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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.

The Difficult Task of Finding E&O Insurance

Buying errors and omissions insurance is no walk on the beach. Of course, since when is buying any type of insurance easy? Although online insurance purchasing has made shopping more convenient, you’re still left with the time-consuming task of doing your due diligence on the policy before you can either purchase it for yourself or recommend it to your clients. As a result, it can be tempting to take shortcuts when shopping for your own errors and omissions insurance. Don’t!

The problem is, there’s too much riding on that purchase to not give it your full attention. If you’re sued without insurance, you’ll have to self-fund your legal defense and pay for any ensuing judgments. Handling these expenses can end up only being an annoyance or can literally put you out of business or take a big hunk, or even all, of your personal assets.

So how should you tackle the difficult task of finding E&O insurance? Start by considering the following three questions:

1. Will the policy adequately protect your finances if you get sued?

2. Will coverage be there in the future when you need it most?

3. Is your E&O insurance policy a good value or are you paying too much for it?

We will cover the first question in this article and the second two in future ones.

Three Keys to Adequate Protection

First, we can’t overstate the importance of making sure your policy has sufficient coverage limits. Limits are typically expressed in terms of per-individual claim and of aggregate claims. In the former case, there may be a limit of $1 million, $2 million, or more for each incident. Aggregate limits mean an E&O policy caps total benefits to a predetermined amount. For example, if you lose two lawsuits worth $1.5 million a piece, but you only have a $2 million aggregate limit, you will be responsible for the remaining $1 million.

If you’re insured under a group master contract, there may also be limits on claim payouts for the entire group. So if it has a run of claims, it may exhaust the total pot available for all members. If you’re considering joining such a plan, ask about the group’s historical loss experience and whether it has ever bumped up against its group aggregate limit.

In either case, you want to be certain to buy sufficient per-incident and aggregate limits to protect you in the event you lose one or more lawsuits. There’s no hard and fast rule about how high, though. But give some thought to the financial status of your typical clients, the average size of the products they purchase, and their potential litigiousness when their expectations are not met.

Second, make sure the policy covers you for the actual duties you perform in your job. These will be defined in the policy section that covers professional services. For example, a typical definition might list:

“1. The sale, attempted sale or servicing of life insurance, accident and health insurance
or managed health care organization contracts (that does not require a securities
license).

2. The sale, attempted sale or servicing of disability income insurance (if purchased as
indicated on the Certificate of Insurance).” Etc.

The key is to be sure the professional services listed match up with your activities and license type. And if you perform duties that don’t appear, make sure to ask if they’re covered. For example, some registered investment advisors also serve as their firm’s chief compliance officers, a duty that may not be mentioned in the policy’s professional services definition. In such a case, if the advisor gets sued as a result of a mistake he makes as his firm’s CCO and his policy only covers his duties as an investment advisor, he might not have any E&O protection in this case.

Third, determine if you are responsible for a certain amount of the loss before the insurer begins to pay benefits. Errors and omissions insurance deductibles can range from $0 to $1,000 per incident for insurance products and up to $5,000 for securities products (variable annuities, mutual funds). However, watch for two nuances regarding deductibles. Some policies (i.e., first-dollar defense policies) only apply the deductible to actual paid claims, not to defense costs. That means if a client files a frivolous claim that gets dismissed, you won’t be responsible for paying your deductible. Alternatively, so-called defense-and-loss policies have deductibles that kick in when legal fees are incurred. This forces you to pay out of your own pocket even with nuisance claims. The former policy type is more expensive, but may be worth it if you often get hit with frivolous lawsuits.

Another deductible nuance arises in the case of multiple claims. Normally, you would be responsible for paying the stated deductible on each loss. This can add up fast if you get sued frequently. However, if you have an aggregate deductible, which typically costs extra, your total deductible will be capped at, say, two or three times the normal deductible. If your business model is risky or the investment climate is volatile, it might make sense to purchase this feature.

By carefully reading a prospective E&O insurance policy, you will be able to determine where it stands on the three issues we just reviewed. There are other features to consider as well, but thinking about these three will be a great start. Even more important is the likelihood that the coverage will be there when you need it most. We’ll address that in a future article. Until then, if you wish to learn more about how E&O insurance works, please visit our E&O insurance product detail pages at EOforLess.

How Errors and Omissions Insurance Factors into Online Trust

Most insurance agents today understand how errors and omissions insurance lowers their risks of doing business. But they may not see how errors and omissions insurance builds online trust. Stick with us while we explain why.

For starters, it’s important to recognize that online trust is the foundation of nearly all business relationships. Whether you transact sales online or not, most of your prospects will head first to your website to check out your background and offerings. If they like what they see, they’re more likely to agree to a meeting . . . and to buy. If they don’t, they will either refuse a meeting or be a hard sell later. Thus, your website factors heavily in establishing the trust you need to grow your business.

In fact, the Pew Research Center’s Internet & American Life Project has shown just how much consumers rely on websites to make sound purchase decisions. According to a 2010 Pew study, 58 percent of Americans have done research online before purchasing a product or service. And on an average day, the study found that 21 percent of adults researched vendors online, compared with 9 percent in 2004. These numbers are likely to be even higher today.

