E&O Insurance for Your Business
Do you need E&O insurance for your business? Almost all financial professionals ask themselves this question at one point or another in their careers. Many answer, “yes” because they perceive themselves to be operating in dangerous times.
Think about it. Insurance and financial advisors deal with complex client needs—savings for retirement, protecting estates, insuring valuable property, etc. The products they sell can be difficult to understand and explain. Marketplace volatility can produce client losses. And the manufacturers of insurance and financial-services products can fail to stand behind their promises to both the people who sell their offerings and the ultimate consumer. Take all these factors into account and what do you have? An extraordinary degree of risk for insurance and financial advisors doing business today.
As a result, financial professionals must ask themselves how comfortable they are dealing with such risks. Are they so confident in their expertise that they believe they’ll never make a mistake? Or do they realize that mistakes can happen to any financial practitioner at any time . . . even to those with high degrees of integrity and competence? If you fall into the latter camp, then you fully understand why buying E&O insurance for your business is a wise decision. It simply reflects the inherent risks implicit in doing business, as well as the impossibility of performing flawlessly with every client, in every transaction.
As if this weren’t disturbing enough, consider the types of mistakes financial practitioners are prone to make.
Worst-Case Scenario
According to one major E&O insurer serving the life/health insurance segment, there are at least 11 potential mistakes an agent can make. They range from . . .
- misrepresentation,
- due diligence problems,
- premium errors,
- office mistakes,
- failure to explain or provide coverage,
- tax losses,
- beneficiary-related mistakes,
- policy change errors,
- suitability issues, and
- business management lapses.
Of all those mistakes the top three most common are misrepresentation (25 percent of the total errors), failure to provide coverage (13 percent), and failure to explain coverage and office errors (both tied at 11 percent).
Compounding the risk is this fact: E&O mistakes carry high price tags. For example, the same insurer found that the average cost of an E&O disability-insurance claim was roughly $149,000. For pension products and individual life policies, the average claim costs were $71,000 and $40,500, respectively. Worst-case scenario? Making multiple mistakes within a single customer account, which could add up to hundreds of thousands of dollars in personal liability, potentially leading to the death of your business and a devastating personal bankruptcy.
Protection
Faced with risks such as these, most savvy financial professionals decide that buying an E&O insurance policy is a wise decision. What exactly does an E&O policy provide? Simply put, it provides protection—money that cushions the costly financial aftermath in the event you lose a lawsuit in court. E&O insurance provides money . . .
- to hire an attorney to defend you,
- to pay for legal judgments and settlements, and
- to pay for court costs levied in the proceeding.
By having E&O insurance, you avoid being personally liable for the direct and indirect financial costs resulting from your error or omission. Your E&O insurance policy should cover these obligations for you, up to your policy’s limits.
Two other benefits of E&O insurance are less obvious. The first is having an E&O insurance claims adjuster on your side to help manage the claim-settlement process. This can be an enormous time saver. The second is the fact that having E&O insurance for your business reduces your stress and worry should you ever get sued. Not only will you sleep easier at night, you’ll also have more time and energy to spend working on your business rather than hassling with a customer complaint or lawsuit.
Strategy
Given the risks and costs just discussed, what strategy should you follow to mitigate your E&O risks? Many experts suggest finding high-quality coverage, at an affordable price and then buying it in the most convenient way possible. To secure high-quality coverage, make sure the policy is designed to precisely accommodate the needs of your business model and license type. For example, if you provide investment-advisory services, then trying to save money by purchasing E&O coverage for life/health agents may be penny-wise and pound-foolish. Also be sure to read the specimen policy to see exactly how the insurer frames the “insuring clause” (what it promises to cover) and its exclusions (what it will not cover).
To secure affordable protection, investigate programs available through professional associations devoted to your business. Such protection is typically issued on a group basis and can be more cost-effective than individually issued policies. Also, check to see if the E&O provider attempts to reward financial professionals who adhere to low-risk business practices. Typically, such insurers offer streamlined underwriting screens in which answering no to, say, 10 risk-assessment questions will qualify you for “preferred-risk” pricing. The savings in this case can be substantial.
Finally, consider whether you want to purchase your E&O insurance through a conventional insurance broker or on an online E&O insurance platform. The former method may be appropriate for advisors with complex businesses with large risks. But the downside of buying through a broker is that it will take more time for the person to submit a long application form to one or several carriers and then to receive a proposal back from. Buying through an online E&O provider is typically much faster. For example, at EOforLess.com, you can typically input your information, answer the underwriting questions, and then pay and bind your coverage in 5 minutes or less.
Whatever you decide, the important thing is that you protect your business against the many risks it faces in today’s risky environment. If you want to assure your professional future, buying E&O insurance for your business is truly the most sensible way to go.
