E&O Insurance for Your Successful Business

In a recent article we discussed the unique E&O insurance risks that start-up insurance and financial advisors face. Their lack of knowledge, low income, and new client base mean they are subject to high levels of E&O insurance risk. If they wish to survive beyond the start-up phase, they need to buy high-quality and affordable E&O insurance as quickly as possible from an insurer they trust.

But what about those professionals who survive the new-business shake out? Do their needs for E&O decline over time? Actually, no . . . and there are five reasons why.

First, experienced financial professionals—life/health and P&C insurance agents, investment advisors, and real estate agents/brokers—will, as they gain knowledge and skills, take on higher-income clients with more complex financial needs. For example, a life insurance agent might move from selling products for death protection only to middle-income clients to providing life insurance solutions for estate planning purposes to affluent clients. This might involve complicated products that cover both spouses, but that only pay a death benefit upon the death of the second spouse. Whenever you’re dealing with more complex needs and insurance solutions, along with wealthy clients who stand to lose much more, your E&O risk will expand geometrically.

Second, as you gain experience and grow an increasingly affluent client base, your income will grow also. This is normally a good thing, but not from an E&O insurance perspective. That’s because the more money you make, the more financially successful you will appear to be in your clients’ eyes. And the more successful you seem, the more likely you will become a litigation target. Clients might file a lawsuit against you because they assume you have plenty of money and/or insurance to make their claim “go away.” But without an E&O insurer and company-provided attorney and claims adjuster in your corner, it will be a major headache to dispense with these “nuisance lawsuits” while still doing your regular work.

Third, as you become more successful, you will naturally become busier than you were when you first started out. If you’re smart, you’ll hire administrative staff to handle all your paperwork. But many agents and advisors resist this step initially because they’re reluctant to delegate their work and to spend the money on an assistant. Big mistake. If you mess up the process of helping clients apply for insurance or of filing for claims, those who don’t receive what they expected may turn to the courts for relief. If they can prove you made a mistake or forgot to do something that hurt them financially, they might win their lawsuit. If you don’t have E&O insurance, the court judgment and administrative costs, plus legal fees, will be your responsibility.

Fourth, as your tenure increases and you begin to address more complex client needs, your insurance and investment-product portfolio will increase both in terms of width and breadth. In other words, you will need solutions for a wider range of situations and within each situation, you will need sub-solutions that work for a wider range of clients. Result: each time you add a product or service, you will face a learning curve that puts you at greater risk of making a mistake. If you attempt to add multiple products or services at the same time, your E&O insurance risk will multiply significantly. This means the helpful process of becoming more responsive to your clients’ needs ironically results in you shouldering more E&O insurance risks.

Fifth, as your firm grows, not only will your clients’ needs and your product portfolios become more complex, so will your computer hardware, software, and networks. You will begin storing more personal client information on your hard drives and you will tend to have more computers and devices connected to the Internet. The minute you expose your firm’s proprietary information and your clients’ persona data to the outside world via the Internet, the more at risk you will be for a potential cyber-breach. If you’re unlucky enough to have one, you will face a nightmare of remediation and regulatory-reporting requirements, not to mention the possibility of getting sued by clients whose information was compromised.

A Perfect Storm of E&O Risk

Put these five factors together and what do you have? A potentially perfect storm of E&O risks for successful entrepreneurs in the insurance/financial/real estate space. But please don’t take this as us raining on your entrepreneurial parade. If you’re fortunate enough to pass unscathed through the start-up years, you have great cause to celebrate. That’s because only about 50 percent percent of U.S. small businesses survive for five years, according to the Small Business Administration. But don’t let your success lull you into complacency. The fact that you emerged in one piece means you are now playing a more nuanced and potentially more damaging E&O game. Now, not all clients will be out to get you, but a small fraction will. And the one that catches you off-guard may be the one that puts you out of business.

Bottom line: don’t assume your success will inoculate you against client lawsuits. Make sure you’re doing business ethically and in full compliance with the law. Work hard to assure that your prospect/client fact-finding is thorough and that your product recommendations are in sync with client needs and risk tolerance. And make sure you have processes in place to identify and resolve client complaints before they turn into E&O insurance claims.

Finally and most importantly, shop for comprehensive, affordable E&O insurance designed for your business type and available online from EOforLess.com. Being successful now means you have to work harder to stay successful. And a big part of that is being insured against the E&O risks that can derail growing firms such as yours. Good luck!

How Errors and Omissions Insurance Factors into Online Trust

Most insurance agents today understand how errors and omissions insurance lowers their risks of doing business. But they may not see how errors and omissions insurance builds online trust. Stick with us while we explain why.