Trust Formula: Authority, Credibility, and Responsibility

What are prospects looking for when they come to your website? We call it the A-C-R formula, which stands for Authority, Credibility, and Responsibility.

First, they want to see that you have the skills and knowledge—the authority—to help them solve their financial problems. Accordingly, your website’s content must convince them you know your stuff and can deliver the goods. The more your site showcases your credentials and expertise, the more powerfully it will establish your authority. Here’s how to speed this process:

  • Make sure your website has a detailed “About Us” page. And don’t just use the same boilerplate everyone else does. Talk about your experience and professional competencies, your core business practices, your education and designations, and the types of clients you serve. The more detailed and personal you can make this discussion, the better.
  • Don’t just claim authority; prove it! Fill your site with as many proof statements as you can: specific insurance/financial strategies you’ve used with clients, testimonials from satisfied customers (if your license allows it), blog articles you’ve written that demonstrate your insights about today’s financial markets and “hot-button” client concerns.
  • If you’ve written articles for industry trade journals, given speeches, or appeared on television or radio, list those experiences on your website. The goal: to demonstrate you are an industry thought leader—i.e., someone who sets the pace for your competitors.

Consumers Look for Credibility

Second, prospects look for credibility—i.e., to see that you are a person of integrity and believability. Since credibility derives from everything you say and do, especially in front of your customers, always operate from a place of total truth and client alignment Here are a couple things that should help:

  • Pay extra for your own Internet domain name. This means your website and e-mail address will display your company name, rather than an Internet service such as Yahoo or Google.
  • When conducting initial and presentation interviews, don’t use fear or hype to arouse attention or motivate purchase. These tactics tend to spark doubt and create less persistent business than do legitimate fact-finding and a thorough discussion of features, benefits, and objections.
  • Also, when speaking about yourself, don’t exaggerate your education, credentials, or past jobs. Stretching the truth is a sure credibility killer, perhaps not right away but always in the end.
  • Follow the Stanford Guidelines for Web Credibility. To further enhance your believability, adhere to the research-based Stanford University model. Two of its recommendations: make it easy for prospects to verify the claims on your site, while making your business tangible by including office and staff photos. For Stanford’s full list of credibility recommendations, go here.
  • Finally, align yourself with third-party organizations that rate firms based on performance or customer satisfaction. Examples are the Better Business Bureau and MacAfee SECURE. The National Ethics Association, sponsor of EOforLess.com, gives its members rights to use its “Ethics.net Registered Member” badge, as well as its “Certified Background Check” logo for those who pass a comprehensive screen. By posting respected credibility badges on your website, you convey not only your commitment to ethical business practices, but also your standing with respected third-party organizations.

Responsibility Is Key

Third and finally, convey on your website that you are a responsible insurance and financial professional—that your business practices are sound—and that you stand behind your work. Here are three tips to get you started:

  • Showcase all third parties on your site that are key value creators and/or protectors—your FMO, broker-dealers, and RIAs; your product providers; your clearing and third-party custodian firms; your Internet security consultant, etc. In short, you want to show that you have a team of outside experts dedicated to keeping your clients’ personal data and money safe.
  • Review your business practices—explain that your recommendations derive from rigorous fact-finding, that you perform comprehensive due diligence on products offered, that your insurance and investment strategies are mainstream and reputable, and that your operations and procedures are well designed and executed.
  • Finally, explain that you practice what you preach in terms of protecting your own business against unexpected losses. Assure clients you have backstops in place should one of your product providers fail, a client gets hurt while visiting your office, or you make a mistake—or fail to do something—that financially harms them. Then explain all of the protections that apply: SIPC coverage for investments, state insurance guarantee funds for life insurance and annuities, commercial liability insurance for your firm, and errors and omissions insurance for your professional duties.

In summary, if you want to accelerate your company’s future growth, fully leverage your website for trust building. Make sure it conveys the points covered in this article. And if you haven’t done so yet, take advantage of your National Ethics Association membership. This will allow you to leverage its two trust badges and benefit from its extensive ethics and compliance content library.

Following the Authority, Credibility, and Trust (ACR) formula will not only send the right message to your prospects and clients, it will solidify your position as a market leader. Good luck!

“Lying is an elementary means of self defense,” said American author and critic Susan Sontag. Many financial advisors would surely agree with that statement. Every day, they encounter prospects who lie in order to deflect their sales efforts. And even after they buy, clients may continue to deceive in order to cloak their inability (or unwillingness) to make decisions. Others are ashamed to admit their out-of-control spending or failure to handle important financial tasks. In short, people lie to avoid facing hard truths about themselves—and their advisor’s disapproval.

Dealing with lies every day can get under an advisor’s skin. As one commented on Insurance Forum several years ago, “You don’t know whether to laugh or to get mad at clients for thinking you’re stupid.” Rather than laughing or getting mad, advisors should realize that lies simply come with the territory. When you’re working with people on sensitive issues such as retirement, disability, death, and money (especially money!), it’s only natural for people to deceive. If advisors get upset every time this happens, they won’t be advisors much longer.

