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.

­Whatever your license type—life or health insurance, securities broker, registered investment advisor, property-casualty agent, or real estate broker owner—cybersecurity should top your list of risk-management concerns. As recent news has repeatedly shown, financial professionals of all stripes face increasing cyber risks. And those who continue doing business as usual are setting themselves up for potentially catastrophic outcomes.

­The good news is agents and advisors have two powerful avenues of self-defense: insurance and security best practices.

Now, if  you thought E&O insurance didn’t protect against cyberattacks, you’re not alone. Many financial professionals assume they need dedicated cyberinsurance to receive the most comprehensive protection. And they’re correct. However, you can still receive basic coverage through your E&O insurance policy. Here’s how that works:

Today’s E&O insurance policies not only protect you against the standard risks of making a mistake or failing to do something important, they now also cover you against certain cyberrisks. For example, EOforLess’s life insurance agent E&O has a client network damage and privacy claim endorsement. This means you will have protection against plaintiff lawsuits relating to an alleged electronic infection that harms a client’s network. The loss must result from you providing covered professional services to the client. In other words, if a client picks up a computer virus (and sustains a financial loss as a result) from having accessed your computer network, your E&O policy can indemnify that person or entity within the limits and definitions of your policy (and the specific wording of its network endorsement). However, it’s important to realize that standalone cyberinsurance offers much more comprehensive protection.

What about common-sense security practices? Actually, implementing a surprisingly short list of measures can go a long way toward keeping you and your clients safe. Here are some of the best measures to implement:

    1. Threat awareness. Part of having secure computers and networks is being aware of the threats you face. To this end, follow industry trade publications to stay current on the cyberattacks and breaches financial entities have suffered recently. Also, visit the Financial Services Information Sharing and Analysis Center to learn more about recent incidents.
    2. Secure passwords. Even in this day and age, a surprising number of people still have poor password hygiene. They use their names and birthdays, rely on simplistic words and phrases, and fail to lock down their passwords against prying eyes and thieving hands. By mandating the use of a password management application, you can vastly augment your firm’s cybersecurity. Such apps simply ask you and your staff to remember one master password. Then through an Internet browser extension, they automatically serve up longer, more complex passwords when you visit websites. This means you’ll no longer need to know or save potentially hundreds of passwords.
    3. Multi-factor authentication (MFA). MFA is a security approach that depends on two or more methods of authenticating a user’s identity before allowing a log-in or other transaction. It typically combines what the user knows (i.e., a password), what the user has (a security token or code), and what the user is (biometric verification as in a smartphone’s built-in fingerprint reader). Having multiple security layers makes it harder for intruders to break into a device or network, since they need to have not only your password, but also your token device and biometric data.
    4. Security best practices. A large number of cyberbreaches occur due to employees’ unsafe computing practices. For example, they often fall prey to e-mail phishing attacks in which they clink on a URL within an email. This then infects their computer with a virus or other code that can lead to unauthorized break-ins. Even worse, online criminals now use increasingly plausible approaches to dupe employees into clicking on malicious links. Solution? Constant employee training on security awareness and best defensive practices.
    5. Data encryption. Make it your business to learn how to encrypt all client data before sending it over e-mail or via other channels. This is a critical element for safeguarding business and customer data.
    6. Destroy old hardware. If you are disposing of obsolete computers or other devices, make sure to magnetically erase the equipment. Otherwise, criminals may find a way to access the data on the computers or devices and use it to perpetrate a breach to your current hardware and networks.
    7. Install  software patches (updates). As the latest cyberattacks are foiled, computer and system vendors typically update their software to fix bugs and close back doors that lead to breaches. However, if you don’t take advantage of those updates, your data will remain susceptible to attack.

The point is this: Cybersecurity is no longer the province of information technology (IT) professionals. Insurance and financial advisors need to stay abreast of the latest threats and adopt protective measures as soon as possible. By keeping informed, adopting best practices, and relying on their E&O and cyberinsurance policies as backstops, they should be well protected against potentially devastating cyberattacks. Good luck!

Would you prefer to spend time and money on growing your business or on protecting it? We thought so. And that’s because it’s human nature to focus on positive things and to avoid dealing with problems.

Yet preventing bad outcomes from harming your business can have as large a beneficial impact as launching a shiny new marketing program or buying new computer equipment or furniture.

In fact, spending money on E&O insurance may spell the difference between your company surviving a nasty client lawsuit or succumbing to it. But if you fail to buy E&O insurance and get sued, you’ll have the aggravation of hiring and paying for your own attorney and then paying for any settlements or judgments out of pocket.

So how to best avoid E&O lawsuits? By scrubbing your sales process of high-risk behaviors. This checklist shows you where to focus your mitigation efforts.

