Check E&O policies carefully for exclusions, expert says

(November 24, 2003) Financial advisors need to study their errors and omissions (E&O) insurance policies with a fine-tooth comb to determine exactly what is and what is not covered, says Robert Ensor of Marsh Canada. Ensor provided an update on the Canadian E&O environment at a recent Peel Institute symposium in Toronto.

When choosing an E&O policy, advisors must first clearly define what professional services they provide to clients, then ask questions about the policy to find out if there’s a good fit, Ensor suggested.

Most E&O policies are aimed at life insurance and mutual fund sales activities, he noted. Financial planning, when done solely on a fee-for-service basis, is typically not covered.

“The good news is that financial planning — which is an integral part of what you do — is covered to the extent that it’s tied to providing professional service,” Ensor said. “So if you’re doing a financial plan, because you need to figure out how much life insurance they should buy and what type they should buy, then those financial planning activities are covered.”

Most E&O policies contain a number of other exclusions, Ensor said, including fraud, sanctions by a regulatory body and economic return. “If you are foolish enough to suggest to a client that they’re going to get a guaranteed return on an investment, you have opened yourself up to unlimited liability,” he said, noting that economic returns have been the basis of half the E&O claims over the past few years. “Don’t make the mistake of making guarantees to your clients.”

Other common exclusions include professional services that are outside insurance and mutual funds, such as income tax preparation. It may be available as an endorsement for an extra cost, Ensor said, but it’s usually not covered since it’s not considered integral to the business.

Other investment products, including securities and real estate are also typically excluded. “Those are pretty scary things for insurers, they’ve lost a lot of money,” Ensor said. “So other than mutual funds and seg funds, they are just not covered under the policy.”

Statistics on errors and omissions claims are hard to come by, since most insurance firms won’t release their records. However, Ensor was able to dig up some 2002 stats from a company that is no longer in the E&O business in Canada.

The unnamed firm dealt with more than 240 E&O claims last year, 77% related to mutual funds and 23% involving insurance. Failure to advise was the most common claim. That’s a catch-all category, Ensor said, which includes failing to provide appropriate coverage and failing to advise that coverage is available.

“With all the new products, it’s tough to keep up, but you have to try to protect yourself,” Ensor said. “Critical illness insurance is probably a good example. A lot of agents are just becoming aware of this although it has been around for a while.”

Ensor also suggested that advisors make sure there’s a provision in the policy so insurers cannot settle a claim without express permission. “That’s important to protect your reputation,” he said. “If they’re taking an expedient approach to settle your claim which will end up leaving a black mark on your record, you’re probably going to want to have something to say about that.”

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca