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The Five Benefits of Errors and Omissions Insurance

What Every Advisor Needs to Know about Errors and Omissions Insurance

People new to business often confuse a product’s features with its benefits. For example, if you were to ask a new life insurance agent what the benefits of errors and omissions insurance are, he (or she) might say E&O insurance generates cash to help resolve client lawsuits. But paying for attorney fees, expert witness charges, arbitration or mediation expenses, and settlements or court judgments relates to the mechanics or features of the policy, not to its benefits. To fully understand the true benefits of errors and omissions insurance, you have to consider the five key reasons to own this invaluable form of insurance.

  1. Less financial uncertainty. As we’ve discussed in the past, buying E&O insurance allows you to replace a large, unpredictable risk (e.g.: the chance of getting sued) with a smaller, known expense (a periodic E&O insurance premium). Most financial advisors find that paying for E&O insurance is more tolerable than having a large unknown risk hovering over them.
  2. Easy access to legal advice. In the unfortunate event a client sues you, you must find an attorney to represent you. But how will you know if the person has sufficient expertise with professional liability cases? And how will you assess his or her track record of winning cases such as yours? Plus, since finding a competent attorney is time-consuming, it may distract you from your normal job duties, reducing your revenue in the short term. However, when you have E&O insurance, your insurer will quickly provide you with a vetted attorney who will immediately launch your defense.
  3. Less stress. Until you’ve been sued, you’ll have no idea how upsetting it can be. For one thing, it raises the possibility you’ll be found liable for a large financial settlement or judgment. If you lack liquid assets to cover that expense, you might be looking at selling off assets or even declaring bankruptcy. For another, it raises questions about your competence. As opposing counsel attacks your competence and credibility, it’s hard not to take those claims seriously and to question your abilities. Having E&O coverage means you’ll have a financial backstop in the event you lose your case. This is a huge stress reducer. What’s more, your attorney will work hard to mitigate the attacks made on your professionalism. This will help to preserve your self-confidence and positive attitude once the case is resolved, hopefully in your favor.
  4. Asset preservation. We mentioned the threat of bankruptcy. Well, preserving your assets is likely the most important E&O insurance benefit of all. The prospect of losing everything and/or of having to go deeply into debt to satisfy a court judgment is a horrifying one for most financial advisors. Fortunately, having E&O insurance will prevent these outcomes, assuring your financial viability and providing you with peace of mind.
  5. Client trust-building. Clients want to know that their financial advisors are true professionals. What does this entail? That you maintain a high standard in terms of how you discharge your duties and that you take responsibility for your mistakes. By doing these two things, you will instill trust among your prospects and clients. Purchasing E&O insurance is the best way to take responsibility for your actions because it means you have a mechanism in place to make your clients financially whole in case you cause them financial harm.

Now, should you mention that you have E&O insurance? Perhaps not explicitly. But you can tell clients you are a responsible business owner who maintains comprehensive insurance coverage to protect your business and its clients against financial loss. Knowing this will not only provide a great deal of comfort to them, it will also help you sleep at night.

So if you’re tempted to not buy E&O insurance (or to lapse your existing policy), consider the profound benefits of having errors and omissions insurance protection: less financial uncertainty, ready attorney access, less stress, greater asset preservation, and enhanced client trust. Wouldn’t you rather have those benefits than not? To review your errors and omissions coverage options, visit EOforLess.com today.

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Is Your Broker-Dealer, RIA, or FMO as Compliant as You?

As a financial professional, you understand why it’s important to maintain a clean compliance record. Without one, it’s hard to grow your business from among today’s skeptical prospects. But do you also know why it’s equally crucial for all of your intermediary firms to be as committed to compliance as you are? Unless your broker-dealer, registered investment advisor (RIA), and insurance field marketing organization (FMO) are as squeaky-clean as you, you may face regulatory trouble down the road.

Here’s the problem. When your intermediary firm has a checkered compliance history, they automatically become the focus of regulator attention. And when regulators become suspicious of your broker-dealer, RIA, or FMO, they tend to also become suspicious of you. This has real consequences for your ability to do business, says Jon Henschen, in a recent ThinkAdvisor.com article.

