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Doing Business Online Demands the Latest E&O Protection

If you’re a life insurance agent who uses Internet quoting apps to attract buyers, you’re at risk of suffering a data breach. But even if you just use the Internet to publish your website or to promote yourself using social media, you’re equally at risk. The problem is, agents who store client information on local databases and then share that information via an office network are in danger of being hacked if their computers are connected to the Internet. Welcome to the brave new world of online life insurance, a world in which just turning on your computer subjects you to potentially devastating financial losses.

What are some of the online risks you face? Allow us to list five of the top ones:

Threat #1: The individual hacker. Your Internet connection theoretically makes the entire world your life insurance sales territory. Unfortunately, though, this also allows lone-wolf hackers to breach any of your wired or wireless computers in order to penetrate your systems and steal your data. If your computers, network, and applications are improperly configured, hackers can grab and sell your clients’ information before you even realize what’s happened. While you’re still scratching your head, the hacker will have posted this valuable data for sale on shadowy online marketplaces in distant countries, far from the reach of U.S. law enforcement.

Threat #2. Your own employees. Most life insurance agents assume foreign hackers across the globe are targeting their data. Few think about the risks people near to them pose—for example, employees at a local coffee shop or restaurant or their own employees. Case in point: a Verizon survey found that 50 percent of all incidents involved people who quit their jobs and then stole their company’s financial data or customer information. Complicating matters is the fact that life insurance agents often hire staff without sufficient pre-employment screening.

Threat #3. Your mobile devices. There are multiple risks inherent in the use of mobile devices within a life insurance sales operation. First, there’s the risk of allowing your employees to use their own smart phones, laptops, and tablets to access your network. Unless you thoroughly vet those devices, you won’t know if hackers have compromised them, leaving you at risk of data theft. And since you and other agents on your team are likely highly mobile, spending large parts of each day visiting with prospects and clients outside the office, you are at risk of getting hacked each time you access your office customer relationship management (CRM) database from an outside, unsecured wireless network.

• Threat #4. Your business vendors. As a life insurance agent or agency owner, you frequently work with service providers who support your business operations. These might be Internet lead providers, paramedical services and the like. Unless you thoroughly review each of these vendor’s cybersecurity policies, you won’t know whether doing business with them subjects you and your customers to heightened risks.

Threat #5. Your personal providers. In addition to firms that support your life insurance business, you also do business with a myriad of other firms personally, including credit bureaus, large online merchants, credit card firms, life/health insurance companies, and even the Internal Revenue Service. Each of these collects and stores a huge amount of data about you, which can be stolen and then used to penetrate your firm’s network and databases.

In short, using the Internet to become a more effective life insurance marketer brings huge advantages in terms of expanding your market reach. But it also brings the downside of subjecting you to heightened cyberrisks. We say this not to frighten you, but to motivate you to focus more intently on cybersecurity, especially on conducting annual risk assessments, updating all your application patches, training staff on secure practices, and testing your firm’s ability to detect and respond to a cyberbreach.

As daunting as all that sounds, there’s immediate help at hand—in your E&O insurance policy. That’s because modern E&O insurance policies have been updated not only to protect you against the traditional risks of making a mistake or forgetting to do something important, but also to protect you against some cyberrisks. For example, life agent E&O from EOforLess includes a client network damage and privacy claim endorsement. What does this mean? It means you will have coverage against monetary claims resulting from an alleged electronic infection that damages a customer’s network. The damage must be the result of your rendering of covered professional services. This means, for example, that a client who picks up a computer virus and sustains financial harm as a result of accessing your computer network can be indemnified through your policy (subject to the limits and definitions in your contract and network endorsement).

What’s more, there may even be coverage for monetary claims resulting from an error or omission that damages a customer’s privacy or sends his or her personal data into the world where it can be sold to online criminals. Again, this customer damage must have resulted from you engaging in your professional duties.

Now, this endorsement is no substitute for a comprehensive cyberinsurance policy. But it does provide some protection against cyberrisks, subject to the definitions in your network risk and privacy claim endorsement. Check your E&O policy for full details.

And don’t forget, your E&O insurance policy also provides a financial backstop for traditional offline errors and omissions—for not providing needed coverage, for recommending the wrong insurance, or for incorrectly executing a customer-requested transaction, among many other potential errors or omissions. As long as you keep your E&O insurance policy in force, it will pay for your attorney fees, court costs, and client settlements should you lose your case (subject to your policy limits and exclusions). Without such protection, you will be exposed to potentially huge legal judgments that could kill your business and harm your personal finances.

