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What Start-Up Businesses Need to Know about E&O Insurance

Many Americans dream of being in business for themselves. In financial services, tens of thousands of life insurance agents, financial advisors and planners, and securities brokers decide to hang their shingles each year. They’re all in search of autonomy, financial growth, and the satisfaction of doing good work for their clients.

If this applies to you, you probably remember how exciting it was when you pulled the trigger and launched your business . . . getting new stationery and cards, equipping your new office, going out on your first sales meeting, and closing your first sale. The best part? Getting your first commission check!

However, with all that excitement, you may not have considered some of the downsides of launching your new venture—the expenses required to set up your firm, the long hours needed to find prospects and close sales, the intense study required to master your product line, the effort to comply with state and federal rules and regulations.

One of the biggest downsides of all: the unique E&O risks that start-up businesses face. Which makes it crucial that financial advisors learn about—and buy—errors and omissions insurance.

Three Major E&O Start-Up Risks

So what risks are we talking about? There are three major ones.

First, new financial professionals typically enter the business with a knowledge deficit. If they’re coming from a totally unrelated field such as teaching or from a corporate job, they’re starting from ground zero in terms of knowledge. They don’t know how to initially approach clients. They lack knowledge about how to best assess financial needs. They’re still in the process of learning about the technical workings of life insurance, annuities, and investment products. Most importantly, they’re not fully aware of how state and federal regulations constrain their actions—and what the costs are for violating those rules.

If the person starting out has some related financial experience—say, as an accountant or as a customer-service person in a life insurance company—the learning curve might not be as steep as if they were totally green. But the point remains that the amount of knowledge needed to break into and then ultimately succeed as a financial sales professional is immense. Which means any lack of knowledge increases the odds of making a mistake . . . and getting sued. Errors and omissions insurance is an essential backstop for start-up professionals who have good intentions, but may lack the knowledge and experience to avoid costly mistakes.

Second, start-up agents and advisors typically start out with a low base income. They need to close a lot of cases, fast, in order to generate an income they can live on. Plus, since they’re typically early in their careers and may have young families, their cash needs might be quite high, but their net worth low. With the average cost of a life insurance-related errors and omissions claim being roughly $40,000, according to a major errors and omissions underwriter, the financial impact of losing a client lawsuit can be devastating. It’s the kind of blow a start-up professional might never recover from and for which the only remedy is bankruptcy. Here again, having a high-quality errors and omissions policy in force can spell the difference between weathering a business storm and getting swept away by it.

Third, new financial advisors typically have, well, a new client base. That means their customers won’t know them very well and may not have lived through the market ups and downs with them. This means advisors may not yet have established a reservoir of client trust and good will. If they make a mistake that harms their clients financially, their customers may not be willing to give them the benefit of the doubt. Their first impulse might be to sue the person rather than work things out. In this case, being insured with errors and omissions insurance is yet another financial safety net for a start-up professional.

In short, launching a new business can be difficult and risky enough without also being unprotected against client lawsuits. Most new agents will never have a problem client and will never get sued. But a small minority will, and the results can be incapacitating from a financial point of view. Are you willing to “bet the ranch” that your new business will never face such a client? If not, now is the time to consider buying high-quality, affordable errors and omissions insurance, designed especially for your business, from the pioneer in online E&O, EOforLess.

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Top Three Scenarios for Which You Need E&O Insurance

As an insurance agent, it’s probably fair to say you spend the majority of your time in the sales process—finding and qualifying prospects, conducting initial sales meetings, assessing needs, presenting solutions, and closing the sale. This being the case, it’s also true that most of your E&O liabilities will arise from that same process. In fact, we would argue that the most common needs for E&O are almost inevitably sales related. Here are three all-too common scenarios.

#1. An agent has a prospect interested in buying life insurance. However, because the agent is pressed for time, he concentrates solely on that need and fails to probe for other needs such as disability or retirement income. After he delivers the life policy to the client, he assumes all is well and makes a note to touch base in a year to see how things are going. However, about six months later, he learns the client had a stroke and will no longer be able to work. A few weeks after that, he receives a call from the client and his wife wanting to know why he never recommended they buy disability insurance. Clearly, “I was in a hurry” will not be an acceptable answer. The agent won’t be surprised when he receives the client’s notice of intent to sue because he neglected to perform a key risk-assessment task.

#2. Another sales-process E&O risk occurs when an agent recommends insurance, but the prospect declines the offer. Perhaps the person just doesn’t feel a sense of urgency to take action or lacks the funds currently to buy more insurance. Now, assume the agent doesn’t ask the prospect to sign a declination-of-purchase waiver. Imagine what will happen if the prospect suffers an injury or illness the policy would have covered if he or she had only bought it. Can you spell l-a-w-s-u-i-t?

#3. Yet another possibility is what insurers call “failure to explain.” Here, an agent identifies the correct need, designs a suitable solution, and persuades a prospect to buy insurance. But unfortunately, he doesn’t explain the product’s provisions correctly or at all. Later, when the insured suffers a loss and needs to file a claim, he’s surprised there’s no benefit available or that it’s smaller than anticipated. The insured’s next move? Hire an attorney.

