How Can a Policy of E&O Insurance Save Your Business?

As much as financial professionals would like to be perfect, they aren’t. They are prone to making mistakes because they are human. And those so-called errors & omissions can be expensive to resolve, at best, and fatal to a business, at worst. Fortunately, a policy of E&O insurance can save their business with proper planning and commitment.

Part of the problem is every segment of the financial world has become more complex over the years. Whether it’s life or health insurance, investments, property-casualty insurance or real estate, the amount of knowledge required to do business has exploded. The regulations that affect professionals have become mind numbingly complicated. For example, the U.S. Department of Labor’s Fiduciary Rule, slated to take effect in April 2017, includes over 1,000 pages of dense requirements. And the technologies professionals use to do business evolve so quickly it’s hard to keep up. In this environment, it’s easy to make a mistake through lack of information or time or through a sloppy mistake.

What’s more, even an innocent mistake can explode into a nasty client lawsuit and a potential financial judgment that can cost tens of thousands, if not hundreds of thousands of dollars, to resolve.

Consider this: according to a top E&O insurer writing E&O insurance for life and health insurance agents, there are at least 11 major mistakes an agent can make, ranging from misrepresentation, premium errors, and failure to explain or provide coverage to policy change errors and beneficiary-related mistakes. But making a mistake is just the beginning. The same insurer found that the average insurance settlement for a disability-insurance related claim was $149,000. Experts say claim costs for large investment accounts can easily hit half-a-million dollars or more, depending on the amount of assets under management.

Being on the hook for a six-figure or higher legal judgment is not something most financial professionals can fund out of petty cash. In fact, most would have to liquidate some or all of their assets in order to pay for a significant legal judgment. How would you pay for a bill this large? Would you have to declare bankruptcy in order vacate your legal liability? How would you continue to meet your financial commitments—say, sending your children to college or funding your own retirement?  If you had to put your entire financial life on hold in order to deal with a nasty E&O dispute, then E&O insurance is made to order. Without a doubt, errors & omissions are human, but relief from liability is divine.

Don’t Get Left on the Hook for Mistakes You Didn’t Mistake

Compounding matters is that many E&O claims fall into the nuisance category. Sometimes clients take offense at their financial advisor for bogus reasons and retaliate by bringing suit. Other times, they have unrealistic expectations about how their financial products should perform or believe their advisor sold them a bill of goods when in fact, they failed to listen to their advisor’s explanations. Whatever the cause, nuisance lawsuits constitute a large portion of America’s legal docket. But this doesn’t render them meaningless; financial professionals still have to defend themselves against even the craziest of lawsuits.

Imagine being sued for something you didn’t do and then losing a court battle. Wouldn’t that be the ultimate case of adding insult to injury? A better solution: Don’t get left on the hook for mistakes you didn’t make. Research your financial liabilities and then shop for an affordable, yet comprehensive, E&O insurance policy from a provider such as This is crucial because even though you might be dealing with a nuisance claim, the costs in time, money, and aggravation are all too real. Being properly insured with E&O coverage will ensure you aren’t left holding the bag financially for something you didn’t do.

Get the Proper Insurance Policy to Fully Cover Your Company

However, locking down this protection doesn’t just happen. You need to get the proper insurance policy to fully cover your company. How? By doing your research and shopping for high-quality coverage that is affordably priced. Here are some pointers that might help you achieve a desirable outcome.

  • First, if your needs aren’t overly complex, take a look at policies issued on a group basis. This typically will yield cost advantages due to the lower costs of insuring large numbers of individuals on a common platform. But if you have an extremely large business and are looking to also insure sub-agents and brokers, then you may wish to consult with an E&O insurance broker. Should that be your situation, understand that dealing with individual brokers will typically require more effort and time due to the complexities of assessing larger risks and shopping them around to multiple insurers.
  • Second, try to take advantage of providers that offer streamlined E&O insurance underwriting, using a limited number of risk-assessment questions to determine eligibility. With such entities, you might be able to receive a lower premium if the company determines you are an attractive risk.
  • Third, check out online E&O shopping platforms, which greatly reduce the time and effort of dealing with bricks-and-mortar insurance agencies. At, for example, the average buyer can select appropriate coverage, fill out an application, and pay for and bind their insurance in 5 minutes or less.
  • Fourth, once you have the proper E&O insurance policy for your business, strive to keep it in force. This will eliminate any coverage gaps that could leave you uninsured when you need full coverage the most.