Traditional E&O coverage, along with the network risk and privacy claim endorsement, will go a long way toward giving you the peace of mind you need to focus on growing your life insurance business in these challenging times. Why worry needlessly about mounting cyberrisks when E&O insurance has your back?

As a Registered Investment Advisor (RIA), you know how important it is to differentiate your firm from its competitors. You also know that advertising is a great way to convey those differences to the marketplace. However, if you get too aggressive with your promotions, you can also get into hot water with the Securities and Exchange Commission (SEC). A recent SEC notice provides a cautionary tale.

According to a National Exam Program Risk Alert from the SEC’s Office of Compliance Inspections and Examinations, some RIAs are violating the SEC’s Advertising Rule (Rule 206[4]-1 of the Investment Advisers Act of 1940). According to recent field examinations and results from its “Touting Initiative,” RIAs are publishing, circulating, and/or distributing ads with untrue or misleading statements. This finding applies to advisors using online, print, or broadcast advertising or sending out promotions directly to clients.

The SEC risk alert identified 10 common RIA advertising violations, including:

  • Misleading prospects and clients about a firm’s investment performance by not deducting advisory fees from investment gains. This deceptively inflates performance.
  • Comparing firm performance to an investment benchmark without disclosing any limitations that might apply to that comparison.
  • Referring to an index whose composition does not relate to the RIA’s advertised investment approach.
  • Highlighting gross investment performance in one-on-one sales presentations without disclosing that client gains were in fact lower because of fees.
  • Making misleading claims of compliance with voluntary performance standards.
  • Touting high-performing individual stocks or investment strategies without mentioning the stocks or strategies that fared less positively.
  • Failing to maintain compliance policies and procedures to prevent deficient advertising practices.
  • Using third-party rankings or awards in a deceptive manner (i.e., without disclosing material facts).
  • Mentioning professional designations in a firm’s Form ADV Part 2B (brochure supplements) that have lapsed and/or failing to explain the minimum qualifications required to attain those designations.
  • Publishing client testimonials on firm websites, social media pages, and in third-party articles or pitch books, all of which are violations of the SEC’s Advertising Rule.

If your firm has engaged in the above practices, now would be a good time to stop. Why? Because the last thing you need is an SEC black mark on your record or a client who thinks you lied and sues as a result. By competing fairly, your prospects will trust you more, your clients will be more satisfied and loyal, and you’ll have less need to use your E&O insurance in a legal dispute. Sounds like a winning strategy, right?

To review the SEC’s Advertising Rule, go here. To learn more about other ethics and compliance issues facing financial professionals, visit the EOforLess E&O HQ.

As we discussed in a prior article, buying errors and omissions insurance is no walk on the beach. The thing is, it imposes three difficult demands on financial professionals . . . on you!

First, you must do a lot of research to make sure your E&O insurance policy will adequately protect you if you get sued.

Second, you must also make sure your coverage will be there for you when you need it most.

Third and finally, you must do your homework so you don’t overpay for your E&O insurance.

In this article, Part 2 in our series, we’ll address the second topic—having E&O coverage when you need it.

E&O insurance is like most other forms of insurance. In marketing terms, it tends to be a low-involvement purchase. That means you know you must have it, but you don’t invest a lot of time into buying it. You simply try to find good coverage as quickly as possible and for as little as possible, purchase your insurance, and then forget about it. But here’s the thing. Decades may pass without you thinking much about your errors-and-omissions policy, other than remembering to write a periodic check to the insurer. BUT . . . if you get sued a year, ten years, or 25 years down the road, you will care a lot about your E&O insurance. You’ll want it to be there for you when an angry, vindictive client wants more money from you than you have on hand or can borrow.

To make sure you’ll have coverage in the future, here are two essential actions.

1. Do adequate due diligence on your prospective E&O insurer.

You want to make sure it either doesn’t run into a cash crunch (which will complicate its ability to pay E&O claims) or doesn’t melt down financially via a self- or regulator-declared insolvency.

If you’re a busy financial professional, this won’t be easy. You have a job to do and a business to run. So it’s unlikely you’ll have the time to become a full-fledged insurance-company analyst. But you can stay on top of current industry news, especially events that affect insurer profitability. And then carefully follow insurance-company ratings changes. Doing both of these things will allow you to identify E&O insurers that may be on the brink of having financial difficulty.

In terms of becoming a student, try to follow property-and-casualty insurance industry news. Now, you probably won’t pay as much attention to it as you would to your own segment’s news (life or health insurance, annuities, investment advisory, financial planning, real estate brokerage, etc.). But you should follow it frequently and deeply enough so you know which E&O companies have experienced financial troubles in the recent past and which might be teetering on the brink of failure now.

