Posts

What’s the best way to keep your life & health insurance business protected against client lawsuits? The most important, obviously, is to have E&O insurance. But close behind is making sure your business practices don’t make you vulnerable to common E&O insurance claims. According to a major E&O insurer, they are most likely to arise from the following causes:

  • In the top position is misrepresentation, accounting for 25 percent of all claims filed by members of a major life insurance trade group. Misrepresentation occurs when you make a statement about a product you sell that is false or misleading. For example, you might claim an annuity has no surrender penalties when, in fact, it does. When your client discovers that he can’t get all his money back within the first seven years, he may file a regulator complaint against you or bring suit in court.
  • In position #2 is failure to provide, which accounts for 13 percent of claims. This refers to an agent not providing necessary insurance coverage even though it was (or should have been) clear that the client needed it. A common situation is when an agent conducts an initial fact-finding interview that uncovers a host of insurance risks that need to be addressed. However, because of the press of other business, the agent fails to address one of the risks on a timely basis, and the insured suffers a loss before she can purchase the needed insurance. Bringing an E&O insurance claim in this situation is a common client scenario.
  • The third most common claim is known as “failure to explain,” representing 11 percent of reported losses. This occurs when an agent sells an insurance or financial-services product or rider, but fails to fully explain how it works. Here’s one possible example: a husband purchases a hybrid life insurance/long-term care policy, which is designed to not only provide a death benefit, but also a nursing-home care benefit in the event the husband needs custodial care. On the surface, such policies are attractive because they cover two risks simultaneously. However, sometimes agents fail to explain that receiving long-term care benefits will reduce the amount of life insurance benefits that can be paid later. That’s because the LTC benefit is essentially an accelerated death benefit. If an agent doesn’t explain the nuances of how such a life/LTC combo plan works, the surviving spouse may be surprised to learn she will receive a much lower death benefit than anticipated because of LTC benefits already paid out. Surprises such as this often lead to disappointment, anger, and, ultimately, lawsuits.
  • In fourth position are so-called office errors, a catch-all term referring to various clerical errors that can result in lower than expected insurance payments or no benefits at all. Examples of office errors, which account for 11 percent of claims, include botching client policy-change requests, not apprising clients that they unintentionally let their policies lapse through non-payment of premiums, or sloppy handling of life insurance applications, which result in claims being denied because clients failed to disclose a material fact to the insurer.
  • Finally, the fifth most common claim, representing 6 percent of lawsuits, are premium errors. These happen when agents and clients cross wires and premiums aren’t remitted to insurers on time, resulting in coverage not being available after an insured suffers a loss. If this ever happens to you, you can be certain you will have an angry, frustrated, and litigious client on your hands.

Given the wide range of claims life & health insurance agents are susceptible to, what are the best ways to protect yourself? The first step is to adopt a risk-management approach to running your business. Take a look at all of your customer-facing processes and make sure they are in good shape. If they are running inefficiently or generating too many errors, then re-engineer them as soon as possible.

The second step is to purchase a comprehensive E&O insurance policy from an online provider such as EOforLess.com. Having your own E&O insurance means you’ll have a financial backstop in the event a judge orders you to pay a large settlement or judgment to a client who beats you in court. It will also provide funds to retain a defense attorney, for expert witnesses, and for court expenses. Without E&O insurance behind you, you will always be one lawsuit away from potential bankruptcy and always beset with stress and worry about your future.

Wouldn’t you rather do business without always having to second-guess your decisions from an E&O perspective? Of course, you would. Which is why you should consider purchasing E&O insurance from EOforLess, the online pioneer of click-and-bind insurance for financial professionals. Contact us today to learn more about our coverage options.

When it comes to E&O insurance, surprises are the last thing you need. For example, if a client begins to threaten you with a lawsuit, you want to know your E&O insurer will stand behind you, not that there isn’t enough coverage left in the policy to protect you. Similarly, there are many nuances in E&O policies that may catch you by surprise if you haven’t uncovered them ahead of time. Here are seven common examples.

