Life insurance agents and real estate agents have very different jobs. But one thing they share is the ability to shape their clients’ expectations in order to produce good outcomes. When customers hold beliefs that aren’t consistent with reality, they often are disappointed with the results their agents deliver. For some, disappointment may turn to fury, which can spark a dispute that ends up in court. E&O insurance coverage is tailor-made for this situation. But it’s better to avoid the dispute in the first place by setting the right client expectations during your initial meetings. Here are some tips for doing just that.

  • For starters, both life insurance agents and real estate agents can make their respective sales processes completely truth-driven. Agents who are selling life insurance or annuities should never promise a benefit that isn’t spelled out in the insurance contract. Meanwhile, real estate agents should never lead sellers to believe they can sell their property for more than local market conditions suggest or buyers to be able to purchase their dream home at substantially lower-than-market prices. Regardless of whether you’re a life or real estate agent, stretching the truth will always establish incorrect expectations that can spark problems later.
  • In addition, agents must use advertising and sales literature responsibly to set appropriate expectations in the minds of their prospects. Life agents should never use illustrations that violate the NAIC Life Insurance Illustration Model Regulation. Meanwhile, real estate agents should always obey their state’s real estate advertising and solicitation rules.
  • Also important is your full commitment to educating your prospects and clients about the details of your services. Life agents should work hard to educate prospects about any contractual element that might generate a financial penalty or extra cost in the future. Real estate agents must be explicit about what they will and won’t do for buyers and/or sellers during a transaction.  Then they must document those activities in a written agreement. Promising to do something you have no intention of doing will be a recipe for disaster in most real estate engagements.
  • Because life insurance agents sell highly complicated products, it’s crucial to define appropriate expectations about things like exclusions (what a policy won’t cover), the possibility of future premium increases, and the conditions under which a policy might lapse. Also crucial is explaining the importance of truthfully and completely answering all questions on the insurance application. Failing to do so can lead to insurers challenging or refusing to make good on future policyowner claims.
  • For their part, real estate agents owe their selling clients a full discussion of the status of the local real estate market and how that will likely affect how long their homes will take to close and at what price. Agents should then help their clients settle on a rational sales price that flows from hard data, not emotions. From the buyer perspective, agents should also help their customers establish appropriate expectations about how much home their budget will allow them to buy and how competitive the buying process will be. For example, a tight market means buyers may wish to avoid low-ball first bids, which may do more to annoy sellers than produce a successful transaction.

In short, by educating your prospects and clients, you will likely head off dashed expectations before they become a complaint or a lawsuit. Still, despite your best efforts, it’s likely that a few of your customers may become disgruntled and take you to court. If you have maintained your E&O insurance in force, you will have a framework in place for responding to the client and protecting your interests.

The first thing to do is to promptly file a claim with your E&O insurance company. It’s important to do this as soon as you suspect a client will file a complaint or lawsuit. This will cause the insurer to open a claim file on your behalf, to appoint an attorney to defend you, and to assign an internal claims adjuster to manage the process of resolving the dispute. During this process, it’s important to let your attorney and claims adjuster do their jobs without interference. Let them handle all conversations and correspondence with the plaintiff and follow their advice in terms of what to say and not say during legal proceedings. Also, be sure to share your entire customer/case file with them. This will help them fully understand what led to the dispute and decide how to best defend you.

With a competent attorney and claims professional in your corner, it’s likely any lawsuit against you will either be dismissed, settled out of court, or adjudicated in a legal proceeding in a reasonable time frame. If your documentation was good and you cooperated fully with your defense team, chances are the legal outcome will be satisfactory. And most importantly, if the court deemed you responsible for paying a judgment, your E&O insurance coverage will provide you with a financial backstop. Without insurance, the cost of losing can be significant, perhaps even forcing you to declare personal bankruptcy.

However, the good news is you can almost always prevent disputes by carefully setting expectations early in your customer relationships. Even a modest amount of discussion will go a long way toward defusing future problems. And any time you spend on client education will be preferable to time spent sitting in court. Right?

