E&O Insurance
Many financial professionals ask themselves, “When is the right time to take out an E&O insurance policy?” As with many things in business, the answer is, “it depends.”
On one level, the answer is cut and dried. Almost all insurance or financial advisors who are in business for themselves should have E&O protection. Why? Because adverse legal judgments can put them out of business if they lack the personal financial resources to pay for them. And even if they win in court, paying for legal fees can be challenging even for those making a good living.
But there are at least five times in which having E&O insurance is even more important than usual. Let’s review each one:
- When you first go into business. At this point, agents or advisors will typically have a lower income and fewer assets than those who are more established. At the same time, their knowledge base may be shallower. Consequently, they may be at higher risk of making a mistake than more experienced professionals are. The combination of fewer resources and greater risk adds up to a compelling reason for new agents to purchase E&O insurance. If that weren’t enough, inexperienced agents might want to consider what’s at stake were they to lose an E&O claim in court. According to a major E&O insurance underwriter, the average claim cost for life insurance disputes is about $40,000. That number grows to more than $70,000 for pension-related claims and to $150,000 for disability-insurance lawsuits. Agents with limited assets and income would be hard-pressed to make good on legal judgments such as these.
- When you add a new product-type to your portfolio. Even though advisors might have years of experience, beginning to sell a new product can be risky from an E&O insurance perspective. If they fail to understand how the products work and for whom they are best suited, they can easily make mistakes that spark E&O disputes. In an environment that is tilting more heavily toward fiduciary best practices, recommending a product that isn’t in a consumer’s best interests can have devastating legal and financial consequences.
- When you enter a new consumer market (example: providing disability insurance to physicians). Agents with extensive experience with one type of consumer might decide to diversify into another segment. The problem is, they might not fully understand consumer needs and expectations in this segment and either recommend the wrong product or provide inappropriate levels of service.
- When you have decades of industry tenure and have grown a highly successful business. In this case, you’ll probably have a deep knowledge base and fully understand the needs of your buyers. However, being successful makes you a litigation target because clients and their attorneys assume you have greater ability to settle lawsuits. In other words, the greater your financial resources, the larger the litigation target on your back.
- When you are too busy to defend yourself against nuisance claims. Sadly, more and more consumers are bringing nuisance claims against their financial providers. They and their attorneys assume that most E&O insurers will simply settle claims for $25,000 or $50,000 just to make them go away. Without having an E&O insurer—and claims adjuster—in their corners, busy financial professionals can easily spend hundreds of hours defending themselves against nonsense disputes. For these individuals, buying E&O insurance shields them from the hassles and expense involved in such cases.
Protection
In the above five scenarios, E&O insurance provides the money and expertise necessary to defend financial professionals against client lawsuits, both legitimate and bogus. E&O insurance provides money to pay for attorney fees, to cover the cost of legal judgments and settlements, and to pay the court for its expenses. Agents and advisors who have been sued can attest to the value of having E&O insurance: less worry, less stress, and less time spent negotiating with unhappy clients. For most individuals, achieving those benefits is well worth the cost of E&O insurance.
However, understanding the value of E&O insurance at certain times of a financial professional’s career is just the beginning. The challenge then becomes to buy quality, affordable E&O coverage as conveniently as possible. Many financial advisors find that online E&O programs are a great way to get E&O protection at a reasonable cost and with a minimum of time and effort. EOforLess.com is one such firm that has emerged in recent years.
Launched in 2008, EOforLess.com provides E&O insurance for life/health insurance agents, property-casualty agents, registered investment advisor representatives, and real estate agents and broker-owners. It has pioneered the use of online shopping to make buying E&O insurance easier and simpler than ever before.
Given the risks insurance and financial professionals encounter over the course of their careers, there isn’t just one right time to purchase E&O insurance; there are many right times based on an agent’s specific needs and challenges. The key point is this: financial professionals who wish to do business responsibly—protecting their businesses, their families, and their future financial viability—rely on E&O insurance to keep them safe. What about you?