  1. Did you know that all “claims made” policies aren’t made equal? Some policy forms are a purely claims made design, while others are “claims made and reported.” The difference? The latter provide coverage only if you file a claim within the policy term or within a short period thereafter. If you try to file the claim after either of those two-time frames, you may find yourself without coverage. Solution: read your policy to confirm which type you have.
  2. Does your policy cover your specific duties? To find out, read your policy’s insuring agreement to see how it defines professional services. It will typically be quite explicit about whom and what it covers. For example, one life insurance agent E&O policy has this definition: “Coverage is limited to general agents or agents with valid licenses in a client’s state or jurisdiction, as well as the general agent’s or agent’s state or jurisdiction, and who are involved in the sale or servicing of life, accident, and health insurance, disability insurance, and indexed or fixed annuities. Covered duties also include financial planning and supervision and training of agents.” The key point? Your actual duties must align precisely with the policy language in order for you to have coverage under the policy. For example, if you have a sideline real estate business, you will not be covered under this policy because those activities aren’t listed in the insuring clause.
  3. Are you familiar with your policy’s exclusions? One of the most common ways E&O policies surprise agents is when they file a claim and the insurer tells them an exclusion applies. If this has ever happened to you, you know how infuriating it can be. Solution? Whenever you purchase a new E&O insurance policy, immediately read the exclusions list. Doing so, for example, will show you’ll have no coverage for claims arising out of litigation that occurred before the policy’s effective date or were in process on that date. Or that E&O claim payments that benefit a family member won’t be covered. Or that financial advisors will not be covered for E&O losses if they use or disclose confidential client information or non-public information. There will be a dozen or more scenarios in which you might assume coverage, but that your policy, in fact, excludes. Study your contract so you know exactly what exclusions apply.
  4. Are you aware of the nuances of coverage limits? The first is the difference between per-claim and aggregate limits. As its name suggests, the former establishes a maximum dollar amount that can be paid on a given claim from an insured. The aggregate limit refers to how much coverage is available for multiple claims from one insured in a given year. However, shared limits introduce a further complexity. Here multiple people within a firm may be covered under one master policy with a limit that applies to every agent and/or advisor insured under the policy. So if the firm suffers a large number of E&O insurance claims in a year, which consumes the entire shared limit, you will be out of luck if you need to file a claim later.
  5. Did you know that some E&O insurance policies apply the stated deductible for all claims filed in a policy period? So if you have five claims and your deductible is $1,000, you will be on the hook for $5,000. Other policies provide for an aggregate deductible for multiple claims. In the example given, this might limit your deductible to only $2,000 in E&O claim outlays in a given year.
  6. Have you heard of E&O policies that apply your deductible to legal fees as well as to claim payouts? Policies with so-called defense-and-loss deductibles make you pay for legal fees up to the deductible amount even if the claim is ultimately proved groundless. Compare that to E&O insurance policies with first-dollar deductibles, which only require you to pay if you’re found liable and a claim payout is required. Obviously, the latter type is more appealing.
  7. Finally, does your claims made E&O policy have an extended reporting period or “tail” provision? This will allow you to file a claim even after your policy expires, as long as the wrongful act happened prior to the end of the policy period. Although most E&O policies have this feature, the length of the period can vary. EOforLess’ life/health agent E&O policy has an unlimited extended reporting period. This can be important if you are planning to sell your business.

E&O insurance policies for life and health insurance agents, P&C agents, registered investment advisors, and real estate agents and broker/owners have many other nuances. To make sure your business is fully protected, carefully read your policy’s fine print. This way, in the unfortunate event you need to file a claim, you will avoid nasty surprises that put you at risk.

But here’s the good news. Many of these surprises can be avoided entirely by purchasing the right policy in the first place. By reading specimen policies before you buy, you can select one from a company that doesn’t impose restrictive provisions. Shopping carefully can literally save you tens of thousands of dollars or more at claim time. Worth the extra work? You bet!

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.