Ask National Ethics Association…
Q: I just purchased errors-and-omissions insurance. What are the most common E & O claim reasons?
A: Former or current clients usually file lawsuits against their financial advisors or insurance agents because they have suffered a financial loss and blame the advisor or agent for their financial suffering. Many of these cases are frivolous and hold no water. The client is just lashing out in hopes of finding someone to pay for his losses.
However, sometimes there are legitimate reasons that can be a basis for a lawsuit. Here are the most common reasons agents and financial advisors make a claim on their errors-and-omissions insurance:
Inadequate Communication and Documentation
Never assume what your client knows. There is never any harm in over-communicating, but inadequate communication can result in a claim. Always provide your clients with more information than you think they need, and keep copies of everything you give them in your client file.
Misrepresentation
Of course, there is no excuse for intentionally overstating your qualifications or experience. Misrepresentation can trigger a lawsuit if your client ever discovers the truth. For this reason, honesty is the only policy.
Misrepresentation can also result from failing to thoroughly explain a policy provision or even making a mistake in an insurance application. It is your job to be completely thorough when you submit information on a client’s behalf.
Inadequate coverage
An errors-and-omissions claim can arise from an agent failing to address a key financial need or providing policies with inadequate limits. To prevent this, always do a full needs analysis, recommend products that address key client problems, and get clients to sign a waiver when they don’t accept your recommendations.
Breach of duty
An insurance agent is responsible for placing all insurance coverage as promised to the client. If an agent fails to do so within the time promised and a client suffers a loss in the meantime, the agent will have breached his duty. Breach of duty also occurs when an agent fails to promptly inform a client that insurance coverage could not be provided for any reason.
Inadequate business practices
Many E&O claims arise because the agent or financial advisor or his assistants were lacking in:
• Knowledge
• Action
• Attention
• Communication
• Concern
• Consistency
• Control
Conclusion
For most financial professionals, errors-and-omissions insurance is a necessary business expense. Know the coverage you need and options available that can protect your business. Continue to do your job in the most professional and ethical manner.
Also shop around so you can purchase E&O insurance with confidence. Keep in mind that insurance companies usually lump high-risk and lower-risk professionals together when determining their premiums. This may result in much higher costs for you. In contrast, National Ethics Association’s sponsored errors-and-omissions insurance is available only to preferred-risk financial professionals
Make sure to keep your policy in force at all costs. Go here to sign up for our free, no-obligation Renewal Reminder. It will help you to avoid the ticking time bomb of an E&O coverage lapse.
Brought to you by the National Ethics Association, sponsor of Preferred Risk E&O insurance for qualified financial professionals.
