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What Is E and O Insurance Coverage and How Does It Work?

Are you a life, health, or property-casualty insurance agent? Do you do investment or financial planning for a fee? Then you know all of these fields can be excellent ways to make a living—both financially and psychologically. But you also know they can be risky. Sometimes insurance or financial professionals do something wrong or fail to do something important. Other times, a client may create a dispute in an attempt to make money or hurt their advisor. In either scenario, getting embroiled in a court battle can turn a satisfying career into a stressful nightmare. And if you lose your case, it can have a devastating impact on your finances.

Enter e and o insurance, otherwise known as E&O coverage or professional liability insurance. With E and O insurance, you can convert a large, unknown, potentially damaging financial loss (a court judgment or settlement) into a known, easily affordable and budgetable expense (E&O insurance premiums). By transferring your risk, you not only will protect your business, but also secure peace of mind. For these reasons, thousands of insurance and investment professionals today buy E&O insurance in order to establish a financial backstop in case they lose a client lawsuit.  Are you among them?

If so, read on for a quick refresher on what E&O coverage is and how it works. If not, consider whether having this form of insurance would benefit you in the event a client decides to take legal action against you . . . and wins.

So what is E&O insurance? It’s simply an agreement between an insurance or investment professional and an insurance company in which the insurer assumes a professional’s liability risks in exchange for receiving a single or periodic premium payment. The purpose of the contract is to generate cash in case a court finds that the professional harmed a customer and must be held financially accountable.

What are the terms of the deal between you and your insurer? The easy answer is that your E&O policy will cover you in the event you make a mistake or neglect to do something that results in a financial loss to a client. The harder answer involves drilling down further and examining the policy’s insuring clause and list of exclusions. Although the latter discussion is beyond the scope of this article, we recommend you carefully read those sections of your policy to see how they define terms such as “insured,” “loss,” “claim,” “wrongful act,” and “professional services” and what losses they will not cover. There are nuances involved in how insurers define these terms. So you want to be sure their contract language syncs with your needs. If not, you may not be protected in the event you get sued in the future.

However, if you operate within the policy’s insuring clause and exclusion list, then you will be fully protected against future lawsuits up to your policy’s limit of liability (example: $1 million). This assumes you pay your premium when it comes due. In the unfortunate case a client sues you, your insurer will then do the following on your behalf:

  • Provide you with an attorney at no additional cost.
  • Assign a company adjuster to investigate and process your claim.
  • Pay your attorney’s retainer fee and additional fees incurred while handling your case.
  • Pay for expert witnesses your attorney deems necessary.
  • Cover arbitration or mediation costs.
  • Pay for any court-related expenses.

For your E&O coverage to work as planned, you must uphold your end of the bargain. This involves paying for your E and O insurance premium on time, never letting your policy lapse, and notifying your insurer promptly at the first sign that a client may file a complaint or lawsuit against you.

Avoiding a lapse is doubly important if you purchased a claims-made E and O insurance policy. That’s because under the terms of a such a policy, the insurer will provide protection for any client dispute or lawsuit that arises and is reported during the policy period. This is true even if the claim resulted from an event that happened many years ago when you had E&O insurance with another company. (Claims-made policies are distinct from occurrence E&O policies. With those, the E&O insurance policy in force when the precipitating incident happened pays the claim, not the one in force when the claim is filed.)

However, there’s an important caveat: You must have maintained continuous E&O coverage over the years. If you canceled your policy, creating a coverage gap, your current claims-made policy will not cover events that occurred prior to the gap.  So if you take nothing else away from this article, let it be this: don’t lapse your E&O insurance policy. Even if you replace it months or years later, you will now have a coverage gap to deal with. This may have dire consequences for your finances if a lawsuit arises from the gap many years from now.

Once you understand how E&O insurance works, the next question is determining from whom to buy it. If you have a large agency and many agents and service staff working for you, or if you engage in complex, risky transactions, you might want to work with an experienced E&O insurance broker. This person will shop your case to multiple markets and return with several insurance quotes for you to consider. Once you select one, you will likely have to submit an insurance application and then wait for days or weeks until the insurer gets back to you with its decision.

Alternatively, if you are a solopreneur and don’t sell risky products (or do risky transactions), you may want to purchase your E&O insurance online from a firm such as EOforLess.com. A pioneer in online insurance sales, EOforLess provides E and O insurance protection for life, health, and property-casualty insurance agents, as well as for registered investment advisors. How to buy from us? You simply visit our website, select the appropriate policy for your license type, complete an application, and provide payment information. You can then bind your coverage and print out proof of insurance within just a few minutes. As a bonus, you will also be enrolled in the National Ethics Association, which provides ancillary benefits such as product discounts and free CE courses. NEA also hosts an online Ethics Center, where you can learn how to protect your firm by adhering to ethical and compliant business practices.