For starters, it’s important to recognize that online trust is the foundation of nearly all business relationships. Whether you transact sales online or not, most of your prospects will head first to your website to check out your background and offerings. If they like what they see, they’re more likely to agree to a meeting . . . and to buy. If they don’t, they will either refuse a meeting or be a hard sell later. Thus, your website factors heavily in establishing the trust you need to grow your business.

In fact, the Pew Research Center’s Internet & American Life Project has shown just how much consumers rely on websites to make sound purchase decisions. According to a 2010 Pew study, 58 percent of Americans have done research online before purchasing a product or service. And on an average day, the study found that 21 percent of adults researched vendors online, compared with 9 percent in 2004. These numbers are likely to be even higher today.

Trust Formula: Authority, Credibility, and Responsibility

What are prospects looking for when they come to your website? We call it the A-C-R formula, which stands for Authority, Credibility, and Responsibility.

First, they want to see that you have the skills and knowledge—the authority—to help them solve their financial problems. Accordingly, your website’s content must convince them you know your stuff and can deliver the goods. The more your site showcases your credentials and expertise, the more powerfully it will establish your authority. Here’s how to speed this process:

  • Make sure your website has a detailed “About Us” page. And don’t just use the same boilerplate everyone else does. Talk about your experience and professional competencies, your core business practices, your education and designations, and the types of clients you serve. The more detailed and personal you can make this discussion, the better.
  • Don’t just claim authority; prove it! Fill your site with as many proof statements as you can: specific insurance/financial strategies you’ve used with clients, testimonials from satisfied customers (if your license allows it), blog articles you’ve written that demonstrate your insights about today’s financial markets and “hot-button” client concerns.
  • If you’ve written articles for industry trade journals, given speeches, or appeared on television or radio, list those experiences on your website. The goal: to demonstrate you are an industry thought leader—i.e., someone who sets the pace for your competitors.

Consumers Look for Credibility

Second, prospects look for credibility—i.e., to see that you are a person of integrity and believability. Since credibility derives from everything you say and do, especially in front of your customers, always operate from a place of total truth and client alignment Here are a couple things that should help:

  • Pay extra for your own Internet domain name. This means your website and e-mail address will display your company name, rather than an Internet service such as Yahoo or Google.
  • When conducting initial and presentation interviews, don’t use fear or hype to arouse attention or motivate purchase. These tactics tend to spark doubt and create less persistent business than do legitimate fact-finding and a thorough discussion of features, benefits, and objections.
  • Also, when speaking about yourself, don’t exaggerate your education, credentials, or past jobs. Stretching the truth is a sure credibility killer, perhaps not right away but always in the end.
  • Follow the Stanford Guidelines for Web Credibility. To further enhance your believability, adhere to the research-based Stanford University model. Two of its recommendations: make it easy for prospects to verify the claims on your site, while making your business tangible by including office and staff photos. For Stanford’s full list of credibility recommendations, go here.
  • Finally, align yourself with third-party organizations that rate firms based on performance or customer satisfaction. Examples are the Better Business Bureau and MacAfee SECURE. The National Ethics Association, sponsor of EOforLess.com, gives its members rights to use its “Ethics.net Registered Member” badge, as well as its “Certified Background Check” logo for those who pass a comprehensive screen. By posting respected credibility badges on your website, you convey not only your commitment to ethical business practices, but also your standing with respected third-party organizations.

Responsibility Is Key

Third and finally, convey on your website that you are a responsible insurance and financial professional—that your business practices are sound—and that you stand behind your work. Here are three tips to get you started:

  • Showcase all third parties on your site that are key value creators and/or protectors—your FMO, broker-dealers, and RIAs; your product providers; your clearing and third-party custodian firms; your Internet security consultant, etc. In short, you want to show that you have a team of outside experts dedicated to keeping your clients’ personal data and money safe.
  • Review your business practices—explain that your recommendations derive from rigorous fact-finding, that you perform comprehensive due diligence on products offered, that your insurance and investment strategies are mainstream and reputable, and that your operations and procedures are well designed and executed.
  • Finally, explain that you practice what you preach in terms of protecting your own business against unexpected losses. Assure clients you have backstops in place should one of your product providers fail, a client gets hurt while visiting your office, or you make a mistake—or fail to do something—that financially harms them. Then explain all of the protections that apply: SIPC coverage for investments, state insurance guarantee funds for life insurance and annuities, commercial liability insurance for your firm, and errors and omissions insurance for your professional duties.

