E&O insurance: Are you protected?

E&O insurance is just what the name implies: insurance designed to provide compensation for financial losses, including defence costs and damages, that occur as a result of an error or omission in the services or products provided to a client. In order to ensure that you are adequately protected, you must understand your needs, find insurance that meets them and take steps to maintain that protection once you have it.

“Someone filling out a form puts in an extra zero or leaves a zero out,” Pollock says. “Or the policy number gets transposed, and that [error] doesn’t get discovered for many years, until a claim is made. E&O insurance helps provide a backstop, in terms of dealing with that dispute.”

E&O insurance is a valuable preventative measure that is mandatory for some advisors. Those who sell life and health insurance are required by most provincial regulators (except New Brunswick, Nova Scotia, PEI and the Yukon) to have an E&O insurance policy in force.

The minimum amount of E&O coverage required also varies by province, says Roberta Tasson, vice president, corporate risk, with the Magnes Group Inc., the Toronto-based insurance broker that provides E&O insurance to Independent Financial Brokers of Canada members. (Magnes also has offices in Montreal, Vancouver and Oakville, Ont.) Further, Tasson says, although fraud is a standard exclusion in a typical E&O insurance policy, some provincial regulators of life and health insurance require advisors to have E&O coverage for fraud.

There are no regulatory requirements that advisors selling mutual funds, securities or exempt-market products have E&O insurance. But dealer firms often require advi-sors to have a policy for these services, says Harold Geller, a lawyer specializing in financial advisor services with Doucet McBride LLP in Ottawa. Most Mutual Fund Dealers Association of Canada and Investment Industry Regulatory Organization of Canada contracts with financial advisors contain an indemnity provision — that is, if the firm gets sued, it can then expect compensation from the advisor.

“I have had a number of cases,” Geller says, “in which, at the verge of settlement, the dealer tells the [advisor]: ‘You’re paying this $500,000′.”

Marc Lamontagne, an advisor with Ryan Lamontagne Inc. in Ottawa, compares E&O insurance with general loss insurance for his home. Although he’s never been in a situation in which his home insurance has been necessary, having the policy in place lets him sleep at night. Because Lamontagne is licensed to sell both investments and insurance, he is required to carry E&O insurance.]

Lamontagne does a significant amount of fee-for-service financial planning, for which E&O insurance is not mandatory. If you provide financial planning unconnected to the sale of a product, you should read your E&O policy very closely, he says, to ensure that your services are covered: “Some policies don’t cover that [service] unless there is a product sale. You need to buy another policy or rider for that [planning] activity. The same is true for financial planners who also have a tax practice.”

If you provide tax-preparation services for your clients, check with your E&O broker to determine whether your current policy covers such activity. If not, Tasson says, you may be advised to purchase a rider or a separate policy. E&O plans available through the IFB cover defence costs, appeals, investigating or settling any claim involving tax legislation in Canada.

 

Shopping For Plans

A variety of E&O insurance plans are available, and you can shop for coverage by contacting plan sponsors and comparing the coverage and rates. One of the most popular avenues for obtaining E&O insurance is through associations, through which members can access an E&O plan offered by an insurance broker that works specifically for that association. Advocis, for example, has a relationship with Willis Canada Inc., which offers a roster of Liberty International Underwriters liability products to Advocis members.

The Magnes Group, as previously mentioned, acts as the E&O broker for IFB members, providing coverage by Axis Reinsurance Co.

Some mutual fund dealers and financial planning firms provide sponsored E&O plans for their advisors; in most cases, this insurance is mandatory. Investors Group Inc., for example, offers its own E&O insurance, which its advisors must purchase.

Some insurance companies offer optional access to E&O insurance plans for advisors who meet a certain threshold of volume of business with that insurer. As for members of insurance companies’ captive sales forces, Tasson says, E&O insurance is compulsory.

E&O insurance is not a “one size fits all” product. Geller urges you to dig out your E&O policy and take a good, long look at it to make sure it is airtight in meeting your needs. Similarly, if you’re shopping for coverage, take the time to ensure you get the coverage you need. “You want as comprehensive a policy,” he says, “as can be purchased on your behalf.”

Pollock points out that, similar to shopping for auto insurance, there are two kinds of E&O insurance consumers: the first is simply looking for the best rate without paying close attention to policy details, while the other looks at the product as a risk-management tool. Of the latter group, he says, “They’re going to compare and contrast carefully what’s in the policies.”

