It is good news for financial services professionals that regulators and advisor organizations are raising practice standards. But higher standards can be a double-edged sword. Financial advisors can expect the courts to hold them to those higher standards if clients sue.

That means it’s good business to have errors and omissions insurance. Look at E&O as protection for both you and your clients — it shields your assets and pays for your defence if a client makes a claim against you, and it provides funds to pay damages to a client should a court find you or your advisory practice at fault for that client’s losses.

“It’s important for consumers that advisors have E&O,” says Randy McGlynn, chairman of the board of the Advocis Protective Association and CEO of the Ontario Teachers Insurance Pla, which offers insurance to Ontario’s education community. “We see it as ‘consumer protection insurance’.”

Even though E&O protects an advisor’s assets.

Scott Robertson, president of Tasman Financial Services in Ottawa and vice president of the Institute of Advanced Financial Planners, agrees advisors should provide protection for their clients — the way another professional would. “You wouldn’t go to a doctor who didn’t have malpractice insurance,” he says.

“People who do financial planning are taking on a lot of responsibility,” adds Robertson, a registered financial planner. And people make mistakes, he adds: “When mistakes are made, advisors have to be able to provide something for the consumer.”

Advocis is the only advisor organization that makes E&O insurance a condition of membership. Other advisor organizations, including the Independent Financial Brokers of Canada and the Canadian Institute of Financial Planners, offer their members E&O packages as a benefit of membership — not as a condition.

Neither the Financial Planners Standards Council, which bestows the certified financial planner designation, nor the IAFP, which bestows the RFP, requires E&O. But, says Stephen Szikora, director of ethics at the FPSC in Toronto, specific licensing requirements of the various products that advisors offer call for E&O insurance. For example, E&O insurance is mandatory for insurance advisors as part of their individual life insurance licence requirements in Newfoundland and Labrador, Quebec, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.

And there is growing support for E&O insurance. In fact, it may soon be required for RFPs.

“The IAFP is looking into it carefully,” says IAFP executive director Larry Colero.

But before the IAFP makes E&O mandatory, Robertson says, the organization would like to see “a plan that would address all the needs our members have, one for more advanced financial planners.”

Szikora says advisors should make sure their policies cover all types of advice they give rather than just specific products. “A simple example would be the financial planner who offers tax preparation for his or her clients,” he says. “Ideally, any E&O coverage carried by a CFP professional would cover all the possible areas of discussion and services offered by the professional.”



With the markets performing well, advisors are facing fewer claims from clients wanting compensation for market losses. As a result, E&O premiums have been holding steady or even dropping.

Three years ago, the E&O picture wasn’t as bright. In the post-9/11 world, when markets were down, there was an increasing likelihood of clients making claims. Insurers started pulling out of E&O underwriting.

Five companies exited the Canadian E&O market, leaving only four to handle the business: ACE INA, Employers Reinsurance Corp., Liberty International Underwriters of Canada and American Home Insurance Co. One company, Trisura Guarantee Insurance Co. , has recently joined the list of firms offering E&O.

The problem with few insurers providing coverage, says Karen McGuinness, vice president of compliance for the Mutual Fund Dealers Association of Canada, is that, should the MFDA establish a rule making coverage mandatory for members, insurers could end up deciding “who can or can’t be in the business.”

Currently both self-regulators, the MFDA and the Investment Dealers Association of Canada, do not require their member firms to have E&O. The members of both organizations are covered by their respective investor protection funds — the MFDA Investor Protection Corp. and the Canadian Investor Protection Fund — in the event of bankruptcy. This protection is separate from E&O.

The setting of premiums and the administering of E&O plans are made more complicated by differences in provincial insurance regulations. McGlynn says the regulators should make an effort to relieve this problem by harmonizing their standards.

@page_break@For example, provincial insurance regulators in Ontario, Saskatchewan, Newfoundland and Labrador, and B.C. require extra coverage for fraud, boosting the cost of coverage in those provinces. Similarly, most provinces require $1 million in coverage per claim and $2 million in aggregate coverage. Manitoba, on the other hand, requires $5 million in aggregate.

McGlynn is concerned about possible gaps in coverage because there is a variety of E&O policies available. He suggests that regulators should ensure that “what they expect is what is in place.”

But a review of standardization was done within a Canadian Council of Insurance Regulators committee a few years ago, says Grant Swanson, executive director of the licensing and marketing conduct division of the Financial Services Commission of Ontario.

The committee decided against standardization. Granted, fraud coverage is extra, says Swanson, but it’s “not a major contribution to the premiums.” As for the aggregate issue, Swanson says, “Most provinces tend to be around $1 million. Manitoba is probably the highest, at $5 million.”

One change that FSCO and a few other provincial insurance regulators have made is to drop the rule that an E&O deductible cannot exceed $1,000. This will help advisors obtain coverage, Swanson says, as the possibility of having a higher deductible could result in lower premiums.