The bottom-line point is this: to sell insurance or investments in today’s litigious world, sensible professionals do business defensively in order to avoid potential E and O insurance claims. Part of this involves developing an ethics policy for your firm and following all pertinent compliance regulations. The other part involves making sure a successful client lawsuit won’t bankrupt you. How? By purchasing comprehensive and affordable E&O insurance. If you’d like to check out your options, please contact EOforLess today.

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E&O Insurance in Action: Claim Scenarios and Outcomes, Part 1

THE SITUATION: Buyer Sues for Misrepresentation of Information

COVERAGE: Failure to Perform Professional Services

A realtor prepared a mock closing statement for a client. This statement was meant as a guide for the client to use to calculate the amount of money needed to be saved in order to purchase a property in their desired area. Their price range was from $500,000 to $700,000. The realtor’s statement contained errors, directing the buyer to save less money than what was needed to close on a specific home that was on the higher end of their price range. As a result of the realtor’s error the sale did not go through at closing due to lack of funds and the buyer lost $5,000 off their earnest money deposit.

The buyer sued the realtor for misrepresentation, resulting in:

Defense costs or “claims expenses” of $10,000
Judgments or “damages” of $7,500

THE SITUATION: Seller Sues for Alleged Misrepresentation

COVERAGE: Failure to Perform Professional Services

The Smith family is relocating and needs to sell their home quickly. Their friends, the Johnston family, wants to purchase the home because of the area. The Smith family asked their realtor which school district their current residence resided in, knowing the Johnston family wanted to purchase the home based on the school district. The real estate agent mistakenly told the Smith family the wrong school district. The Johnston family realized this and withdrew their offer. The Smith family had to put their home back on the market.

The Smith family sued their realtor for misrepresentation, resulting in:

Defense costs or “claims expenses” of $5,000
Judgments or “damages” of $0

THE SITUATION: Buyer Sues for Negligence

COVERAGE: Failure to Perform Professional Services

Retired from teaching, a woman decides to open a nanny business. She needed a new home with a larger yard that could be used appropriately. She consulted via email with her local real estate agency about purchasing a residence in which she could also run her business. The broker showed her a home that she loved. After purchasing the home, she was then told by the association that they do not allow use of the property for any sort of babysitting, nanny, or daycare business. She only purchased the home to pursue a part-time income from a nanny business.

The buyer sued the real estate agency for negligence, resulting in:

Defense costs or “claims expenses” of $15,000
Judgments or “damages” of $10,000

THE SITUATION: Buyer Sues for Discrimination

COVERAGE: Discrimination Indemnity & Defense

A minority couple was relocating to a new state and used a real estate agent whom they discovered on the internet who resides locally. The clients flew into the area to view homes and discovered that they were only being shown homes in areas predominately inhabited by other minority couples like them. When they asked if these were the only homes available that fit their criteria and price range, the realtor stated that these were the only properties available in this city. The couple decided to retain the services of another local realtor. There were many other properties available in the city and in neighborhoods that fit their criteria and price range.

The buyers sued the original realtor for discrimination, resulting in:

Defense costs or “claims expenses” of $75,000
Judgments or “damages” of $35,000

THE SITUATION: Renter Sues for Alleged Fair-Housing Discrimination

COVERAGE: Discrimination Indemnity & Defense

It has been tough for a partially disabled gentleman to find a new apartment in today’s market. He finally found an apartment of his liking, located on the second floor of the building. He approached the property manager in person to discuss renting the property. The property manager said she didn’t think it would be a good fit for the gentleman but she would have other apartments available in the upcoming months. When the gentleman asked why she didn’t think it would be a good fit, she replied that she noticed he was partially disabled and walked with a cane. Since the apartment was on the second floor of the building, with no elevator access, she had concerns for his health. Although, the property manager had good intentions, the gentleman felt discouraged. He wanted to rent the property and although the property manager did not say he couldn’t rent the property, her actions were still in violation.

The gentleman sued the property manager in violation of the Fair-Housing Act for discrimination, resulting in:

Defense costs or “claims expenses” of $55,000
Judgments or “damages” of $25,000

*NOTE: The above cases are fictional examples. Please review the actual policy for coverage intent.