Many financial advisors view E&O disputes as something that only happen to incompetent or criminal financial advisors. In reality, the odds of incurring a claim or lawsuit are quite high, with insurer statistics suggesting as many as one in seven advisors experience a claim at some point in their careers[1]. Accepting this fact will equip you to respond effectively to a client claim if and when it occurs.

To help you manage an E&O incident, here are some do’s and don’ts that will protect your interests, as well as help your insurer process your claim.

Things to do during an incident:

  • Do manage your emotions. Never lash out in anger or frustration at a client who is filing a lawsuit or arbitration claim against you. Do your best not to take the situation personally. By keeping a level head, you will better position yourself to cooperate with your E&O insurer and attorney to put the matter to rest.
  • Do give prompt notice of the claim to the insurer. Check your policy to see how your company defines “prompt.” And file all required claim forms and supporting documents in order to get the claim started.
  • Do report both real and potential claims. Failing to report the latter may void your coverage for actual claims that arise later.
  • Do provide a comprehensive account of the incident to your E&O claims rep. To collect this information, tap the collective brainpower of all team members involved with the client and collect all relevant documents. Then create and present a chronological narrative that walks your claim rep through the entire event.

Things NOT to do during an incident:

  • In speaking with your customer about the incident, don’t admit wrongdoing. However, continue to be sympathetic to the person. Also, don’t try to defend yourself or provide documents that prove your point.
  • Once you learn of the problem, don’t attempt to “cover your tracks” by augmenting or fixing errors in the customer file. This will make it look as if you have something to hide.
  • Don’t volunteer the fact that you have E&O coverage. However, don’t deny it if directly asked. In either case, don’t provide actual E&O policy language to the customer or to the plaintiff’s attorney. Refer all such requests to your claims representative or defense attorney.
  • Don’t offer to settle the claim yourself by providing funds to the customer. This holds true even if the settlement amount is small. And don’t discuss settlements directly with the claimant. Always refer such discussions to your insurer and attorney.
  • Don’t give a written or recorded statement to the client’s attorney without the guidance of, permission from, and involvement of your own counsel. The same holds true if the request comes from the client’s insurance company or investment provider, who may be fishing to see where culpability lies.
  • Don’t get involved in the day-to-day management of your claim. Let your E&O claims rep manage the process. That person has the training and experience to facilitate the process.
  • Don’t discuss your claim with anyone other than your claims rep, defense attorney, or staff members involved directly with the client account. As the old saying goes, “loose lips sink ships.”

Also keep in mind that E&O incidents, if well handled, should be only temporary problems. By cooperating fully with your E&O carrier and defense attorney, you will speed the process to a hopefully positive conclusion. But remember,  the best strategy for handling E&O disputes is to prevent them from happening in the first place. In this regard, compliant sales practices and disciplined practice management will be your best allies. Good luck!

For more information about ethical sales practices, please visit the National Ethics Association’s Ethics Center at For information on affordable errors-and-omissions insurance for low-risk financial advisors, please visit

[1] Swiss Re Corporate Solutions, “E&O Happens,” retrieved 10/27/14

Have you ever replaced your smartphone before you really needed to? Then you fell victim to the high-tech equivalent of churning.
Churning in this context is perfectly legal, and brand marketers like Apple and Samsung depend on it.

Churning exists in financial services, too. It occurs when an advisor sells consumers a product and then gets them to replace it with another one, to generate an additional commission. As you know, each churn generates not only commissions, but also surrender fees and other penalties. So if there’s no material gain to the client after the transaction, complaints and lawsuits often ensue.

Churning has been with us forever. Yet despite compliance departments’ diligent efforts, advisors continue to succumb to its allure. Why?

