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.