The Calgary-based National Exempt Market Association (NEMA) announced the launch of its own errors and omissions (E&O) insurance program on Monday, an initiative that is meant to fill a void in the exempt-market space, according to Craig Skauge, NEMA’s president.
“About five years ago, when the exempt-market dealer (EMD) regime started, a number of insurers jumped into the pool [to provide insurance coverage],” Skauge explains, “assuming the exempt market was just like any other financial services sector and not really understanding the intricacies of it.”
As the exempt market has grown, the level of coverage available to EMD advisors has declined. This has occurred as some insurers have realized that this segment of the industry requires policies crafted specifically for EMDs — not policies that are better suited for other parts of the investment industry such as mutual funds or insurance, Skauge said.
NEMA worked with BFL Canada and the Canadian arm of Zurich Insurance Co. Ltd., the insurers behind this policy, to develop a program more tailored to this group of advisors. This includes the inclusion of concepts that are more relevant to EMDs, such as the offering memorandum exemption and accredited investors.
The policy carries an annual premium of $1,000 for up to $1 million in coverage and $1,300 for up to $2 million. There is a deductible of $10,000 for each claim for securities, including exempt-market securities. The deductible is only applicable to damages, not to an advisor’s defence.
NEMA’s E&O program is also available to advisors who are dual-licensed, whether they belong to the Mutual Funds Dealers Association of Canada or the Investment Industry Regulatory Organization of Canada, or licensed for life insurance or accident and sickness insurance.
“We wanted the policy to be crafted for EMD reps, but a number of them work in other sectors of the financial services as well,” Skauge said. “We didn’t want them to need multiple insurance policies.”
The policy will cover advisors who have been dealing with claims prior to the inception of the program — so long as the advisor in question had previously possessed E&O coverage through another insurer. Those signing up for this type of insurance for the first time will not be eligible for such coverage.
There is also financial assistance to advisors who are the subject of a regulatory investigation. Advisors in this situation can claim up to $40,000.
“What [this insurance] does is it allows [EMD advisors] to properly defend themselves in the event of a regulatory investigation,” Skauge said. “Often times, the legal costs are prohibitive.”
NEMA is also working on an insurance policy for corporate dealers. The decision was to focus on dealer representatives for now as these advisors find it more difficult to obtain coverage, Skauge said. Under NEMA’s current E&O policy, dealers with advisors who make a claim may receive some coverage through a vicarious liability clause.