Has there ever been an easy-to-understand financial-services product? Even for those in the business, life insurance and investment products can be complicated. This is understandable, of course, because with so much money at stake, product providers must define their offerings using precise legal terms. Unfortunately, this can make their policy documents difficult for consumers to understand, let alone those who sell the products.

This holds true for E&O insurance, as well.  The insuring clauses (the contract language that determines for whom and under what circumstances the product will deliver benefits) and the exclusions (language detailing when policy benefits won’t be paid) for professional liability insurance can confound even experienced agents and advisors.

Given such complexity, it’s important to pull the camera back and view E&O insurance from a wider angle . . . to get the big picture, if you will. This can help you better appreciate what it does and why it’s so important to buy it for your business (and to keep it in force).

To that end, we’ve boiled down E&O insurance into a short FAQ. Obviously, there’s much more to know than what we provide here. However, view this as a refresher discussion on why E&O insurance is essential and how it works. If you have further questions, please explore the E&O HQ at EOforLess.

Q: What is E&O insurance?

A:   E&O insurance is a contract between a financial professional and an insurer in which the latter agrees to assume the former’s liability risks in return for one or multiple premium payments.

Q: What is the purpose of E&O insurance?

A:   An E&O policy provides cash in the event a court finds that an agent or advisor has financially harmed a customer and must now pay a settlement or judgment to that person or entity.

Q: Under what circumstances does an E&O insurance policy provide benefits to a financial professional?

A:   E&O insurance pays benefits after a business professional makes a mistake, fails to do something important, or is negligent about performing his duties, thereby financially harming a client.

Q: What types of benefits does an E&O insurance policy provide?

A:   An E&O insurance policy provides cash to pay an insured’s attorney fees, court costs, and court settlements and judgments, subject to the limits and exclusions stated in the policy.

Q: What are E&O insurance policy limits?

A:   E&O insurance policy limits define the maximum benefits payable under an E&O policy.  They’re typically expressed in terms of two numbers. The first is the per-claim limit, and the second is the maximum allowed for all claims during the policy period.

Q: What are some common exclusions stated in E&O insurance policies?

A:   Common exclusions include claims for litigation settled prior to an E&O policy’s inception date or that is pending at that date; claims that benefit an insured’s family member; claims relating to the insured’s regulatory infractions or fines; claims stemming from a financial professional’s dishonest, fraudulent, criminal, malicious intentional acts or those that willfully violate state or federal law; or claims involving actual or alleged bodily injury, sickness, disease, emotional distress, mental anguish, or the death of any person. Check your E&O policy document to review all exclusions that may affect coverage under your contract.

Q: What is a “claims made and reported” E&O insurance policy?

A:   This is a form of professional liability insurance in which only claims made and filed during the policy period will be covered. If the insured cancels the policy and a claim arises at a later point, there will be no coverage.

Q: Can an insured cancel an E&O insurance policy at any time?

A:   Yes, an insured can cancel an E&O policy at any time. In such an event, the insurer will refund a pro-rated share of the premium. However, if a client files a claim for an incident during the policy period, there will be no coverage unless the insured purchased extended-reporting period coverage.

Q: What’s extended-reporting period coverage?

A:   Extended-reported period coverage provides protection for claims resulting from work completed during a prior reporting period. However, it doesn’t apply to current or future client work.

Q: What is an E&O insurance retroactive date?

A:   An E&O insurance retroactive date refers to how far back the insurer will pay for claims. In many cases under a claims-made E&O policy, your existing insurer will pay for claims arising from prior policy periods with other insurers, as long as you have maintained continuous coverage.

Q: Does E&O insurance protect your firm against frivolous lawsuits?

A:   Yes, your E&O policy will provide you with a lawyer and pay that person’s fees to defend you against frivolous lawsuits.

Q: Are E&O insurance policy retentions the same as deductibles?