Reprinted with permission of Arthur J. Gallagher & Co.

For more information on affordable errors and omissions insurance for low-risk real estate agents and brokers, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.

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Claims Made and Reported E&O Policies: What You Should Know

Most real estate errors and omissions insurance policies are insured via a “claims made and reported” insurance policy. The term claims made and reported can be difficult to grasp. Our goal is to help in explaining these types of policies so there is a better understanding of the advantages and disadvantages.

Claims made policies trigger or enact coverage based on when the claim is made, not when the error, omission, prior deal, etc. actually happened. All claims must be reported during the policy term in order for a claims made and reported policy to respond. This can be problematic as it could often be months or years before a suit or claim is filed.

To address this issue, there is a “retroactive date” added to the E&O policy. The retroactive date is the first date an E&O insurance policy was purchased and continuously maintained. By adding a retroactive date to an insurance policy, the insurance companies will generally then add prior acts coverage. E&O policies with a retroactive date listed and prior acts coverage will cover claims that arise during the policy period starting from the retroactive date until the end of the policy term. This makes it crucial for companies with an E&O policy to ensure that they maintain their retroactive date and prior acts coverage on these policies.

By allowing an E&O insurance policy to lapse or be cancelled by an insurance provider, you create a risk of losing the retroactive date and prior acts coverage. Most insurance companies will no longer honor a retroactive date and prior acts coverage unless there has been consecutive, uninterrupted insurance coverage.

While claims made and reported policies can be frustrating due to the way coverage is triggered and the need to maintain the retroactive date, they do have some advantages. One notable advantage is the limits of the current policy purchased will be applicable in the future as the insurance limit for claims that might arise from past transactions. This can be an advantage in that generally companies are purchasing higher limits today than they did several years ago. Plus, over time insurance companies have broadened the coverage they offer for errors and omissions policies. It is recommended to review the current E&O policy in place, looking for exclusions and restrictions in the insurance E&O policy.

Reprinted with permission of Arthur J. Gallagher & Co.

For more information on affordable errors and omissions insurance for low-risk real estate agents and brokers, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.

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Life’s Duty: Will You Answer the Call?

Imagine one of your clients wants to buy life insurance (yes, it happens). But you never get around to sell the product because you had bigger fish (read: “products”) to fry. Or what if you knew a client had a large life insurance need, but you never raised the topic because you were just too busy? In both scenarios, did you fulfill your duty as an ethical financial advisor? If you failed to do so, did you just create a potential errors-and-omissions claim?

We might ask the same question of the entire life insurance industry. That’s because millions of Americans need life insurance today. But they’re not getting an opportunity to buy due to changing field force demographics. Consider these statistics:

  • According to LIMRA, the number of life agents has plummeted from about 250,000 in 1975 to some 150,000 recently. Meanwhile, the number of agent recruits has fallen to about 35,000 per year, down from 55,000 in 1975.
  • Not surprisingly, the industry is only selling about 9 million life policies a year, down from 17 million in the mid-1980s. Yet over this time frame, the number of U.S. households with children increased by about 20 percent. Talk about a missed opportunity.
  • Making things worse, 50% of Americans say they need more life insurance and 25% say they’d buy if given the opportunity. But fewer and fewer are getting that opportunity.
  • And the outlook will likely remain cloudy since the distribution force is aging (median age of an independent life producer is 56) and has largely migrated to the affluent end of the marketplace.

But there’s good news. Many insurers have launched alternative distribution models that leverage Internet efficiencies to tap the vast middle market. But more can be done if you’re up to the challenge. Here are a couple things to try:

  • View the risk of dying too soon as a pivotal financial risk. If you’re not equipped to handle it, be sure to refer your client to someone who is.
  • Recommend life insurance sales as a potential career to the unemployed people you know. Same for the young college graduates who continue to have trouble landing their first jobs.
  • If you do a lot of life sales, considering hiring a college intern to assist you. You never know how the seeds you plant today will take root in the future.
  • If you’re a member of the National Association of Insurance and Financial Advisors (NAIFA), make sure they’re providing your name to the Agent Locator on lifehappens.org. This will give consumers access to one more agent who will answer life’s call.

Finally, always probe for the life insurance need. If you uncover it, make an appropriate coverage recommendation. And if the prospect refuses to buy, have the person sign a release documenting his or her refusal. That piece of paper might prove useful some day in a court of law.

For more information on ethical business practices, please visit the National Ethics Association’s Ethics Center. For more information on affordable errors and omissions insurance for low-risk financial advisors, visit EOforLess.com.

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