The key is to determine potential P&C insolvencies before you place your future in a company’s hands. And insurer failures aren’t rare. According to an A. M. Best study, there were 871 financially impaired P&C companies over a 34-year period. The major cause of their difficulties, accounting for 37.2 percent of impairments, was deficient loss reserves and/or inadequate pricing.

The A.M. Best study also found that the second highest reason for impairments was rapid company growth, which accounted for 17.3 percent of the cases. The third highest reason, at 8.5 percent, was suspected fraud.

In the majority of instances, insurer impairments resulted from some form of mismanagement, with a much lower number resulting from natural disasters that overwhelmed an insurer’s loss reserves. A.M. Best also found certain company types to be more prone to financial problems. Those owned by investors (stock insurers) tended to have four times as many issues as mutual (policyholder owned) firms. What’s more, P&C insurers with the lowest premium volume tended to fail more frequently than those with higher volume.

Tracking P&C insurer ratings changes is also crucial because studies have correlated insurer financial strength ratings with frequency of impairment. According to another A.M. Best study, the lower the Best ratings, the higher the rate of failure. For example, over a one-year period, the impairment rate for insurers rated A- was 0.19 percent, while those rated B had an impairment rate of 1.69 percent. The study also found that even though insurer financial crises happened more often in the 1980s and 1990s (often dozens in a single year), insurer insolvencies still occurred regularly over the last few years, with nine firms becoming impaired in 2015 alone.

The takeaway? Follow insurer rating changes, especially for those whose products you sell and for those from which you may want to buy E&O insurance. And here’s another reason: insurance companies and field marketing organizations (FMOs) will generally only do business with agents who have E&O insurance, preferably from insurers with a B+ or better A.M. Best rating. So if you want to speed your carrier/FMO appointments, pay attention to E&O insurer ratings and ideally do business only with higher-rated firms.

Following industry news and ratings changes aren’t the only things you can do. When you’re evaluating a potential E&O insurer, probe hard on their history in the business. Are they new entrants? Have they experienced growth surges due to charging unrealistically low premiums (i.e., trying to buy market share)? Do they have a reputation for paying their E&O claims promptly? How solid is their loss reserving? Again, no one’s suggesting you should become an insurance-company financial analyst. But at the very least, select your E&O insurer with your eyes wide open.

2. Keep your E&O insurance in force at all times. This is certainly a good rule for all types of insurance, both for you and your customers. But when it comes to E&O insurance, keeping your coverage in effect is extremely important. That’s because most E&O insurance policies are written on a “claims made and reported” basis. This means they will protect you against claims from your prior deeds that surface and get reported during your current policy period. In other words, your E&O insurer is responsible for claims that arise on their watch, even if the precipitating event occurred while you were insured elsewhere.

Under this system, you can maintain continuous E&O coverage for decades, moving from one insurer to the next, as long as you never have a coverage gap. And let us emphasize the word never. So assume you started your career with Carrier A and stuck with them for 15 years, then forgot to renew your policy and stayed uninsured for several years, and then purchased another E&O policy, which you kept for another 20 years. What impact would this have? Since you had a coverage gap, your current policy would only cover you for events that occurred after you bought your second policy. Without that gap, it would have protected you for claims arising from events that occurred during your first 15 years in the business. This is a serious risk exposure because, as you know, sometimes it takes years for a financial professional’s mistake or omission to hurt a client financially . . . and spark a claim.

As you can imagine, having an E&O coverage gap is like a ticking time bomb. If things are going well, you may not give it another thought. But if you get hit with a client lawsuit arising from the period before your coverage gap, you will have zero protection from your policy.

Consequently, if you care about protecting your business from potentially business- and career-ending financial disputes, you must avoid coverage gaps at all costs. To that end, make sure to put a high priority on paying your E&O policy premiums as they come due. When you receive your bills, immediately put the payment dates on your calendar and/or schedule a payment right away using your business-checking online payment system.

If you buy your E&O insurance from a marketing firm such as EOforLess, you can also sign up for a free e-mail renewal service. By visiting EOforLess.com and clicking on “Free Renewal Reminder” you will receive reminder e-mails 30, 15, 7, 3, and 1 days prior to your payment date. This will make it highly unlikely you will forget to renew your coverage, creating a coverage failure that might demolish your finances and future livelihood.

In short, the name of the game when it comes to E&O insurance is to make sure your policy adequately protects you, will be around if and when you have a claim, and will not strain your budget. We’ll discuss the last feature in Part 3 of this series.

Independent Agency Owners Must Give Themselves High E&O Priority

As the owner of an independent insurance agency, you know how important it is to help your clients assess and mitigate their business risks. In fact, you’ve probably focused your entire career on meeting those dual challenges. But what about your own agency’s risks? Do you spend as much time on those as you do reducing client risks?