A:   Yes, an E&O insurance policy retention is the amount of the claim settlement or judgment the insured is responsible for after which the insurer is responsible for the balance.

Q: Why is E&O insurance important to have?

A:   E&O insurance is important to have because it provides four essential benefits: a reduction of financial uncertainty, assistance with handling a client dispute, personal stress reduction, and bankruptcy prevention.

Q: What is the most convenient method of purchasing E&O insurance?

A:   The most convenient method of purchasing E&O insurance is to buy it from an online provider such as EOforLess, which offers click-and-bind coverage within minutes of arriving at the site.

A Former Ameriprise Financial broker has been kicked out of the industry for excessive and unsuitable trading of senior accounts. FINRA also sanctioned broker Larry M. Boggs for exercising account discretion without written authorization. Case in point: Boggs made 101 transactions on the account of an 82-year-old university professor whose investment objectives were growth and income and who had a moderate risk tolerance. In order to pocket commissions of $34,889, the broker generated client losses of $19,391.

A Washington state investment advisor lived the high life at his clients’ expense, sparking an SEC fraud charge. According to authorities, Ronald A. Fossum, Jr., stole hundreds of thousands of dollars in client funds in order to pay his taxes, jet around the world, and live rent-free. The government claims Fossum persuaded more than 100 investors to invest $20 million in three unregistered funds he owned and controlled. His modus operandi was to offer clients promissory notes paying 8 to 12 percent returns and then invest the proceeds in distressed oil and gas firms, real estate ventures, and derivative instruments. However, instead of making the promised investments, he pocketed his clients’ money in order to buy a home; make mortgage payments; travel to Fiji, Africa, and Mexico; and buy cars. Fossum also used classic Ponzi tactics, using money from new investors to pay the returns of older investors. Fossum and a partner,  Alonzo R. Cahoon, of Morgan, Utah, face individual counts of fraud, multiple violations of the Exchange, Securities, and Advisers Acts, disgorgement of ill-gotten gains, and civil penalties.

A Baton Rouge, Louisiana investment advisor is in hot water for using client funds to pay for his lifestyle, to make other investors whole, and to invest in a high-risk real estate scheme. Ralph Willard Savoie is now looking at one count of wire fraud, according to acting U.S. Attorney Corey Amundson. Authorities say Savoie raised more than $150,000 from investors. But instead of investing their funds in securities, insurance, and in industrial cooling towers, he wrote checks to himself and to his family. He also used client money to pay off prior investors. When one customer suspected something was wrong, Savoie responded by promising to return the man’s money “as long as (the client) did not report the matter to law enforcement.”

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.

Three Compliance Developments: Or Why An Advisor’s Work is Never Done!

Financial professionals face a daunting challenge: stay on top of their clients’ needs, track product-portfolio changes, AND stay current on regulations.

Several news items crossed our desks in late 2017 that brought this reality home. One report dealt with FINRA’s proposed ban on expungements. Another promised SEC action on insurance and securities professionals using the term “advisor.” The third announced that the SEC is creating a searchable database of bad brokers.

Clearly, none of these items was blockbuster news. But the three together would demand a block of advisor time and attention. We’re not complaining, mind you. Each of these initiatives appears to be sensible and probably overdue. Yet, they reinforce how compliance-driven this business has become. And it suggests that each new rule brings with it opportunity costs—for product manufacturers, agents and advisors, and regulators themselves.

To help minimize your costs, here’s a brief review of each item, which hopefully will reduce the amount of time you need to spend on it.

FINRA Expungement Ban: No, FINRA isn’t doing away with all expungements . . . just certain ones that are more than a year old.  As reported in Financial Advisor magazine, the action follows a dramatic increase in securities professionals applying to have very old complaints erased from their records.

In theory, requesting an expungement shouldn’t be a problem when a complaint is inaccurate or factually unsupported. The trouble is, defense attorneys have been recruiting advisors in droves to purge their BrokerCheck files of complaints dating back 10 or 15 years, even those without factual errors. Reason: they figure that after such a long period, consumers probably won’t dispute the request, and advisors will get an easy win.