In conclusion, E&O insurance is designed to help financial professionals mitigate the risk of getting sued, a risk that can be substantial because they are human and prone to making mistakes. But self-insuring this risk is no longer necessary—or recommended—because  relief from liability isn’t just readily available and affordable, it’s divine!

Do You Really Need a Full Policy of E&O Insurance for Your New Business?


As a financial professional, do you lead a full life—rich with family, friend, hobbies, travel, and the like?

Do you enjoy buying gifts for your small children or helping your grown ones achieve their life goals?

Do you still get a lot of enjoyment from your career, both from a financial and client-service perspective?

If you answered, “yes” to all these questions, then you have a life full of meaning and joy. But what would happen if you lost your job or if your firm went under? Or what if you lost all your savings due to a prolonged client dispute? What would your life be like then? Would it be as enjoyable and worthwhile as it is today? Probably not. Which is why you should take steps today to protect your business, career, and family against the devastating impact of a client lawsuit. How? By purchasing affordable and comprehensive E&O insurance.

This recommendation is even more important for financial professionals who are new to the industry or who have just set up their own firms. These transitions greatly increase the risks of getting sued, making the need for insurance much more acute.

What a Full Policy of Errors & Omissions Insurance Can Do for Your New Business

You’ll notice our repetition of the world “full.” That’s because when it comes to protecting your busy, enjoyable life, there’s no substitute for a high-quality, comprehensive E&O insurance policy, especially one provided by a top-rated insurer and a well regarded administration firm. What can a full policy of Errors & Omissions insurance do for your new business?

For starters, it can provide peace of mind. You can go about working in your business without constantly second-guessing yourself and worrying about whether an unhappy client will sue you.

E&O insurance also provides financial benefits in the event you do get sued. These take the form of helping you retain and pay for an attorney, covering the administrative costs that your attorney might incur while defending you, and paying for legal judgments should you lose a case in court. Plus, in the latter case, your E&O policy will pay for any court costs a judge imposes on you.

Errors & Omissions PolicyAnd there’s the value of not having to deal directly with a plaintiff and keeping tabs on your case while it wends its way through the legal system. With E&O insurance, your insurance company will assign a claims adjuster to help manage the details of resolving your claim so you can focus on continuing to work in your business.

What’s more, E&O insurance policies typically cover other expenses that many financial professionals never think about:

  • The costs of retaining an expert witness to buttress your case.
  • Money needed to hire an arbitrator or mediator should you and the plaintiff decide to pursue an alternate path to dispute resolution.
  • Finally, expenses incurred during the process of settling the claim.

Put all that together and it’s easy to see that a full policy of errors & omissions insurance will greatly preserve your ability to enjoy life, both today and decades from now.

The Best Way to Limit Your Accountability for Errors & Omissions

Buying and keeping an E&O insurance policy in force is the best way to limit your accountability for errors & omissions. However, as important as that is, it’s also important to prevent the need for ever having to use your E&O policy. Appropriate risk management is the answer. To that end, here are ten tips to help you avoid client disputes from interfering with your life:

Tip #1: Be a True Professional.
There is no short path to professionalism. Do your homework and know what your clients need and which products best meet those needs. Keep expanding your knowledge base by earning industry designations and completing continuing-education coursework. And always stay up to date with your regulatory requirements.

Tip #2: Take Responsibility for Due Diligence.
Never delegate due diligence to a third party. This means don’t take another advisor’s or another company’s word at face value. Investigate all product claims and fine print yourself so you can be sure your clients will be well served. Also, make sure all products and investment programs you offer are legitimate and fully compliant with regulatory requirements.

Tip #3: Don’t Stray from Your Specialty Area.
Only recommend products you are comfortable with and have sold in the past. If you’re uncertain, get support from your marketing organization or from another advisor in your office.

Tip #4: Follow All Solicitation Rules.
Make sure your solicitation materials are clear and don’t misrepresent your offerings. And avoid designing your own marketing materials; instead, rely on company-provided materials. But if you do create your own, be sure to secure all required approvals.