In all three cases, due to an agent’s error or omission (E&O), insureds didn’t receive the insurance coverage they thought they purchased, either through the agent’s processing mistake or failure to present the product or properly explain a policy feature. In effect, there was a gap between the customer’s expectations and the insurance company’s delivery of benefits. Whenever such a gap occurs, the agent will always face a looming—and potentially career-ending—E&O risk.

Although the above situations are top E&O dispute triggers, another major one involves underwriting. Unfortunately, many agents fail to explain the importance for prospects to truthfully answer all life insurance application questions. As a result, they often omit key data or flat out lie. The agent doesn’t press the prospect for the truth because he wants to make the sale and get paid. If the underwriter fails to uncover the unreported health condition(s), the policy will get issued as applied for. Assuming the insured dies a year or so later, the policy will still fall within the two-year contestability period, meaning the insurer can take another look at the insured’s medical records to see if the person misrepresented his or her health history. If it discovers a material and substantial omission, it might elect to deny the claim. It’s not hard to imagine an E&O lawsuit being filed once the beneficiary hears this news.

Buy E&O to Minimize the Risks of Selling Insurance

The takeaway is clear: If you’re a successful insurance agent, you will likely spend most of your time developing new business. Just about every facet of this process subjects you to large E&O risks. What to do? First, make sure your sales practices are ethical. You want to make certain prospects and clients know you’re on their side and committed to doing what’s right. Second, work hard to comply with the relevant laws and regulations for your license and in your jurisdiction. The combination of ethical business practices and compliant conduct at every stage of the sales process will largely inoculate you against E&O disputes.

But in the unlikely event you get sued, you’ll need E&O insurance to cover your attorney fees and settlements or judgments should you lose your case. What type of E&O policy should you buy? One that covers your business activities, that is issued by an A rated or higher insurer, and that is easy and convenient to buy, preferably online. EOforLess provides just such coverage for life/health agents, property-casualty agents, registered investment advisors, and real estate broker/owners . . . and has since it created the “click-and-bind” E&O insurance  model in 2008.

In summary, if you’re concerned about the risks of selling insurance today, consider buying your E&O insurance at EOforLess.com. It will be an affordable, high-quality financial safety net for your business in case the worst comes to pass.

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Trusted Life Agents Have E&O Insurance

There are two reasons life agents should carry E&O insurance. The first has to do with them. The second has to do with their clients. Let’s take a closer look at each perspective.

Life Agents Buy E&O Insurance for Themselves

The reason life agents buy E&O for themselves is because what they do for a living is inherently risky. Think about it. Every day you help clients deal with complex financial matters involving potentially tens of thousands or even hundreds of thousands of dollars. In fact, when an affluent client buys life insurance to fund an estate transfer, literally millions of dollars can be on the line. Making a mistake or forgetting to do something that botches such a transaction can leave you susceptible to potentially career-ending lawsuits.

Another reason life agents need E&O for themselves is because they often work with older clients who may have cognitive impairments. Such clients may authorize a purchase that their children find unsuitable. When this happens, the clients’ beneficiaries, who often stand to inherit large estates, are not shy about making their views known. Worse, if they think the agent took advantage of their ailing parent, they will not hesitate to file regulator complaints or even sue a life agents.

And let’s not forget today’s unsettled regulatory environment, especially around the U.S. Department of Labor’s Fiduciary Rule. Although the rule went partially into effect on June 9, 2017, it might still be revised, watered down, or cancelled prior to its full effective date on January 1, 2018. Until then, life agents who sell retirement products will be expected to serve a client’s best interests. And if they don’t, they run the risk of clients and their attorneys suing them for breach of fiduciary duty.

Finally, let’s not forget that many life agents work in home-based offices, either for themselves or for a life insurance agency. In either case, they may lack dedicated administrative support. This means they have to handle all their own paperwork, including the filling out and filing of life insurance applications. Because sales, not paperwork, is their forte, life agents who work alone may make mistakes that create E&O liability risks

Put the above factors together and what do you have? A compelling reason for you to buy E&O insurance to mitigate your business risks. But equally important is the need to buy E&O insurance for your clients’ sake.

Life Agents Buy E&O Insurance for Their Clients

Although it’s human nature to assume one will never make a mistake, the fact of the matter is mistakes happen, even to the most experienced life agents. And if the worst comes to pass, ethical life agents realize the importance of both protecting their businesses against legal claims and making their clients whole financially. They are rewarded for this because people would rather do business with agents who take responsibility for their mistakes rather than those who shirk responsibility in order to save money.

In short, life agents who wish to build and maintain a sustainable practice know they must always be selfish and selfless when it comes to E&O insurance. They must protect their own financial interests so they can continue to work in their business, while at the same time being responsible for any harm they cause to their clients. The beauty of E&O insurance is that it allows life agents to cover both bases for a reasonable cost, for as long as they keep their E&O policy in force.