For one thing, it’s easier to churn an existing account than it is to create a new client. And when an existing client trusts you, replacing multiple contracts without cause (other than making more money) can be child’s play. But just because churning is simple doesn’t make it right. Here’s why:

  • Churning is illegal. One of the quickest ways to lose your license is to churn your clients’ holdings. (Example in a second.)
  • Churning is unethical. It dramatically violates the spirit of the fiduciary standard of care. Even though non-Series 65 agents aren’t true fiduciaries, we believe they should still uphold the spirit of that license.
  • Churning is a reputation killer. Once it gets out that you’ve been sanctioned (or worse) for churning, clients and potential clients will realize you aren’t worthy of their trust. And they’ll share that knowledge on the Internet.
  • Churning can get you sued. When clients wise up to an advisor’s unnecessary transactions, they’ll tally up their losses and take their grievances to court.

Case in point? An Illinois advisor found himself in the headlines recently for falsely claiming to be a fiduciary when in fact he was allegedly all about selling—and replacing—equity indexed annuities.Despite claiming not to sell investments on commission and claiming he operated under a fiduciary standard, he nonetheless replaced prior contracts he sold with 31 new EIAs. As a result, the advisor received roughly $160,000 in commissions, but his clients lost nearly $265,000 in surrender penalties and other fees.

For his efforts, the advisor is now looking at potentially losing his securities and investment-advisory licenses, as well as paying substantial fines. Plus his state’s attorney general has brought fraud charges against him. And time will tell how many clients sue him. So who needs this kind of trouble, not to mention a ruined reputation?

Don’t let this happen to you. Protect yourself (and your clean errors-and-omissions record) by following these pointers:

  • Never initiate a replacement unless there are tangible client benefits for doing so.
  • “Taking the money because you can” is not a sustainable business strategy. Instead, strive to build life-long mutually beneficial relationships.
  • Don’t just give lip service to “client’s best interests.” Live that principle every day.

Because churning isn’t earning a living . . . it’s burning your clients.

For more information on reducing your errors-and-omissions insurance liabilities, please visit our E&O Headquarters at

There’s been a lot of sound and fury about annuity suitability in recent years. Concerned about inappropriate sales to seniors, many states have adopted new suitability standards for agents to follow. Not surprisingly, insurance companies want their agents to justify and document the appropriateness of their annuity sales.

What’s an agent to do? Get serious about annuity suitability by following these timely principles:

  1. Focus on being a true professional. True professionals make suitable recommendations to their clients. If they recommend products or services that serve other agendas, they are no longer true professionals Professionalism implies an agent has listened to a client’s desires, financial goals, and constraints. It also implies the agent’s recommendations fall within generally accepted standards of best practices. Being a  professional implies the agent strives to meet the client’s needs first, never his or her own.
  2. Rediscover the joys of fact-finding. True professionals don’t rush to close a sale in the first meeting. They patiently take the time to thoroughly assess the unique needs of their clients before making any product recommendations This may include following a measured process, spanning several interviews, of obtaining relevant client data.
  3. Make good use of your suitability forms. Yes, they can be annoying to fill out. But if you use them with every client, making sure to ask all the questions, you will almost always be on safe ground.
  4. Fully document your client meetings. Take good notes during all client meetings, being careful to record any information that supports your product recommendation. Also, ask and then record answers to questions such as when clients will need access to their money and/or when any income distributions will be needed. Then document their clear understanding of guaranteed features, including living benefit options. What the client tells you will help you select a financial product with a suitable surrender period, among other features.
  5. Maintain client records for five years or longer if your state requires it. This applies especially to information that supports your product recommendation.
  6. Broaden your in depth knowledge of multiple financial products to properly meet client needs. In other words, avoid becoming a “one-trick product pony.” Instead, master a variety of product solutions that address a broad range of customer needs.
  7. Help your clients understand how to get access to their money. In the case of annuities, make sure clients know when and under what terms they can access their money. Be doubly sure they sign off on-and fully understand-all surrender period definitions and potential surrender charges.

When in doubt about whether your recommendations are suitable, always do the right thing. The best defense against errors-and-omissions claims is to simply treat your clients ethically. This will prevent unsuitable sales, client complaints, and E&O nightmares no agent needs.

Visit our E&O Headquarters for more informational resources.