This, in fact, is what typically happens. According to Financial Advisor, arbitrators grant expungements 90 percent of the time. As a result and in response to heavy criticism from the plaintiffs’ bar, FINRA wants to ban expungements on requests made a year or longer after a case closed. This would “ensure that the expungement hearing is held close in time to the underlying customer case, when information . . . is available and in a time frame that would increase the likelihood for the customer to participate” in the hearing.

Our takeaway? That now may be the time to apply for an expungement if you believe an old client complaint is flawed. That’s because FINRA is taking comments on its proposal until February 5, 2018. After an ensuing period of rule making, it will issue a final regulation, after which you may lose the ability to remove old complaints.

If you don’t have old complaints with issues, then ponder the importance of preserving your clean record through ethical and compliant business practices. As with many regulatory developments over the years, the agencies have not only raised the bar in terms of what they consider appropriate conduct, they have made the negative impact of getting sanctioned more severe. So take a look at your business practices to make sure you’re doing everything possible to prevent a FINRA complaint. Once it hits your CRD file, it will likely become much harder to remove.

Use of term “advisor.” The second item relates to an SEC official announcing that the investment-advisor regulator will be taking another look at the titles advisors and brokers used to describe their businesses. According to Financial Advisor, the executive told an industry meeting that the SEC is concerned about securities brokers who call themselves “advisors,” thereby implying they are fiduciaries under the Investment Advisors Act of 1940, when in fact they operate under the less stringent suitability standard.

The SEC also is concerned about brokers holding themselves out as advisors (and thus as fiduciaries) at one point in their client relationships, but then acting as a commissioned salesperson at other times. “If I’m the client, does it really work if I pick up the phone and call you and you’re my fiduciary while we’re talking and when we hang up you’re not my fiduciary any more?” asked Rick Fleming, head of the SEC’s Office of the Investor Advocate, at the TD Ameritrade’s Advocacy Leadership Summit in early November 2017.

However, Fleming stressed that regulating use of the term “advisor” shouldn’t be “worse than the disease” or something that weakens an advisor’s fiduciary role. “What we have to make sure of is that the rule has to be no less stringent than the (Investment Advisors Act of 1940). You have to build in exceptions to accommodate brokers’ business model,” Fleming said. “You have to allow them to sell a limited line of products and proprietary products, and fiduciary duty as written doesn’t allow that.”

This compliance item actually is quite serious, as it may force life insurance agents or securities brokers to change what they call themselves. If this involves reprinting business stationery and revising marketing materials, the headaches and costs involved could be significant. Implication? If you’re planning to enter the industry, think hard about what to call yourself and make sure your title doesn’t encourage a prospect to think you’re something that you’re not.

The regulatory risk is even greater for insurance-licensed producers who not only use the word “advisor,” but also titles such as “financial planner” and “wealth manager.” Not only do they not provide the broad-based financial advice such fee professionals provide, state insurance regulations require them to not mislead consumers about the scope of their work. For example, the NAIC advertising model regulation says that, “No insurance producers may use terms such as ‘financial planner,’ ‘investment advisor,’ ‘financial consultant,’ or ‘financial counseling’ in such a way as to imply that he or she is generally engaged in an advisory business in which compensation is unrelated to sales unless that actually is the case.”

Barred-broker database. The last compliance item relates to the SEC creating a searchable database of barred brokers and advisors. SEC Chairman Jay Clayton announced this at a Practicing Law Institute meeting in early November 2017. “Clearly, there are fraudsters in our marketplace who are seemingly unafraid of, or undeterred by, the risks of being caught,” Carney said. “The SEC can target the underlying conduct of those fraudsters—and we do—but we also can and should arm investors with information that makes it more difficult for them to be defrauded.”

