Given the litigious nature of modern times, a professional services provider or advisor should make they have comprehensive errors and omissions (E&O) insurance in place. When you’re examining your own coverage needs, there are several important aspects you should consider.

Prior Acts

Prior acts coverage protects the insured from claims on errors that may have made before taking out the professional liability policy. Many insurers include time restrictions and will only cover claims that are made after the policy is effective. Retroactive coverage can be acquired for an extra premium.

Legal Expenses

Some insurance policies will include these expenses in with the liability limit of the policy thus reducing the amount payable for such claims. This could be disastrous in the event of a large claim. For example if you have a $1 million policy and the claim comes to $700,000 with legal defense costs of $400,000, you’re on the hook for the $100,000 if your policy includes the legal costs in with the limit of liability.

Territory

Not all insurance policies consider the jurisdiction from which the claim originates in addition to that of the error or action that gave rise to it. Make sure you are covered in case a client sues you from abroad rather than here in Canada.

Extent of Coverage

For many advisors, the sale of mutual funds and insurance products generates the bulk of their income, but they may provide additional services such as tax preparation or estate administration. If you sell or advise on any of the products listed below, you should make sure that they are covered under your professional liability policy:

-Limited partnerships

-Private placements

-Syndicated investments

-Stocks and bonds

-Real estate investments

Mandatory Coverage

In most provinces, a minimum amount of errors and omissions coverage is mandatory for anyone who holds a life insurance license. Ontario requires that all agents hold a minimum of at least $1 million of errors and omissions (E&O) insurance in respect of any one occurrence, and at least $2 million in the aggregate, with a maximum deductible of $1,000. Provincial regulators will conduct random audits to determine if insurance-licensed advisors do have appropriate E&O coverage in place.

Professional liability coverage is available from insurance companies like Encon, as well as through associations like the Canadian Association of Financial Planners (CAFP) and ADVOCIS.

Claims

Agents are subject to the potential for claims from their clients every day. During 1999, there were approximately 50 claims made and 25 reports of potential claims. The expense of defending against these actions even when the agent has done nothing wrong can be enormous. Here are a few examples of the types of claims that are made and some ways in which they could possibly be prevented or at least provide the necessary information to properly defend them.

Visit www.advocis.com for more information on E&O Insurance.

1. The client requests a transfer of funds from one account to another. The agent mistakenly transfers the funds to the wrong account and/or completes the transaction on the wrong date. The result is a loss of share value in the funds.

All such requests should be confirmed in writing, either by requesting the client to communicate the request in writing, or by confirming the understanding of the request in written reply. Agents should also ensure they are able to execute transactions on the date requested.

2. The agent meets with the client to discuss business opportunities and provides various ideas and recommendations regarding future actions. The client later alleges that they suffered a loss due to bad advice and that they were not aware of the decisions taken by the agent.

Agents should ensure that they keep detailed notes regarding all conversations with clients and should keep them in the client’s file for a period of no less than 6 years. Understandings about agreements regarding planning and investment decisions and future actions to be taken on the clients’ behalf should be communicated in writing by the agent to the client.

3. The client’s expectations regarding a product, service or benefit is not met, and claims that the agent erred either in the understanding or explanation of the benefit in question.

It is important that agents understand completely what they are offering and if there is any doubt, they should confirm it first prior to offering it to the client.

Frequently Asked Questions

What is an errors or omissions claim?

A claim is a verbal or written demand for compensation arising from an alleged error, omission or negligent act of the agent. Claims should be immediately reported to your insurance broker.

How can I tell if a claim is likely?

If the agent knows that an error, omission or negligent act has occurred, this could result in a claim being made against them. If the agent is made aware of a client’s unhappiness with their services or receives a letter from a lawyer representing a client, this could indicate a possible claim. All notices of possible claims should be reported to your insurance broker.

What should I do if I think a claim is likely?

Contact your insurance broker to report the potential claim.

What should I do if a lawyer requests my client’s file or calls me to discuss the client’s file?

Be professional, but make no comments. Ask that the requests be submitted in writing and notify your insurance broker.

Contacting your insurance broker early on when a claim has been made , or you suspect a claim is imminent, will benefit you in the long run. Your insurance provider can then begin taking actions to protect and defend you immediately.