Tip #5: Engage in Full Disclosure.
Provide all required disclosures and candidly answer all client questions about your track record, business approach, and third-party relationships.

Tip #6: Complete Thorough Fact-Finding
Always schedule enough time to do comprehensive fact-finding with a prospect. Dig up and record all relevant facts, especially regarding appetite for risks. Then link all recommended solutions back to the facts you uncovered.

Tip #7: Always Make Suitable Recommendations
Make sure to present only suitable solutions, giving the prospect several from which to choose. After prospects agree to purchase your product, review their reasons for buying and get their agreement in writing.

Tip #8: Educate Clients about What They Bought.
Make sure clients understand how their products work—benefits, costs, exclusions and the like. Misunderstanding features and benefits is a major cause of E&O disputes, so be sure to fully educate your clients early in the game.

Tip #9: Leave a Paper Trail.
This may well be the most important technique of all. Always document key decisions, including those to refuse coverage, in writing. You’ll need this paper trail in order to defend your actions in court.

Tip #10: Avoid and Then Resolve Client Complaints.
The best complaint is the one you never have to deal with. Try to smoke out client dissatisfaction early in the relationship before it progresses into a legal dispute. How? By paying close attention to what they say about what they bought and about your personal service. Also, observe what they don’t say – their expressions, body language, etc. In most cases, there will be weeks, if not months, of warning before a client sues you. Take action during this period to resolve any festering discontent before it becomes a formal complaint or legal action.

The point is this: everyone wants a life full of joy and satisfaction. But it’s hard to live that life when you have financial risks hovering over you. It’s even harder to enjoy yourself when you’re looking at spending your life’s savings on a legal judgment that could have easily been funded with high-quality, affordable E&O insurance. Bottom line: the best way to limit your accountability for errors & omissions is to purchase comprehensive protection through a firm such as, backed by top-rated insurers and professional administrators.

Deciding which broker-dealer (BD), financial marketing organization (FMO), or registered investment advisor (RIA) with whom to affiliate is never a trivial matter. Typically, financial advisors and insurance agents choose to contract with those organizations that provide the optimal mix of payout, product choice, marketing support, technology prowess, sales/marketing assistance, and compliance expertise. However, many advisors fail to consider the errors-and-omissions coverage provided by (or referred through) their partners. This can be a costly mistake.

The good news is most such organizations provide access to some form of E&O coverage. If the partner is ethical and committed to building a long-term relationship with you, the E&O protection should be affordable and of high quality. Yet, not all organizations are ethical or committed to their producers. Do your due diligence to confirm you’re getting a good deal.

As with all things financial, complexity rears its head quickly when discussing E&O coverage. Practices vary based on whether the entity is a BD, FMO, or RIA. Further, within each type of organization, there’s no standard way of delivering E&O coverage. Here are some broad guidelines to consider.

If you’re a registered securities representative, selecting a broker-dealer means you’re required to buy the firm’s errors-and-omissions coverage. The BD arranges for a block of coverage from an insurance company. Then, it divvies up the block among its contracted reps, charging each one a fee. Now, here’s where things get complicated. Some BDs will simply charge their reps their cost. Others will view E&O as a profit center, “marking it up” to a greater or lesser degree. What’s more, some will treat all reps the same, charging a standard rate. Others will vary the rate based on the rep’s production. Still others might play favorites, charging a better price to reps whom they “favor.”

Despite these complexities, getting E&O from your broker-dealer makes more sense than not. Selling securities in volatile times, especially to high net-worth clients, creates substantial risk for advisors. Getting covered through your BD simply makes good business sense. And since the BD wants you to be covered in order to minimize its own risk exposure, it will hopefully do its best to procure high-quality and affordable coverage. In the rare event a BD overcharges for E&O, registered reps will have to factor that into their overall BD assessment. If the firm is lacking in other areas—say, its product portfolio is weak or its computer support is lacking—then it might make sense to shop for another BD.

But be careful. A BD that charges a low amount for E&O might be capturing profits elsewhere in the relationship through higher securities transactions costs (or other costs). Evaluate the BD’s E&O offering in the context of its total product and service quality.