> Advocis. Advocis is the only advisor organization that requires its members to buy its E&O plan. The plan is managed by the APA, which was set up in 2004 as an entity managed separately from Advocis.

The APA plan is a “self-insured retention” plan, says McGlynn. The idea is to build up a reserve of assets from member premiums, so that the APA will take on some of the E&O risk. There will always be some portion of the plan that is backed by the APA.

The APA is following the lead of other professions such as doctors, architects and lawyers, which all have this type of self-insured plan, says McGlynn.

“As we build reserves,” he says, “we assume more risk, so our liability is backed by monies that we have accumulated.” This way, APA members will be less vulnerable to market cycles, he adds.

Also, by creating a long-term sustainable underwriting reserve, the APA should also be able to reduce premiums. However, McGlynn says, the plan is evolving: “It will take five years to get to the ultimate place that we want to be. But, each year, we will be building assets.”

Under the APA plan, claims go through a “triage process” handled by a claims management firm, Leonard French & Co. Ltd. in Winnipeg. French operates separately from the APA’s present insurer, Economical Mutual Insurance Co.

“We want to make sure that frivolous claims are sorted out quickly,” says McGlynn. French also provides “early intervention” for serious claims, such as providing access to the best legal advice available.

Toronto-based broker Willis Canada Inc. , designed the APA plan. It provides four general levels of coverage.

> Coverage A extends to licensed life and accident and health advisors as well as to licensed mutual fund advisors. Fee-based services that fall within the scope of the advisor’s licence and designations are covered. It also covers unlicensed assistants.

> Coverage B extends to securities reps, preparation of tax returns, acting as an executor, acting under the financial/certified divorce specialist designation, providing service and advice related to non-CDIC term deposits, notes and bonds; service and advice related to exempt products available through corporate arrangements, as long as they are given prior approval by the insurer; and fee-based services that fall within the advisor’s licence and designations.

> Coverage C is for unlicensed fee-for-service planners.

> Coverage D is for licensed administrative assistants.

No matter what coverage level is chosen, the APA plan is a “claims-made” policy. That means a claim that arises during the term of the policy must be made while the policy is in force. In other words, an advisor shouldn’t hesitate to report a claim.

The “prior acts” provision provides full coverage for professional activities performed prior to the present coverage. However, the advisor must have had continuous coverage in the past. There can be no lapses in E&O coverage.

The APA plan provides “vicarious liability” defence cost coverage. This means that if an advisor’s firm is also named in a lawsuit, the firm will also be covered — as long as it hasn’t directly contributed to the negligence that is the subject of the claim. A firm would have to rely on any corporate coverage it has as a separate corporate entity to defend its own negligence.

Advisors can buy extra coverage for “extended reporting periods,” which is recommended for retiring advisors. An advisor’s liability doesn’t end with retiring from the industry. The APA also suggests that advisors buying books of business from retiring advisors demand that the retiring advisor have the extra ERP coverage. That way, the acquiring advisor will not face claims arising from the purchased book.

For Coverage A in Alberta, B.C., Ontario and Quebec, the premiums for a $1-million limit of liability per claim and an annual aggregate of $2 million is $705. That’s down from the base premium of $900 for the 2003-04 policy year. (Generally, Advocis member premiums dropped two years ago, and have remained steady since then.)

For Coverage B, it’s $640 for $1 million per occurrence and $1 million in aggregate; for Coverage C, it’s $368.

Willis also charges a brokerage fee of $150 for paper applications. Online applicants get a slight discount — they pay a $100 fee.

The deductible for insurance claims is $1,000. The mutual fund claim deductible is $5,000. However, the deductible does not apply to defence costs, so all legal costs are covered.

For more information about premiums for higher limits/aggregates and for other provinces, please see: www.apa-ins.ca. For information on policy exclusions, call Willis at 1-877-646-9888.



> Independent Financial Brokers Of Canada. For the Mississauga, Ont.-based IFB, E&O claims are handled by the plan broker, Toronto-based Lowndes Lambert Group. The insurer is American Home Insurance Co. About two-thirds of IFB members are insured through the organization. The plan covers insurance advisors, licensed mutual fund reps, licensed assistants and any employees who are “acting within the scope of their duties.”

The plan also provides coverage for “additional insureds.” This covers an innocent party such as a sole proprietorship or a family-owned firm that is dragged into a lawsuit as part of any claim against an advisor, says Don Dudas, the IFB’s E&O consultant.

“If someone sues the company, we would provide support,” he says.

There is one catch: no other licensed producer can be a shareholder in the firm.

The IFB also provides vicarious liability defence costs for the advisor’s mutual fund dealer and/or managing general agent. It is a claims-made policy, and also provides prior acts coverage. One unique aspect of the IFB plan is that it does not require continuous coverage. The coverage extends to all “wrongful acts, defined as any actual or alleged negligent act, error or omission arising out of professional services of covered individuals.”