  • First, intermediaries who don’t comply with regulations or that hire agents or advisors with the same disregard spark extra regulatory sweeps and audits. These will distract their management teams and make it harder for advisors with clean backgrounds to get their business on the books and their compensation processed.
  • Second, the more regulatory scrutiny a firm receives, the more money it will spend on legal and compliance services. These costs will ultimately come out of advisor compensation—out of your wallet or pocketbook.
  • Third, when regulators find evidence of wrongdoing, they often will push for the removal of the responsible parties. If they have long tenure, their leaving will weaken the company’s institutional memory and bench strength. This may not bode well for its ability to compete in the future.
  • Fourth and finally, every time a broker-dealer, RIA, or FMO gets into regulatory hot water, it will generate negative publicity that lives forever on the Internet. As the firm’s reputation weakens, so will yours because you are tied to the firm. It’s hard enough to generate new clients without giving prospects an additional reason to question your integrity.

Solution? Do thorough research on any intermediary firm before joining it. If you’re considering a broker-dealer, conduct a thorough BrokerCheck review to uncover the scope of disclosure events among its registered representatives. Simply go to Brokercheck.finra.org, click on the individual tab, then type in the broker-dealer’s name where indicated. The result will be pages showing all the firm’s registered reps and indicating those with disclosure events. If you see “yes” in the disclosures field, click on “more details” to learn about the person’s infractions.

Now, this process can be unwieldy because there’s no way to retrieve a summary report showing the percentage of reps at a firm with disciplinary issues. Best you can do is scan the individual reports and then click on the “Yes” to see how and why an individual representative got into trouble. However, if you scan the broker-dealer’s registered representative summaries long enough, you’ll be able to see if the firm has dubious ethics.

According to Jim Eccleston of Eccleston Law, as you’re doing this, watch for disclosures that indicate:

  • Serious negligence or financial abuse of clients, including churning, borrowing from a client, forging documents, or selling unapproved products from an outside organization (selling away).
  • A pattern of paying fines for violating industry rules.
  • Personal bankruptcy or other credit-related problems that suggest the representative is financially stressed or has exercised poor financial judgment.
  • Repeated firings from prior broker-dealers and/or working for many different firms in various states over a short period of time.

It’s also important to evaluate a broker dealer’s own compliance record, not just those of its representatives. To do that, return to the main BrokerCheck page, click on the “Firm” tab, and then enter the firm name or CRD# where indicated. Hitting “search” will return the firm’s disclosure history (if any), where you’ll get a sense of its own adherence to industry regulations and business ethics.

You can do the same individual and firm-level analysis for investment advisor representatives and their RIA firms by visiting the SEC’s Investment Adviser Public Disclosure website. For insurance FMOs, your sleuthing will be much trickier because there is no single government agency or database to check. Since FMOs often operate in multiple state jurisdictions, it can be tough to get a handle on how many of their agents have run afoul of the law . . . or whether the firm itself has. Best advice: let Google be your friend.

Hopefully, researching FINRA, SEC, and state insurance compliance records will reveal whether signing with an intermediary firm is risky. If so, doing business anyway might result in you paying more for your E&O insurance. On that basis alone, it’s wise not only to do your due diligence before joining a broker-dealer, RIA, or insurance FMO, but also to take what you find seriously. No point paying more than necessary for your E&O insurance.

For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.

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Top 10 Reasons to Buy Your E&O Online

If you’re like most people, your old habits may die hard. For example, you may have started buying E&O insurance decades ago in the usual fashion . . . shopping for an agent, requesting a quotation, filling out a paper application, then waiting days or weeks for your E&O policy to arrive in the mail.

That process served its purpose for a long time. But thanks to the advent of new technology, it’s no longer the best way to buy E&O insurance. Instead, many financial professionals today shop for and buy their professional liability insurance online. Tens of thousands of them each year would do it no other way.