Granted, helping clients manage their risks is what you do for a living; it’s how you get paid, after all. But you should also find time in your schedule to reduce your own loss exposures. Not only is completing an E&O risk assessment crucial, so is the process of buying E&O insurance. Plus, once you have E&O insurance in force, it’s important to periodically re-assess your risks and to make sure your E&O insurance is still up to the task of keeping your agency safe.

In other words, independent insurance agents should not succumb to what is popularly known as “shoemaker’s children syndrome”—the tendency of successful cobblers years ago to allow their children to go shoeless. If you recognize yourself here, don’t worry . . . you’re not alone. High-performing insurance agencies and their owners clearly must focus on the tasks that generate new and renewal revenue. And with only so many hours in each day, it’s understandable they allocate the lion’s share of their time to activities that grow their businesses. For example, the best general agents have a relentless focus on client-facing activities such as:

Assessing risks by engaging in careful risk audits
• Matching risks with appropriate types of property & casualty insurance
• Helping clients select sufficient coverage limits
• Identifying stable insurance markets that understand client needs
• Securing proposals from insurance carriers
• Helping clients evaluate competing insurers and products in order to make a wise purchase decision
• Helping clients understand what they bought and keep their coverage in force
• Periodically re-assessing client risk profiles
• Securing insurance coverage for new risks and updating coverage for existing risks

Successful independent agents will perform—and excel at—the vast majority of these tasks, if not all of them. If they don’t, their clients will find someone else with whom to do business. But do they excel at performing these activities for their own business? Perhaps not. And what about you? Do you postpone this task when client work beckons? Again, if you do, that’s fine. But recognize that the longer you put off addressing your own E&O exposures, the more likely you will suffer a crippling E&O loss. Is that what you want for your business?

What’s more, don’t think for a minute that getting sued only happens to other agency owners. According to Insurance Journal’s 2016 Agency E&O Survey, 22.3 percent of general agents had an E&O insurance claim in the past five years, 10.7 percent had one six to ten years ago, and 17.8 percent had a claim more than 10 years ago. In all, more than half of all general agents (50.8 percent) had suffered an E&O claim in the past.

Fortunately, the survey also found that 83.5 percent of agency owners purchase E&O insurance to protect their firm’s assets. However, many aren’t adequately evaluating their E&O exposures before the sale, matching those exposures to a suitable E&O policy with sufficient limits, and then reassessing everything periodically in the future.

How to Defeat Cobbler’s Syndrome

If your agency suffers from “cobbler’s syndrome,” what should you do about it? Here are some ideas to consider:

First, admit you have a problem. Facing up to the fact you’ve been neglecting your financial security will be your first step toward getting your risk exposures under control. Not admitting it means you will be trapped in self-defeating behavior that jeopardizes everything you’ve worked for.

Second, don’t beat yourself up over past omissions. What’s done is done. The important thing is to get your agency’s risk factors under control as quickly as possible.

Third, recognize that dealing with client needs will always trump addressing your own needs. That’s just the nature of the beast. The solution is to manage your time more efficiently so you can address not only your clients’ problems, but also your own.

Fourth, do an action plan for E&O risk mitigation. Break down the process into its component steps, and then get those steps on the calendar. As the old truism suggests, when it comes to achieving important goals, you need to plan the work and work the plan. Once you know what needs to get done, get those steps on the calendar and focus relentlessly on completing them.

Fifth, don’t rush the process of E&O risk analysis and insurance policy selection. Be really deliberate when it comes to these decisions because making a mistake could expose your agency to potentially fatal losses.

Sixth, do your due diligence on E&O insurance policies or group certificates from several providers. A key aspect of this process: the degree to which E&O marketing/admin firms and E&O underwriters specialize in agencies such as yours, as well as their ability to quickly investigate and pay E&O claims. Obviously, the insurer solvency ratings should be solid as well—at least a B+ from A.M. Best and ideally higher.

Finally, don’t underestimate the convenience of buying E&O insurance online from a firm such as EOforLess. With your time in short supply, why waste even a minute working through traditional brokers and underwriters with their complex paper forms, multiple carrier proposals, and long wait times from application to issue? You can reallocate the time you save here to the core tasks of keeping your clients—and your agency—well protected in a dangerous world.

In short, your agency might have been like a cobbler’s child . . . lacking not shoes, but adequate E&O insurance. But past is not necessarily prologue. It’s never too late to assess your firm’s E&O insurance needs and to buy effective, comprehensive, and affordable E&O insurance online from a firm such as EOforLess. Good luck!