  • Only purchase sales leads from marketing firms that use compliant practices.
  • Properly identify yourself and your products in all pre-approach solicitations.
  • Conduct comprehensive fact-finding with all prospects.
  • Use a valid profiling instrument to understand your clients’ appetite for risk.
  • Only recommend suitable insurance and investment products to clients.
  • Never misrepresent the features, benefits, fees, or penalties of a recommended product.
  • Make sure clients understand what they’re buying, both at the time of sale and at policy delivery.
  • Review every client’s changing personal circumstances on an annual basis.
  • Execute all client service requests as quickly as possible.
  • Don’t disappear during times of market volatility; make yourself available to reassure nervous clients.
  • Establish reasonable expectations regarding the benefits of owning an insurance or investment product.
  • Document in writing when a client decides not to follow one of your recommendations.
  • Build a relationship with your clients’ children so they understand the nature of the work you do with their parents.
  • Memorialize in the client file all key plans and implementation steps.
  • Stay within your area of expertise; refer “outside” product sales to highly skilled third parties.
  • Do your own due diligence on product or insurance/investment firms before recommending them to clients.
  • Standardize your office policies and procedures, train your staff on them, and have printed copies on file.
  • Have a process for documenting and responding to client complaints.
  • Stay on top of regulatory and rule changes affecting your business.
  • Adopt a defense posture in every facet of your business; try to anticipate problems and eliminate risks whenever possible.

Are you a new registered investment advisor (RIA)? Then you know the process of setting up an investment-advisory firm is no simple matter. Whether you’re licensed with the Securities and Exchange Commission (SEC) or with a state securities administrator, establishing a firm that complies with federal or state regulations can be a daunting challenge. Then there are the tasks of deciding on the legal entity of your firm as well as designing its operational procedures.  And let’s not forget the crucial chore of purchasing investment-planning software, along with other financial applications, and the hardware necessary to run all these tools.

Given all this, it’s understandable that some new RIAs put E&O insurance at the bottom of their task list . . . or maybe even decide not to buy it.

As a new RIA, you might rightly assume your assets under management (AUM) will be limited for the first few years as your client list grows, creating only nominal E&O exposures. You might also be doing business with friends, relatives, and other people who you believe would be unlikely to sue you (at least, in theory). And you might take comfort from the fact that your regulatory agency does not require you to buy E&O insurance. How crucial can it be if it’s not required? Finally, you might decide that the cost/benefit ratio of buying E&O insurance is skewed too far toward the cost side of the equation.

Reasonable points, all. But we’d encourage you to consider these counter-points:

  • First, purchasers of financial- and investment-planning services today are not the same as those who purchased these services 15 or 20 years ago. They are much more knowledgeable about financial matters. They expect their advisors to know what they’re talking about and are much less forgiving when their advisors make mistakes.
  • Second, depending on your target market, you may quickly find yourself bringing on clients with seven-figure investment portfolios. They’ve been working for decades and now as baby-boomers are looking to move into retirement. Consequently, they can be sitting on substantial investment portfolios. Make a mistake in how you manage their hard-earned money or forget to do something important, and you will likely face an unhappy, litigious client.
  • Third, as baby-boomer portfolios have increased over the decades, a cottage industry of lawyers and law firms has formed to seek out financial-advisor clients who believe they’ve been wronged. In fact, a common marketing strategy of such firms is to get the names of advisors that FINRA or  the SEC have sanctioned and then blast them all over the Internet to recruit potential plaintiffs. Bottom line: the RIA marketplace has become much more legally treacherous over the last decade.
  • Fourth, RIAs often assume lawsuits will never happen to them because they’ve never been sued before. This is a cognitive bias called “the gambler’s fallacy.” Here, RIAs falsely believe the odds that something happened (or didn’t happen) in the past will determine the odds of it happening (or not happening) in the future. So if they never got sued, they never will. Clearly, this is a serious cognitive error that can have devastating financial consequences for a new RIA.
  • Fifth, as a new registered investment advisor, you may not be fully aware of the many ways an RIA can make mistakes, harming a client who then brings suit. You might breach your fiduciary duty, which is among the most frequent causes of RIA lawsuits, or recommend what turns out to be an unsuitable investment. Or you might innocently misrepresent the features or impact of an investment strategy or transaction, creating losses for your client. Then there are a host of negligence-related errors that can harm your new RIA firm. They might range from incorrectly executing a trade or falling for an Internet fraudster who wants you to wire your client’s money to him (who’s operating unbeknownst to you from an office in Nigeria). Then, as often happens, you might get sued just because a client is angry the stock market tanked, reducing her portfolio’s value.

Finally, depending on the nature of an RIA’s business, it’s not unlikely for clients to file six- and even seven-figure lawsuits against them. Being on the receiving end of a large legal action will quickly transform an RIA’s views on the costs vs. benefits of having errors-and-omissions insurance.

In short, even though you may be new to the RIA business, you’ll want to mitigate the financial risks of becoming embroiled in a client dispute. By putting a financial backstop in place before you get sued, you’ll be able to focus on working with your insurer-provided attorney and claims adjuster to mount a defense and hopefully achieve a positive outcome as quickly as possible. With your legal dispute behind you, you can then turn your attention to adding new clients and serving your existing ones, secure in the knowledge that if a problem arises with one of them in the future, your E&O insurance will be there for you.