It’s not hard to see why. Consider the disadvantages of buying it the old-fashioned way:

  • It’s harder to identify providers of E&O insurance. Without the Internet, you’d be forced to ask friends and colleagues for referrals. Depending on their experience, you might end up with only one or several buying options.
  • Your ability to shop for the best features will depend on your agent’s knowledge. If the person lacks awareness of certain key features, then he or she might not bring them to your attention.
  • Your agent might discourage you from running “what if” scenarios, which can have a big impact on pricing, because they can be time-intensive to complete.
  • Once you select an E&O insurer and your desired coverage amounts and other policy options, you request a formal quotation from your agent who decides which carrier(s) to submit it to. This might take days or weeks based on how busy the agent is.
  • Once you receive several price quotes from different insurers, you select one and then submit a paper application to that firm. Hearing the underwriting results might take days or weeks.
  • Once you hear your policy has been approved, you pay for it, typically by sending a paper check to your agent or insurer. Postage will be on you.
  • Days or weeks later, you will receive your policy and proof of insurance. If you need additional coverage certificates, you’ll have to ask your agent or insurer for them.

If that sounds complicated, it’s because it is. Complicated and time-consuming. Using an analog process, it often took days or longer to shop for and purchase E&O insurance. In light of this burden, is it any wonder so many agents went uninsured?

Now, let’s consider the contemporary online alternative:

  • To shop for E&O insurance, you simply enter an appropriate search term into your Internet browser application. The leading online E&O providers generally appear on page one of your search engine results. Click on the ones that interest you to learn more about their firms and offers.
  • Based on your needs, click on the type of E&O protection you’re interested in. For example, if you’re a life agent, select the coverage for life and health insurance professionals. If you’re a P&C insurance agent, RIA, or real estate agent or broker-owner, select the coverage that fits your license and professional duties.
  • Once you’ve drilled down on coverage type, take a look at the pricing and read the provider’s explanations and disclosures. Most will have specimen policies available for downloading, so you can carefully check specific provisions.
  • If the policy meets your needs, provide the firm with your personal and firm information, answer the underwriting questions, and decide on how you’ll pay for the policy. You’ll provide all of this information via online forms that are easy and quick to fill out.
  • After you’ve submitted your electronic application and payment information, wait a minute or two for the provider’s e-commerce platform to process your personal and payment information and then provide your insurance certificate.
  • Finally, print out your certificate for your files and for any insurance FMOs, securities broker-dealers, or registered investment advisors you work with, now or in the future.
  • Depending on the payment method you select, your checking account or credit card will be billed automatically. And when your policy period expires, you’ll be reminded to renew your policy, typically via an e-mail.

Bottom line? The old-fashioned method is more complicated and takes a lot longer than the online method. In this day and age, when time is at a premium, it no longer makes sense to shop the old way. Savvy financial professionals use the Internet to buy E&O insurance because it’s the quickest, most efficient, and easiest method available. If you’re not among them, ask yourself why and consider becoming a modern shopper next time.

When you’re ready to make your move, visit EOforLess.com, sponsor of E&O insurance for financial professionals since 2008. We’ll lay out all your options, walk you through the buying process, and generate your coverage certificate in just a few minutes, not days or weeks. Isn’t it time you bought your E&O insurance the contemporary way from the firm that invented online E&O buying . . . EOforLess.com!

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A Contrarian View: Top 10 Reasons NOT to Buy E&O Insurance

A Contrarian View: Top Ten Reasons NOT to Buy E&O Insurance

On most days, you’re likely to hear us speak of the benefits of owning E&O insurance. But today, we’d like to take a contrarian (and somewhat lighthearted) view. To that end, here are 10 reasons why financial professionals should avoid buying E&O insurance. Ready?

Reason #1. You’re tired of being a life insurance agent, investment advisor, P&C insurance agent, or a real estate agent or broker/owner. You want out of your career, but can’t quite figure out how to extricate yourself.

