the now delayed full implementation of the DOL Fiduciary Rule, which has encountered headwinds from the Trump Administration. The latter regulation has been delayed until 2019.

“Consumers who purchase life insurance and annuity products deserve to have financial services providers act in their best interest when providing advice,” says NY Financial Services Superintendent Maria Vullo. “Given the key role insurance products play in providing financial security to middle-class New Yorkers, it is essential that a provider adhere to a higher standard of care and only recommend insurance and annuity products that are in the consumer’s best interests.

The department said that the proposed amendments to its current suitability regulation will mandate a best-interest standard for all life products, not just annuities, and to products sold in any context, not just under ERISA. It would also apply to the provision of advice at any point in the customer/agent relationship.

The proposed rule is now open for 60 days of public review and comment.

According to the law firm Carlton Fields, the amendment to the existing Suitability in Annuity Transactions (11 NYCRR 224) would usher in sweeping changes to how New York licensed life/health agents sell their wares. Key points in their analysis follow:

  • The amendment broadens the existing law by applying a best-interest standard to life insurance policies, as well as to in-force policies, not just proposed offerings. In other worlds, all customer communications must take the person’s best interests into account. This pertains to any advice or act “intended to result in a consumer entering into or refraining from entering into a transaction.”
  • It also broadens suitability analysis in two ways. First, it applies it to “all available products, services, and transactions,” as well as to specific issues such as duration of liabilities and obligations and to tolerance of non-guaranteed contractual elements.
  • It applies a prudent person standard of care to all transactions.
  • It expands required consumer disclosures, including potential client consequences, tax implications, and compensation methods pertaining to the action, among several other new disclosure mandates.
  • It prohibits agents from saying or implying that a transaction is part of a financial or investment management service without having proper expertise.
  • It expands applicability of the new rule to all agents involved in the matter, not just to those with direct customer contact.
  • It requires that agents and agencies establish and maintain procedures to prevent financial exploitation and abuse.
  • It allows all compensation amounts and types that are currently permitted under New York insurance statutes.

Perhaps the most significant change is scope expansion, says law firm Carlton Fields. For example, the new Life & Annuity Suitability Rule would not only apply to advice given at the point of initial sale or annuity but also to subsequent recommendations. For example, it would apply to discussions about whether to increase a life insurance policy’s face amount or to receive early death benefits. In terms of annuities, the new regulation would apply to any discussions about electing a step-up to a benefit base for an income benefit or greater death benefits or even to deciding to pay additional premiums.

For further information on the new measure, contact your compliance officer or visit the New York Financial Service Department’s rule-making page. For information on errors and omissions insurance, visit EOforLess’s EO HQ.