The IFB’s E&O insurer is more reticent about coverage of sales of alternative products. Because of concerns on the mutual fund side, says Dudas, the insurer “would take a close look at the dealer’s corporate governance procedure for vetting products.”

There are two levels of coverage: $1 million per occurrence and $2 million in aggregate; or $2 million per occurrence and $2 million in aggregate. (It should be noted, however, that insurance regulators in Manitoba and Quebec both require $5 million in aggregate.) Both levels of coverage provide limits mandated by provincial regulators. An extra rider for extended reporting is also available.

The deductible is $1,000. In this case, defence costs are subject to the deductible.

The major policy exclusions include claims arising out of the bankruptcy of a major insurer and claims for wrongful acts made prior to the policy date if the advisor knew or could reasonably have foreseen that the act could lead to a claim.

There are four levels of coverage: life insurance advisors who have less than 50% of their earnings derived from mutual funds; life insurance advisors who have 50%-99% of earnings derived from mutual funds; mutual fund advisors with 100% of earnings from mutual funds; and mutual fund-licensed assistants whose employers have IFB E&O.

The IFB plan’s fees vary from province to province because of different requirements from the provincial insurance regulators. B.C. has the lowest premium — $654 for advisors with $1 million in aggregate — and rates range upward from there.

The IFB plan’s rates have dropped each year for the past two years. For example, in Ontario, the rate for this year dropped 10% from the 2005-06 coverage year, down to $749 for a life insurance broker with less than 50% of his or her earnings from mutual funds.

For more information, please visit the IFB Web site: www.ifbc.ca/eo_insurance.php.



> Canadian Institute Of Financial Planners. The CIFPs E&O plan has coverage for each of three groups: financial planners who are life and accident and sickness insurance and mutual fund advisors; fee-for-service financial planners who are not licensed to sell insurance or mutual fund products; and licensed marketing assistants. All three are for claims-made coverage.

The first type of coverage extends to services that licensed life insurance, accident and sickness insurance and mutual fund reps would provide. Prior acts are covered if continuous E&O coverage has been in place. The liability limits are similar to the IFB plan. The deductible is $1,000. Similar to Advocis’s plan, the deductible does not apply to defence costs.

For licensed reps, the coverage extends to the insured, his or her administrative assistant and any heir, executor or legal representative. Vicarious liability is provided for the advisor’s firm. ERP coverage is also available.

The fees for licensed advisors are $720 for $1 million in aggregate and $945 for $2 million in aggregate. Fee-for-service advisors pay $500 for $1 million in aggregate and $800 for $2 million in aggregate.

The CIFPs plan has been “claim-free,” says president and CEO Keith Costello. He notes that all of his organization’s members hold the CFP designation: “They must maintain professional standards to keep their CFP. So, they’re very careful.”

As a result, the CIFPs is anticipating better premiums for its plan members. Twenty-five per cent of CIFPs members get their insurance through the organization.

The broker for the CIFPs E&O plan is Marsh Canada Ltd. The insurer is Employers Reinsurance Corp.

For more information on the CIFPs plan, visit
www.cifps.ca/Public/default.aspx.



Most insurers want to protect their customers, so they demand that advisors selling their products have E&O coverage. However, an advisor is not necessarily required to buy into the insurer’s E&O plan unless he or she is a so-called “captive” agent.

For example, at Clarica Financial Services Inc., a subsidiary of Toronto-based Sun Life Assurance Co. of Canada, “the sales force is required to carry E&O insurance, and we work with them to arrange the coverage,” says Brenda Ben, assistant vice president of individual compliance at Sun Life.

“Advisors outside of our Clarica sales force who sell Sun Life products must supply evidence of E&O coverage when they apply for a Sun Life contract. And we request evidence of renewal on an annual basis,” adds Ben.

This is a requirement regardless of the volume of business placed with Sun Life.

The situation is similar at Winnipeg-based Great-West Life Assurance Co. “Advisors for Freedom 55 Financial are required to participate in our sponsored E&O insurance as part of their exclusive arrangement with our organization,” says Marlene Klassen, director of media and public relations for Great-West. At the same time, she says, “the coverage provided under the company-sponsored plans is not exclusive to our products.”

For advisors working with Great-West or its subsidiary, Canada Life Assurance Co., the company-sponsored plan only one option, says Klassen: “Regardless of which E&O plan they carry, advisors must provide us with a copy of the certificate of coverage.”

The E&O plan at Waterloo, Ont.-based Manulife Financial Corp. is more accessible than it was three years ago. Back then, advisors had to put at least 50% of their business through Manulife in order to get favourable rates for the company’s E&O plan.

“It’s less restrictive now,” says Tom Nunn, Manulife’s assistant vice president for media relations. “There is no longer a minimum sales volume requirement, and the 50% restriction was changed to a minimum of 20,000 sales credits. For life products, a credit reflects a dollar of premium; for wealth products, a credit reflects 25¢ of every $1 invested.”

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