Still, we believe financial professionals can be a little too accepting of client untruths. When they fail to challenge them, bad things can happen. For example, a smoking prospect who claims to be a non-smoker on a life insurance application can jeopardize her beneficiary’s death benefit if she dies within the two-year contestability period. And what about clients who lie about their shopping or gambling addictions? Can advisors justify ignoring behavior that can devastate a family’s finances?

And there’s the matter of legal exposure. Working with deceptive clients can lead to intra-family conflict, compliance lapses, and illegal conduct, leading to potential lawsuits and errors-and-omissions claims.

The point is this: advisors can safely shrug off most client lies. But some must be challenged to protect the client and the advisor. How? By improving your ability to detect them and by becoming more confident at meeting them head on.

How to detect lies? Our first advice is to ignore a lot of what you read in the popular press. Many self-proclaimed experts suggest that when clients look up and to the left or appear stressed out or nervous are red flags. Wrong! According to Maria Hartwig, Ph.D., an associate professor at the John Jay College of Criminal Justice in New York City, nonverbal behaviors such as gaze aversion, fidgeting, and changing posture have no scientific value in detecting human deception. In fact, the U.S. Transportation Security Administration invested some $ 1 billion to evaluate methods of “reading” facial expressions and other nonverbal clues in order to identify terrorists. Government auditors have uncovered few positive results from these efforts. What’s more, a wide-ranging review of the scientific literature revealed people can spot lies only about 47 percent of the time, which is less than by chance. “The common sense notion that liars betray themselves through body language appears to be little more than a cultural fiction,” Professor Hartwig told the New York Times last year.

Despite scientific debunking, so-called experts continue to argue that signs of emotion and stress are markers of deception. However, many people can easily control their emotions when lying, while others may appear anxious for totally unrelated reasons. A better approach: focus less on emotions and more on the cognitive task of lying itself. In other words, recognize that emotions are easily masked during deception, but cognitive effort is not. So if you can detect a “high cognitive load” and/or reasoning flaws in verbal answers, you’ll be on more solid ground.

For example, let’s say you’re doing fact-finding with a male client (his wife couldn’t get off work). In probing the man’s risk tolerance, you get credible, confident answers. But when you ask about the woman’s appetite for risk, the man stares without blinking and his posture stiffens while he considers his answer. As he describes his wife’s “money personality,” his halting delivery stands in stark contrast to his former speaking style. Based on the cognitive load theory of lie detection, it might be wise to push for a separate conversation with the wife to confirm what the husband said.

Experts suggest also watching for behavior such as repeating identical phrases; giving short, superficial answers; pausing between sentences; evading questions; talking in a strangely impersonal tone; and shifting the discussion to third parties and other topics.

In addition to seeking evidence of “cognitive load,” pay close attention to inconsistencies. For example, a client might promise to keep her spouse fully informed about future investment purchases, but refuse to provide his cell phone number for the file. If she was so committed to transparency, why is she so reluctant to provide her phone number?

Also look for conflicting fact patterns. For example, a client might claim to have no health problems during underwriting for a new life policy. However, an application taken a few years ago revealed a chronic irreversible condition. How can someone have perfect health and a chronic condition at the same time?

Assuming the above techniques help you to catch a person in a lie, your first reaction might be to gloss over it. This might be fine with routine lies that are nothing more than buying objections, including:

  • My brother-in-law is my agent.
  • Just send me some written information and I’ll look it over.
  • I missed the meeting because I had a doctor’s appointment.
  • I never received your proposal in the mail.

Statements such as these might not always be lies. But when a prospect repeatedly dodges your sales probes and closing attempts with flimsy excuses, refocus your efforts on identifying legitimate needs and responding to underlying objections. If the person continues to lie, then consider moving on to the next sale.

However, some client lies are impossible to ignore. Clients who lie in order to prevent a negative event (getting declined for life insurance) or augment a positive event (misstating age to get a larger benefit) should be viewed as trouble magnets. Proceed very carefully in such cases.

So the next time a prospect or client lies to you regarding a serious matter, take a deep breath, then . . .

  • Give the person the benefit of the doubt. Don’t automatically assume the person is lying. Probe to see if there’s a misunderstanding.
  • If there is no misunderstanding, call the lie out. Let the client know that it’s in both of your best interests to be completely forthright. Then ask for a clarification of the person’s prior statement.
  • If the person resists coming clean, make the point that a productive advisor/client relationship demands full transparency and candor. Without it, you won’t be able to do your best work. Plus, if the person isn’t being truthful now, how can you ever fully trust him or her in the future?
  • Being caught in a lie can upset clients. So gently communicate your empathy and explain you will hold nothing against them. But if they refuse, say you’ll need to reconsider your ability to serve them in the future.

By getting better at detecting and confronting client lies in this fashion, you’ll create a more enjoyable, less stressful work environment, while minimizing errors-and-omissions claims in the future. Why give liars a pass when the vast majority of clients can be counted on to tell the truth?

For information on ethical sales 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 E&OforLess.com.