In summary, if you want to accelerate your company’s future growth, fully leverage your website for trust building. Make sure it conveys the points covered in this article. And if you haven’t done so yet, take advantage of your National Ethics Association membership. This will allow you to leverage its two trust badges and benefit from its extensive ethics and compliance content library.

Following the Authority, Credibility, and Trust (ACR) formula will not only send the right message to your prospects and clients, it will solidify your position as a market leader. Good luck!

How to Build Your Business with Ethics.net and EOforLess.com

Most insurance and financial professionals today have access to the same products. They position themselves roughly the same way. Their customer service is comparable. And they’ve largely earned the same industry certifications, so their knowledge bases are similar. How can an agent or advisor stand out? By building stronger customer relationships based on trust. The good news: not all agents are equipped to do this. If you can, you’ll have a leg up on your competitors.

Where does trust come from? Simply put, it comes from:

  • What you say and do,
  • What your clients say and do,
  • What prospects and customers see when they visit your website or read your marketing materials, and
  • How much credibility you project into the marketplace.

Let’s go over each of these elements. The starting point for creating trust: words. You must always strive to speak from a place of deep authority. Know what you’re talking about, and project that expertise in every consumer interaction, whether personal or via your website. Authority comes from years of study and experience and is conveyed through facts, not hype. If you know your craft, you don’t have to exaggerate what you bring to the table. You just have to speak the truth.

The quality and credibility of your words must emerge in every phase of the sales cycle. When you call for appointments, your words should be totally above board, never misrepresenting what you do or what you sell in order to get an appointment. When you score an interview, you should never sell through fear or misrepresentation. And when you present a solution, you should strive to clearly and accurately explain all product features and benefits. If you don’t, you will not only erode trust, but also plant the seed of future client disputes and E&O insurance claims.

Your actions are also pivotal. Everything you do speaks volumes about your trustworthiness. Whether you follow up with the information you promised during an interview. Whether you return phone calls promptly. Whether you meet the deadlines you committed to for completing a transaction. Whenever you break a promise, you create a trust deficit. When that mistrust grows, every aspect of moving your business forward becomes harder. If your deficit grows too large, you will soon be treading water . . . and ultimately sink.

What clients say is also crucial. Because let’s face it. If you drop the ball with a client, that person will complain about it to many others, both face-to-face and online. But when you impress a client as a professional with integrity and unquestionable competence, he or she will talk you up to their friends, post favorable reviews on Yelp and Google, and perhaps even agree to write a testimonial for you on your website (assuming you’re not an investment advisor).

Client actions come into play when they refer you to a friend or recommend you to a professional group to which they belong. When clients act positively on your behalf, you know you have won the trust battle.

The final credibility element has to do with images or optics. When a prospect visits your website, does he see an attractive, professional page design that projects strength, reliability, and conservatism? Will she see photos and videos that portray you and your team as highly impressive professionals? Will he notice your marketing brochure is well designed and informative? And will she take note of your affiliations with highly credible business groups, especially your financial-services designations and trade association memberships?

Also important is belonging to organizations that can highlight your commitment to ethics and compliance. Two important ones are the Better Business Bureau (BBB) and the National Ethics Association (NEA). Financial professionals belong to the BBB to show they’re consumer friendly and to resolve complaints (using the BBB’s complaint-resolution process).

NEA differs from the BBB since it advocates for ethics in the financial-services industry, educates producers about ethical and compliant business practices, and provides tools for advisors to showcase their integrity. By joining NEA, agents and advisors can:

  • Stamp their business with an ethics seal.
  • Enhance their credibility by passing a Certified Background Check.
  • Be listed at Ethics.net as a Registered Member.
  • Advocate for transparency by providing access to industry regulators directly on your Ethics.net profile.

The items above are powerful trust icons that eliminate friction in the sales process, speeding your prospects’ journey to the close. But there’s another trust-building feature of NEA membership that producers should consider: the ability to buy NEA-sponsored E&O insurance from its affiliate, EOforLess.com. Think about it. When you protect your business with E&O insurance, you are basically telling the world you are a responsible professional—that you stand behind your words and deeds 100 percent. Consequently, in the unlikely event something goes wrong and a client suffers a financial loss, you will have the financial means to make things right.

In summary, if you’re looking to build your business on a foundation of trust, consider doing the following:

  • Be careful about what you say and do,
  • Give your clients multiple reasons to say positive things about you,
  • Make sure your marketing vehicles are confidence builders, and
  • Show that you’re responsible by purchasing E&O insurance.

And if you can save money and time by doing the last item at EOforLess.com, all the better. Good luck!

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.