Misrepresentation happens all too often in financial services. Just look at the number of financial professionals cited by regulators for stretching the truth about their products. They often try to make those products look better than they are or suggest they provide benefits they don’t. In fact, we recently heard of a broker who told a prospect that a variable annuity was no different than a fixed annuity!

Ethically speaking, misrepresentation is no different than lying. And we all know lying is wrong. But what about failing to disclose information to a client? Is that a lie? Some would argue it’s an omission, not a lie, and a mere ethical glitch compared to misrepresentation.

We’re here to tell you that non-disclosure is just as serious a matter as misrepresentation. If you routinely fail to provide key information to your prospects, and you do this for your own benefit, then you are in the same position as a lobster placed in a pot of lukewarm water: totally unaware of the hot water that will soon engulf you.

So let us disclose some key information about disclosure in the interest of promoting quality service for your clients and career longevity for you.

What exactly is disclosure?

It’s nothing more than sharing facts about a product or strategy with a prospective client. The sharing of information should be robust and the goal of sharing should be to help the person weigh the pluses and minuses of the recommendation and to make an informed decision.

If you’re a life insurance agent, disclosure is particularly essential because of the nature of the life insurance contract. According to Ron Duska, professor of ethics at The American College, life insurance contracts are not negotiated. Instead, they are contracts of adhesion, which means they are devised by the insurer and must be bought or rejected by the client. Because of this, insurance companies bear the burden of educating policyowners about their contracts, a burden shared by agents since they represent the insurance carrier.

How much are you ethically obligated to disclose?

What you are legally obligated to disclose is the starting point for this answer. Certain financial licenses may require specific disclosures of business background, practices, or fees. Failing to comply with these regulations is a serious matter. But assuming you do comply with the minimum disclosures required by your license type, how much further should you go? We believe you should disclose as much as possible, especially if non-disclosure would lead a client to think you held information back for financial gain.

Obviously if you have to choose between a product that is a little better for the client, but not quite as good for you (lower commission), the choice should be clear. The client’s needs must be put in front of your own. You’d obviously disclose all the pertinent facts about that product to the client.

On the other hand if you have two products that are equally beneficial to the client. Then there is nothing wrong if one pays more commission to you. Most consumers do not mind you making money because it makes you more vested in serving them. This is especially true when that money does not come directly from their pocket as is the case for fixed annuities and most life insurance policies. Under this scenario, if the client were to ask about your compensation, you should feel free to explain the higher compensation for the reasons just described. And if the client doesn’t ask, you may still want to disclose, assuming you’re comfortable doing so.

Perhaps the general rule is this: disclose more rather than less, especially when not disclosing might cast doubts on whose interests you serve.

What exactly should you disclose?

Again, that varies by license type, but generally disclosures fall into four basic areas.

  • Information about the product clients are considering purchasing, including specific details that define how the product works, its material risks, and its future performance.
  • Information about the carrier that will provide the product, including carrier ratings and track record.
  • Information about the application and any underwriting process, especially about the risks of providing false medical information for health, life or disability insurance.
  • Information about the specific product illustration provided in your sales presentation, especially the difference between future values that are projected vs. guaranteed.
How should you document your disclosures?

Professor Duska provides some excellent advice here. He suggests you document three things:

  • The reason for the product recommendation, including specific facts that led you to conclude that the proposed product was suitable for the client.
  • Copies of any illustrations upon which the sale was made, including the client’s signature.
  • A disclosure statement, which briefly defines the key product features, benefits, costs and term period, again with the client’s signature.

We’d also add one additional item that can prevent a lot of grief if your client passes away and you begin dealing with beneficiaries. That would be a document that defines the client’s wishes regarding the disposition of funds relating to beneficiaries. Because beneficiaries often challenge the decisions of their deceased parents, it’s best to document those decisions very carefully in writing while the parent is still alive.

What do you stand to lose and to gain from full disclosure?

When you disclose fully, you may lose some commission dollars or maybe the sale itself. But you stand to gain much more from the stronger client trust—and more solid relationship—that will ensue. Never take a short-term view on ethical issues such as disclosure. The power of ethical conduct only becomes evident over the years as your reputation builds and begins to pay dividends such as more referrals, longer client retention, and higher income.

Perhaps the strongest case for full disclosure is the positive affect it has on one’s stress level. When your default position is more disclosure, not less, then ethical quandaries and self-disputes vanish, and you just do what comes naturally. Plus, when your philosophy is to share fully with clients, you will experience the serenity that comes from educating the client and letting the chips fall where they may. Whether you make more or less money as a result, you still win!