In today’s busy, stressful world, any product that helps the seller and the served as powerfully as E&O insurance does is a product worth having, especially if it builds trust as well.

So here’s the bottom line. Are you in the market to buy E&O insurance for the first time or looking for an alternative to your current E&O coverage? Then consider the benefits of buying from EOforLess, an online source of affordable and convenient E&O since 2008. EOforLess specializes in meeting the needs of life agents with quality protection at a low cost, making it a huge win-win for both them and the clients who trust them.

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What to Look for When Purchasing E&O Insurance

There are six things to look for when purchasing E&O insurance. The first two things—the insuring clause (i.e., whom the policy protects and when will it provide benefits) and the exclusions (conditions under which benefits aren’t available) are integral to the policy contract. In other words, in return for paying a premium to—and entering into an agreement with—an insurer, the contract will provide benefits as long as certain conditions are met.

As you buy E&O insurance, your first challenge is to make sure the policy works for you at the contract level. Are the benefits on offer appropriate for your financial needs and license type and are the exclusions reasonable? You should immediately reject any E&O insurance policy that misses the mark on those two points. There are many alternatives on the market today, so why buy E&O insurance that’s unlikely to meet your needs when you need it most?

Don’t Forget These Four Value-Added Features

But once you’re satisfied the product will perform well at its core, it’s time to look at four other features that distinguish E&O products from each other. Let’s consider each in turn:

  1. Price: You obviously don’t want to pay more for your E&O insurance than necessary. You also don’t want to pay too little. Here’s what we mean. If your policy is too expensive, it will be a hardship to keep in force. You’ll likely let it lapse, which will create a coverage gap that could leave you uninsured in the future even if you get a new policy. So buying expensive E&O insurance is obviously not in your best financial interest. But why is paying too little a problem? Because insurers and their marketing partners may have designed a product that isn’t actually insurance. Instead, they may be promoting a risk-sharing pool that is not statutorily required to pay claims. Thus, if the pool runs out of money just as you’re getting sued and ready to file a claim, you may be out of luck if you lose in court.
  2. Top Rated Insurer: When you buy E&O insurance—or any type of insurance for that matter—you want your insurer to be there when you need help. Problem is, some companies may have set aside fewer financial assets in reserve for future claim contingencies. This means they may be financially stressed if future claims are greater than anticipated. Or if the gap between claims and underlying assets is great enough, they may become insolvent. Not good if you’re counting on the insurer to pay for your E&O judgment or settlement. For this reason, four ratings firms (A.M. Best, Moody’s, Fitch, and Standard & Poor’s evaluate insurance company finances and assign letter grades to reflect claims-paying ability. Each rating organization uses a different scale, so an A from one may not be comparable to an A from the others. However, just make sure your E&O insurer has ratings either at the very top or close to the top of each rating firm’s scale. This means it will likely still be in business if and when you need to file an E&O claim.
  3. Fast Application: Once you’ve determined the E&O policy you’re considering will meet your needs, that you can afford it, and that the insurer selling it is financially strong, it’s time to consider how easy it is to purchase the policy. In the old days—say five or ten years ago—most financial professionals bought their E&O insurance through specialized insurance brokers. This required an initial agent discussion, the preparation of an insurer quote, and then the completion of a lengthy E&O insurance application and underwriting process. As you can imagine, this process could take weeks or months, leaving insurance agents unprotected against client lawsuits in the interim. Today, thanks to Internet technology, increasing numbers of financial professionals buy their E&O insurance from online innovators that have re-engineered the entire buying process, making it much easier to select an appropriate product, complete an application, and print out a policy in minutes rather than weeks or months.
  4. Free Ethics/Compliance/Continuing-Education (CE) Courses: Finally, look for your E&O insurer to not only provide a financial backstop in the event you get sued, but also to help you avoid disputes in the first place. Make sure it publishes useful ethical guidance, which helps you do business the right way, and informative compliance content, which helps you avoid regulatory sanctions. Also look for free CE courses in order to help you fulfill state and professional-group education requirements.

When you find an E&O firm that ticks all of the above boxes, your due diligence will be over. The good news? EOforLess is just such a firm. As a leader in E&O insurance for financial professionals since 2008, EOforLess offers:

  1. High quality, affordable E&O insurance customized for various insurance, investment, and real estate license types.
  2. Affordable protection that even new agents, brokers, and advisors can afford, starting at $489 per year for life & health agents.
  3. Highly rated insurance underwriters, including CNA, Everest National, and Liberty International.
  4. A customer friendly website that speeds you through the process of selecting a policy and then applying and paying for it . . .all in minutes or less.
  5. A content-rich website that provides ethics and compliance guidance to help you avoid customer complaints and lawsuits, along with access to unlimited online CE courses to facilitate your license or designation educational compliance.

In short, as you enter the E&O marketplace, consider all the factors that go into high-quality E&O protection—from contract design and price to insurer ratings, ease of shopping, and educational support. As you consider what EOforLess brings to the table, we hope you’ll agree our total package represents a super value in today’s crowded marketplace.

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