In the insurance world, agents have more flexibility to source their own E&O protection. As with BDs, FMOs typically require agents to have E&O insurance as a condition of contracting. However, unlike BDs, FMOs don’t access a block of coverage for agents to draw upon. Instead, they often research the market and make referrals to one or more “preferred” E&O providers. Since agents aren’t required to follow the FMO’s recommendation, they should evaluate them on their merits:

  • Do the recommended E&O policies provide high enough coverage limits?
  • Do they cover your specific products and business activities?
  • Is the insurance company highly rated and financially stable?
  • Does the company have a solid track record of paying claims?

As with BDs, the good news is that FMOs are unlikely to refer you to a grossly inadequate E&O insurer. That’s because they want to reduce their own financial liability by creating a risk buffer at the agent level. Once again, price may become an issue for some agents. If the recommended policies are too expensive, be sure to shop around for better deals.

Avoid the common practice of simply signing up for E&O insurance in order to provide the FMO with a coverage certificate, then dropping the coverage at the first opportunity. According to E&O experts, this may save you money in the short run, but will create potential financial problems in the long run due to coverage gaps. If you’re committed to staying in financial services, don’t just buy E&O to generate a certificate.

For investment advisor representatives, the options depend on the type of RIA selected. If the RIA is a wirehouse type, then advisors will be required to purchase the RIA’s E&O (see earlier BD discussion). If the advisor is affiliated with an independent RIA, then E&O practices will mirror those of insurance FMOs. So the onus again will be on the RIA to shop for a reasonable deal. In either case, it is crucial to fully review the coverage supplied and make sure it’s suitable to your business model.

Finally, when it comes to errors-and-omissions insurance, our best advice is perhaps the simplest. Do your due diligence before buying E&O insurance, make sure you’re not overpaying for it, and keep it in force continuously. Also, do business in such a way that you will never need to use it. That’s the savviest E&O decision you can make in today’s litigious environment. Good luck!

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at

Not all E&O policies are the same. And depending on your specialty, there are certain elements you may need that others do not. Here are some of the features you should look for in a high-quality E&O policy:

Adequate liability coverage

All E&O policies include liability coverage that protects you from financial loss due to a lawsuit arising from your error or omission. Liability coverage has two parts:

Per Individual Claim – Usually, there is a limit per incident or claim. The typical individual limit is $1 million. This means that any single liability claim resulting from a lawsuit will pay no more than $1 million.

Aggregate – Each E&O policy has an annual aggregate that limits how much an insurance company will pay each year. The usual annual aggregate is $2 million. That means the insurance company will pay on multiple claims up to, but no more than, $2 million. Some insurance companies state a lifetime policy aggregate limit rather than an annual aggregate. Be sure the lifetime limit is adequate if you go this route.

Remember, a general liability policy only covers incidents that affect bodily injury due to negligence from property or product safety. It does not cover financial loss to clients. Be sure to get adequate professional liability coverage from a high-quality E&O policy.

Legal and court costs

Whenever you are served legal papers that name you in a lawsuit, it will cost money just to defend yourself. Legal fees and potential court costs add up quickly and can turn even a small claim into a giant financial burden when you consider the total court and legal fees involved. Look for this important provision in your E&O policy to shield you from these damaging expenses.

Post-retirement claims coverage

E&O claims do not always arise while you are in business. They may surface years later after you’ve retired and a past client files suit against you. Your E&O insurance policy should have a provision to cover any claims that occur post retirement. This assures you will not be exposed to great financial risk after you stop working.

Employee or administrative coverage

Most financial professionals have employees or staff who serve clients directly. When they make a mistake or fail to carry out a required task, you will be held accountable. Employee or administrative coverage protects you from employee E&O risk.

Coverage extension to spouses, domestic partners, legal representatives, or beneficiaries

Nobody wants to have their family or other loved ones affected by a lawsuit. Some cases may name spouses as an actual defendant, even though they had nothing to do with the main financial professional’s business. Protect your loved ones with this important coverage feature.

Coverage flexibility

Make sure your E&O policy can be adjusted for whatever products and services you provide. Basic policies cover you for the sale and servicing of life, accident, and health products. But also look for optional coverage for fixed and indexed annuities, variable products and mutual funds, disability insurance, and RIA Series 65.

Visit our E&O Headquarters for more informational resources.