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Errors & Omissions Insurance for Investment Advisers

Errors & Omissions Insurance [“E&O”] (otherwise known as professional liability) is a type of legal liability insurance that protects advisers from claims made by dissatisfied clients who alleged negligence or other some other wrongful act.  This might include a claim for breach of contract, failure to execute a trade or a simple mistake.  Usually the claim arises from a financial loss.

Routes to Coverage

There are a limited number of insurers that provide E&O insurance to Registered Investment Advisers and two possible routes to coverage.

First, coverage can be placed through a group policy via an insurance program with a Broker-Dealer, Life Insurer or similar relationship.  This is not the subject of this article.

The second – and most preferable coverage option for independent investment professionals – is to secure a unique policy.  Separate coverage means that the policyholder does not share coverage with other Advisers, develops an independent insurance history and maintains continuous coverage for claims arising from prior acts.  Separate coverage may also allow the Advisers “selling away” privileges (selling a broader range of non-aligned products and services) that may not be possible through a group program.

Claims Made Policies

Policies are written of a claim made basis.  That is, coverage is limited to claims made against the Adviser during the term of the policy.  The policy may also be subject to a prior acts date restricting coverage to services performed after a certain date, usually found on the declarations page of the policy.

When reviewing a proposed policy certain important features should be considered.

Definitions & Exclusions

A most important clause is the definition of professional services.  Fundamentally crucial to the policy – it defines the services are covered.  Carefully read this to ensure that it is broad enough to cover all activities.

Concurrent with the definition of professional services is the policy exclusions.  This is a list of what is NOT covered.  This lists high risk products and services that are outside the scope of the policy (like Alternative Investments, Investment Banking or Broker-Dealer services).

An important policy exclusion relates to fraud and criminal activities. This is a common to all E&O policies.  However, when reviewing this exclusion it is important to ensure there is coverage for defense costs until fraud or criminal activity is proven AND that the exclusion does not apply to advisers that did not participate in the fraud or criminal activity.

Another definition that deserves careful scrutiny is “wrongful acts.”  This essentially describes what is covered. It should include both intentional and unintentional acts and also fiduciary duty.  The clause is often described as the coverage trigger as the wrongful act is the primary cause of any claim.

Policy Features

Other important policy features my include:

Cost of Corrections (or trading errors) coverage:  if there is a trading error the insurer will cover the difference to avoid a much more expensive claim from an aggrieved client.

Subpoena coverage: the insurer will provide an attorney to respond to a subpoena.

Disciplinary Proceedings coverage: the insurer will provide an attorney to defend the Adviser in the event of a FINRA, SEC or State investigation or disciplinary hearing.

Fiduciary Liability coverage: this policy includes activities as a fiduciary as defined in Section 2510.3-21. of the U.S. Department of Labor regulations.

Cyber Liability coverage:  the policy covers liability claims arising from illegal access to computer networks, theft of client personally identifiable information and notification costs.

Specialist Insurance Agent

When evaluating a Investment Advisers E&O policies it is prudent to employ the services of a specialist insurance agent that has access to various insurer and understands the nuances of coverage.  In addition, the agent may be able to negotiate improved terms and conditions on behalf of the Adviser.

Suits against investment advisers are becoming more commonplace, but generally track with fluctuations in the stock market.  The protection of a broadly worded E&O policy backed by a financially strong and experienced insurer is crucial to the long-term success of all investment professionals.

 

Rickard Jorgensen, FCII, ACIArb, ARM is a specialist professional liability agent and risk management consultant.  He can be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com

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