Assets under management is a good starting point to determine what type of E&O policy would be best for you. But there are other aspects of your practice that you should consider when shopping for E&O insurance, Pollock says. Consider factors such as number of clients, support staff (both number and level of experience) and the complexity of products offered to determine what kind of E&O package is appropriate.

Assessing Your Needs

There are several components to E&O insurance policies that you should consider. Below are some questions to ask when selecting E&O coverage:

1. What Do I Need Covered? E&O insurance policies are often offered in bundles, depending on the advisor’s needs. At Advocis, for example, three basic compensation caps are available: $1 million, $2 million and $5 million. These are available under four packages from which you can choose, depending on your range of business.

You can choose a package based on the types of products you handle — such as life insurance, segregated funds, mutual funds, etc. — and fee-only services you provide. Some packages provide coverage for transactions executed by licensed administrative assistants as well as the senior advisor.

2. Does The E&O Policy Provide Regulatory Defence Funding? Advisors occasionally are required to respond to an inquiry from a regulator with respect to possible misconduct when a claim is made. Some E&O policies provide a limited but substantial budget for responding to these inquiries, Geller says, as well as for subsequent investigations and enforcement proceedings.

Just responding to such an investigation would easily cost the you $5,000, Geller says. Typical communication with the regulator could jack the cost up to $10,000 or more. Some E&O policies offer a $25,000 budget for this sort of event. Still, if you’re involved in such an inquiry, Geller says, you should engage a lawyer.

3. Will The Policy Protect Me After I Retire? When you decide to leave the business, you are still responsible for complaints about the work you have done. You can purchase “extended reporting period” insurance (a.k.a. “tail” coverage) as a one-time deal for between one and 10 years, based on a percentage of the expiring premium, which covers you if you are served with a claim after retirement.

An E&O policy should offer this continuing coverage, Geller says. Even if you are ultimately off the hook, you may still have to cover your defence costs of $20,000 to $50,000 to get to that point, he says, and the cost can rise even higher. Adds Geller: “We saw a bill recently on defence of an action that was almost $500,000.”

4. Does The Plan Have A Plan Aggregate? Karin Mizgala, CEO of Money Coaches Canada of Vancouver, says her E&O policy, sponsored by the Canadian Institute of Financial Planners, is up for renewal early next year and she will be comparing a few plans. The main factor that concerns her is whether a large number of claims made by members of the group plan in one year might affect her ability to receive benefits.

Each E&O policy contains an aggregate limit per advisor, Tasson confirms, which is the highest amount the insurer will pay out for any one claim or series of claims on one policy for that advisor. In addition, a group E&O insurance plan may contain a plan aggregate — a limit to the amount the insurer will pay out for any series of claims in one policy term for all members insured under that policy.

If, for example, a policy has a plan aggregate of $25 million, and that policy insures enough advisors that the total individual aggregates exceed that amount, some advisors might theoretically be unable to access their minimum coverage should they make a claim. Such a shortfall would contravene the regulatory requirements that insurance advisors hold a prescribed minimum amount of E&O coverage. Which is why you should check for a plan aggregate when shopping for E&O insurance.

5. What Is The Price? E&O insurance is priced competitively — for now, at least — says Pollock. Because organizations such as the Advocis’s APA operate on a non-profit basis, he says, group plans’ premiums are set so that the losses of the few are spread among the premiums of the many. For instance, a $1-million policy would cost $600 annually through the APA. Unlike auto insurance — for which premiums might rise if the insured gets a speeding ticket — E&O premiums are set so that those with the same needs would pay the same premium.

So-called “circumstances” — in which advisors alert their E&O brokers at the first sign of a possible complaint before it gets ratcheted up to “claim” status — do not affect premiums.

In the unlikely event that you have faced multiple claims, without actually having your licence revoked, you would be unable to buy into a group E&O package, according to Tasson. In this situation, you might have to work out an individual policy with a broker, which will be more expensive and limited in scope.

Geller emphasizes that you should consider your E&O insurance needs very carefully. Recognize that your needs may change over time, as will policies as the industry evolves.

“This is not something that should be bought on price sensitivity,” he says. “It’s your future.”  IE