According to a report in Financial Advisor magazine, the SEC plans to create a new website and database that will allow consumers to search for records of individuals the SEC has barred or suspended for violating federal securities law. The agency hopes this will shed light on the activities of barred or suspended brokers or advisors, helping consumers to wisely select a financial professional.

As with FINRA’s proposed expungement ban, the SEC’s banned broker database is another example of regulators raising the bar for financial professionals. In this case, though, it primarily affects bad actors who’ve already been thrown out of the business, making it harder for them to travel to a new jurisdiction after being sanctioned elsewhere. This is a positive development for ethical agents and advisors, who presumably will face less competition from rogue players who are simply out to scam the public.

To read more on ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

Beware Illegal Gifts . . . and Not Just During the Holidays

Not all gifts are wise, especially if you’re an insurance agent. That’s because giving something of value to prospects and clients can lead you to violate your state’s anti-rebating statutes. And this can land you a state insurance department fine regardless of whether your intent was innocent or not.

Although you no doubt learned about rebating in Compliance 101, it can’t hurt to review key concepts. Let’s start with what rebates actually are. Most regulators consider rebates to be giving value in various forms to a customer relating to a purchase of insurance. For example, all of the following would be considered an illegal rebate in most states:

  • Any gift designed to induce an insurance purchase, especially when the value of the gift is significant in relation to what the prospect will pay in premiums.
  • Any return of agent commissions to the buyer.
  • Any offer of free insurance that is contingent on buying insurance.
  • Any agent or agency premium payment on behalf of a prospect.
  • A refund of premiums resulting from favorable policy persistency.

The key point: regulators will normally view anything an agent introduces into the purchase process that is not defined in the contract as either a rebate or an inducement. What is the difference between the two? The former involves returning a part of a person’s premium payment after the sale, whereas the latter provides for the delivery of value in order to motivate someone to buy. In either case, regulators enforce anti-rebating statues in order to create a level, competitive playing field for all producers and companies and to assure that all consumers have access to the same policy terms.

So how do you know when you’re in danger of violating your state’s anti-rebating statutes? According to the white paper[1], “Understanding Concepts of Rebates, Gifts, and Inducements,” by Currin Compliance Services, Inc., start by answering the following five questions. A “yes” to any of them suggests you may be on dangerous ground.

  1. Are you giving, paying for, allowing, or offering anything of value that is not defined in the insurance contract?
  2. In considering the items in #1 above, would prospects be more likely to purchase the insurance on offer?
  3. Are you offering value in order to acknowledge or reward your existing client base?
  4. Is the offer unrelated to the insurance offer you’re making?
  5. Does your offer include a game of chance such as a raffle or lottery?

Although a “yes” answer points to a rebating violation, this is not a foolproof conclusion. That’s because two states—Florida and California—do not prohibit rebating at all. For example, in Florida, you can offer a rebate to one customer as long as you do so for all customers. Similarly, California agents can engage in rebating as long as their carriers allow it. There are other regulatory nuances in these two states, which the Currin white paper explains in greater detail.

The paper goes on to list a number of do’s and don’ts when it comes to the topic of rebates and inducements. It will be well worth your time to adhere to the following guidance:

  • Don’t make offers of cash or cash equivalents, even if the payments are nominal. The closer you get to cash payments, the more likely you’ll run into trouble.
  • Do check with state rules about item giveaways to attract prospects. These are often permitted, especially if they carry a company or agent/agency logo.
  • Don’t make offers contingent on an insurance purchase. That is a huge red flag to insurance departments.
  • Do try to make offers as far away from the sales process as possible.
  • Don’t make them specific to individual consumers or groups of consumers. The broader your scope, the better.

The point is, whenever you’re tempted to give something of value to a prospect in order to close a sale, think twice. And since insurance departments treat this issue differently, be sure to consult your own state’s anti-rebating statute before going ahead with a promotion. Still uncertain? Check with your agency, FMO, or carrier compliance department.

You can read more on ethical practices and tips at www.ethics.net.