Top Ten Things Every Advisor Should Know about E&O Insurance
#1: You need it.
In today’s economy, it’s just too risky to do business without errors and omissions (E&O) insurance. If you’re ill equipped to absorb $20,000 or more to settle a customer claim or spend $20,000 to $100,000+ to fight it, you definitely need E&O insurance.
#2: You’re probably paying too much for it.
Problem is, most carriers charge a “one-size-fits-all” premium. That means low-risk insurance agents or financial advisors pay the same premium as higher-risk advisors.
#3: You can pay less for it.
At least one insurance company rewards low-risk advisors by charging lower premiums. In return for proving they adhere to responsible business practices, such advisors can save 20% to 50% on their E&O insurance premiums. (See eo.ethicsdev.com for details.)
#4: Your policy must have these two features.
Your errors and omissions policy should provide retroactive coverage, as well as an extended reporting period. The former means you’ll be protected going back to your first continuous period of E&O. The latter means you (or your heirs) will be covered for errors and omissions while you were working, even after you retire, change careers, become disabled, or die.
#5: You should customize your policy.
Make sure your E&O policy covers your specific job activities. For example, if you are an investment advisor representative, then a standard life & health agent policy won’t do. In addition, know the specific limits of liability for each claim, as well as your annual aggregate, and total aggregate for all advisors in the program.
#6: You should always buy E&O insurance from a top rated insurance carrier.
Avoid insurers with low marks from the various rating agencies. Also watch out for so-called “risk-sharing plans.” No state insurance departments check their books or require them to hold minimum reserves. If such a plan fails, you will be left holding the bag.
#7: Your policy should be free of handcuffs.
Be careful when considering FMO-sponsored E&O insurance. It may lock you into the FMO by making your coverage contingent on staying with them or on writing a certain level of business with one of their carriers. Also, watch for coverage exclusions when you sell products outside the FMO.
#8: You should ask about post-sale service.
Having a properly designed policy is the starting point. Also ask about who will provide post-sale service. Make sure the administrator is equipped to handle various payment options, has a responsive call center, and is committed to prompt claims processing.
#9: You should revisit your needs periodically.
E&O insurance isn’t something to buy and put in the drawer until you need it. Every year or two, revisit your needs to make sure the policy is still appropriate.
#10: You should work hard to prevent E&O claims.
Once you purchase an errors and omissions policy, get serious about preventing future claims. Three main strategies: recommit to high standards of ethics, make sure your office is well managed, and resolve complaints promptly. For more information, visit www.ethics.net.