So here’s the bottom line: Don’t skimp on disclosure. Get serious about sharing information with your clients. I promise you they will reward you with trust and loyalty beyond measure.

Visit our E&O Headquarters for more informational resources.



The Incident

An agent writes a $1 million life insurance policy on his then 36-year-old male client. The client requests a premium waiver in case he ever gets disabled. The agent assures the client the policy will be issued with the rider. However, the policy is issued without one. The client receives the policy, never looks at it, and places it in a drawer for safekeeping.

Years go by and the client pays his premium faithfully. One day, on his way home from work, he loses control of his car on the highway due to an oil tanker spill. He’s seriously injured. Ultimately, he loses use of an arm and goes on long-term disability.

Months pass and the client still can’t work. Since he can no longer afford to pay for his life insurance, he tells the company he wants his premiums waived. The company responds that the policy has no such rider. The policy lapses due to non-payment of premium.

Eventually, the client dies from his injuries. The client’s beneficiaries file a death claim with the insurer, which is denied because the policy is no longer in force.

The Claim

The client’s beneficiaries sue the agent and the carrier for negligence, breach of contract, bad faith, misrepresentation, and violation of consumer protection laws.

The Outcome

The agent insists the client never requested a premium waiver. But he has no proof of this.

The client’s beneficiaries claim their loved one asked for the rider in the initial sales interview and that he always believed he had one.

Because the claim is a he-said/she-said scenario, backed by conduct consistent with the client’s believing he had the rider, the insurance company is unable to defend the agent. It settles the claim out of court.

The Takeaway

Agents can avoid such E&O claims by:

• Documenting all client requests in writing.

• Filling out the application line by line during the sales interview.

• At the end of the meeting, confirming what the client bought.

• At policy delivery, reviewing the policy benefits one more time.

• Always encouraging clients to ask questions about their coverage.


Congratulations on buying an errors and omissions insurance policy! You’ve taken a big step toward protecting your current business and future livelihood. But don’t stop there. Be sure to nip potential claims in the bud. The following ten tips will show you how.

Tip #1: Be a Consummate Professional.

There is no short cut to professionalism. Do your homework and know what you’re recommending. Keep investing in your knowledge base by earning appropriate designations and attending professional development courses. Stay current on regulatory requirements.

Tip #2: Do Your Research.

Make sure all products and investment programs you offer are registered with the appropriate regulatory authority and approved by your broker-dealer, registered-investment advisor, and insurance FMO.

Tip #3: Stay In Your Expertise Area.

Only recommend products you fully understand and are licensed to sell. If you refer clients to other providers, make sure you can vouch for their competence and integrity.

Tip #4: Solicit Business Properly.

Make sure your solicitation materials are above board. You never want to misrepresent who you are, what you do, or what you sell. And if required to, have your insurance company and/or broker-dealer approve your solicitation materials.

Tip #5: Practice Full Disclosure.

Make sure to disclose all required information and be totally up front about your track record, business practices, and affiliated advisors and companies.

Tip #6: Do Thorough Fact-Finding

When you first meet the client, take time to fully understand the person’s situation. Uncover and document all relevant facts. Do a careful job of assessing risk tolerance. Then set appropriate expectations for future results.

Tip #7: Link Your Recommendations to Documented Needs

Make sure to present only suitable recommendations (preferably more than one). After the prospect agrees to buy, review the reasons for buying the product and get the prospect to agree in writing.

Tip #8: Educate Clients about What They Bought.

Make sure clients understand what their product covers and doesn’t cover, as well as all moving parts, fees and expenses, and any underlying risks and guarantees. You can never over-educate a client.

Tip #9: Leave a Paper Trail.

This is crucial. Always document the outcomes of key client conversations, decisions made, and coverages declined. And remember, no client interaction is irrelevant. Document every call or conversation no matter how trivial the subject matter. Doctors and attorneys do this, and so should you.

Tip #10: Promptly Resolve Client Complaints.

If a client is unhappy with you, find out why. Then do your best to resolve the person’s complaint before it turns into a regulator sanction or lawsuit. Also, if you sense the client will file a formal complaint, let your compliance department know as soon as possible.

Bottom line: Preventing future E&O insurance claims isn’t rocket science. But it does require careful planning, attention to detail, and commitment. The ten tips just described will get you started. The rest is up to you.

Visit our E&O Headquarters for more informational resources.