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The Importance of Errors & Omissions Insurance for Financial Advisors

Errors & Omissions (E&O) insurance is a critical component of risk management for financial advisors. This specialized form of liability insurance protects advisors from claims of negligence, mistakes, or omissions in the professional services they provide. Here, we discuss various aspects of E&O insurance that financial advisors should consider to ensure comprehensive coverage.

1. Sufficient Dollar Amount of Coverage

Determining the appropriate amount of E&O coverage is crucial. Advisors should assess their risk exposure based on the size of their client base, the complexity of services offered, and potential claim amounts. Consulting with an insurance professional can help determine a sufficient coverage limit that provides adequate protection without being excessively costly.

2. Verify Products You Sell Are Covered and Not Excluded

Financial advisors should ensure that all the products they sell and services they provide are covered by their E&O insurance policy. It is essential to carefully review the policy to identify any exclusions that might leave the advisor vulnerable. Advisors should work with their insurance provider to clarify coverage details and amend the policy if necessary to include all relevant products and services.

3. Coverage if Switching Firms

When a financial advisor switches firms, it’s crucial to confirm that their E&O insurance policy provides coverage for prior acts. This “prior acts” coverage ensures that any claims related to services provided at the previous firm are still covered under the new policy. Advisors should verify with their new firm or insurance provider that such continuity of coverage is in place.

4. Coverage if Name of Firm Changes

If a firm undergoes a name change or rebranding, it is vital to ensure that the E&O insurance policy remains in effect. Advisors should notify their insurance provider of the name change to update the policy accordingly. This step is crucial to prevent any coverage gaps that could arise from discrepancies in the firm’s name.

5. Are Associates and Staff Covered Under the Policy?

E&O insurance should ideally cover not only the financial advisor but also associates and support staff working under them. This comprehensive coverage ensures that all team members are protected against claims arising from their professional activities. Advisors should verify that their policy explicitly includes coverage for associates and staff.

6. Coverage for Indemnification

Indemnification clauses in E&O insurance policies protect financial advisors from having to pay out-of-pocket for claims made against them. These clauses ensure that the insurance company will cover legal costs, settlements, and judgments, providing financial security and peace of mind for advisors facing lawsuits.

7. Having an Insurance Tail

An insurance tail, or extended reporting period, is essential for financial advisors, especially when retiring or switching careers. It extends the period during which claims can be reported for incidents that occurred during the policy period. This coverage ensures that even after the policy has expired, claims made later on can still be covered, protecting advisors from potential lawsuits arising from past services.

8. Best Practices for Collaborative Projects

If you are involved in projects with other financial advisors, it’s essential to ensure that all parties have adequate E&O coverage. Verify that your colleagues’ insurance policies provide sufficient coverage and do not have exclusions that could impact the project. Additionally, make sure that your E&O policy will cover you for any claims arising from your colleagues’ actions. Establishing these best practices helps mitigate risk and ensures comprehensive protection for all involved.

9. Hammer Clause

The hammer clause is a provision that can significantly impact an advisor’s decision-making during a claim settlement. It allows the insurer to compel the insured to accept a settlement offer. If the advisor refuses, they become responsible for any additional costs incurred beyond the proposed settlement amount. Advisors should carefully review the hammer clause to understand its implications and negotiate more favorable terms if possible.

10. Choice to Select Counsel

Some E&O insurance policies may allow the insured to select their legal counsel, while others may require using the insurer’s preferred attorneys. The ability to choose counsel can be advantageous, as it allows advisors to work with lawyers who have specific expertise in financial services litigation. Advisors should seek policies that offer this flexibility.

11. Burning Limits

Burning limits, also known as eroding limits, mean that legal defense costs reduce the overall policy limit available for settlements or judgments. Advisors should be aware of this feature and consider policies with high enough limits to cover both defense costs and potential claims adequately. It’s important to choose a policy with sufficient limits to avoid being underinsured.

Bakhtiari & Harrison (www.bhseclaw.com) represent financial advisors and firms in the industry from a holistic approach on a proactive basis. We understand the unique challenges financial advisors face and are dedicated to providing comprehensive legal support to ensure you have the coverage and protections you need. Our expertise includes ensuring continuity of coverage when switching firms, verifying adequate coverage for products sold, and navigating complex E&O policy provisions. We also advise on best practices for collaborative projects, indemnification clauses, and negotiating favorable terms to safeguard your practice. Trust Bakhtiari & Harrison to give you peace of mind and the robust legal backing necessary for your professional success.