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

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.

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