Have you ever felt trapped in your current career, knowing you’ve had enough, but unsure of how to break free? Well, not buying E&O insurance or failing to keep your policy in force can be a perfect solution. If you get embroiled in a client dispute and end up losing your case without E&O protection, you might end up totally liberated! For example, all of your personal and business assets may need to be liquidated to satisfy court judgments or settlements. With no assets to speak of, including no business resources, you won’t be able to work in financial services or perhaps in any field. In short, you’ll be free of everything you’ve grown tired of and able to try something new . . . or nothing at all!

Reason #2. You have so much debt now that an E&O judgment will likely bring bankruptcy relief.

If you’re like many Americans, you probably carry too much debt, both personally and professionally. Most people soldier on with their heavy debt loads, paying the minimum amount due each month and looking at nothing but years of unrelenting loan payments. However, without E&O insurance, a legal judgment may be a great excuse to file for bankruptcy and get your financial life back.  Also, don’t minimize the personal satisfaction of telling one’s creditors to get lost. Declaring bankruptcy can be worthwhile from this perspective alone!

Reason #3. You’d rather just concede defeat to a client suing you than be forced to participate in a boring court proceeding.

We get this! Having interminable conversations with a lawyer who’s trying to protect your assets is SO boring. And sitting in a courtroom for hours when you could leave work early to play golf or have a beer at the brewpub is SO annoying. For those financial professionals who’d rather hand over everything they own than spend even a minute speaking with their attorney or sitting in a courtroom, this reason is for you!

Reason #4. You believe in the carpe diem philosophy (“seize the day”). In other words, you see no reason to spend money to protect your future security when you can spend it to enhance your current happiness.

In other words, you’re the kind of person who lives for today because who knows what tomorrow will bring. You’re more than happy to go unprotected because chances are nothing bad will happen. Plus, it’s a lot more fun to spend your money on food, drink, and vacations than to make sure your future is safe and secure. Right?

Reason #5. You believe your mistakes are best put behind you, not taken responsibility for.

As part of the human condition, mistakes happen. For this reason, they’re hard to prevent and pointless to get worked up over.  As a result, when you make a mistake, you believe it’s best to move on and let the chips fall where they may. This being true, what’s the point of having E&O insurance, a policy that helps you take full responsibility for your mistakes? Other people can clean up after you so you can just get on with your life. In this regard, paying for E&O insurance is pointless and stupid.

Reason #6. Client disputes are entertaining and best prolonged for maximum enjoyment.

You’re a big fan of Judge Judy. You find human conflict to be fun and love watching courtroom battles on TV. Because of your fascination with legal drama, you’d prefer to prolong the experience if you’re ever sued. You’d do this by defending yourself in court rather than allowing a trained attorney to more efficiently represent you.

Reason #7. Similarly, you believe the only person who can competently defend you in court is you.

In part, you believe this because you have found that the smartest person you know is you. You have also found that no one knows more about winning than you. With bottomless self-confidence, you see no reason to waste money on E&O insurance, which, frankly, will only saddle you with an attorney who’s dumber than you.

Reason #8. It’s best not to have E&O insurance because clients will be motivated to sue you.

It’s a dark view of humanity, but it’s your view. You sincerely believe that everyone is selfish and, given half an opportunity, out to hurt you.  Consequently, you’re convinced that if your clients learn about your E&O coverage, they will ignore your years of service and good advice and contrive a reason to sue you. And all of your clients are like this. 

Reason #9. You’ve never been sued before, and you don’t plan on being sued now.

You’ve been in the industry for decades and have never been sued. Why would clients start suing you now? What could possibly change?

Reason #10. E&O insurance is too expensive for the value received.

Since it’s unlikely you’ll ever get sued, you probably will never use your policy. Paying for a service you’ll never need is a gross extravagance. Why waste the money? And under what scenario would you ever need to use your policy?

With 10 reasons like these, it’s surprising any financial professional buys E&O insurance, ever. They wisely put their money toward more productive uses and let the legal chips fall where they may.  Yet hundreds of thousands do purchase E&O insurance and continue to pay for their E&O premiums year after year, despite never getting sued and having many other legitimate uses for their money.

Hmmm, what do these sensible financial professionals know that the naysayers do not?

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