E&O INSURANCE:
THINK YOU KNOW IT ALL?
THING AGAIN….
© 2011 The Magnes Group Inc.
Key Discussion Items:
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Financial advisor/client relationship
Financial advisor/regulators
E&O Insurance
Coverage Structure – Definition of
Professional Services
Outside Business Activities
Claims Arena – Common Allegations
Risk Management Tools
What To Do If….
Questions
© 2011 The Magnes Group Inc.
Financial Advisor/Client Relationship
 Financial advisors are increasingly the
target of E&O claims, particularly in the
wake of the financial crisis
 Fiduciary Relationship
 There are more complex transactions and
there is more reliance on the advisor as
the professional in the relationship
 There is also more willingness to sue
© 2011 The Magnes Group Inc.
Financial Advisor/Regulators
 Not only can clients commence a civil
matter against an advisor/agency/dealer
alleging negligence, they can also file a
complaint with the regulatory body, ie.
FSCO, MFDA, OSC
 If the regulatory body commences an
investigation, this can be a very time
consuming and expensive process for
the advisor/agency/dealer
© 2011 The Magnes Group Inc.
What is Errors & Omissions Insurance?
▪ Transfer of Risk Mechanism
▪ Contract of Indemnity (called an Insurance Policy)
▪ Parties of the contract:
Insurer and Policyholder (also known as Insured)
▪ Subject to the terms and conditions of the contract:
◦ Insurer will defend the policyholder
◦ Pay compensatory damages on behalf of the
policyholder
for:
financial loss incurred by a third party as a
result of an error or omission made by the
policyholder in the rendering of
PROFESSIONAL SERVICES.
© 2011 The Magnes Group Inc.
What is Errors & Omissions Insurance?
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Can also provide regulatory investigation coverage to
advisor/agency/dealer
◦ First Party Coverage
◦ Sublimit of insurance may apply
▪
Advisor E&O policies – Vicarious Liability
extension to the Agency and/or Dealer
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Extended Reporting Period Coverage (Tail Coverage)
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Referral Arrangements
© 2011 The Magnes Group Inc.
Why Is E&O Insurance
Purchased?
▪ Mandatory Requirement of Licensing
▪ Mandatory Requirement by Insurers,
Agencies, and/or Dealers
▪ Transfer of Risk Mechanism – protect
your business and your assets
▪ Sleep Insurance
© 2011 The Magnes Group Inc.
Definition of Professional Services in an E&O
Insurance Policy
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Definition in Financial Advisor E&O Insurance Programs
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Defined by licenses and/or registrations held, ie.
Life/Accident & Sickness Insurance Agent
Mutual Fund Registered Representative
Exempt Market Dealer Representative
IIROC Registered Representative
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Product Defined or Practice Defined?
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Other licenses held by advisors, such as but not limited to:
 RIBO License
 Mortgage Broker License
 Non Medical Travel Insurance License
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Outside Business Activities
© 2011 The Magnes Group Inc.
Definition of Professional Services in an
E&O Insurance Policy
▪ Definition in a Corporate E&O Policy
 Individually customized based on operations
 Can cover all operations, or one aspect of
operations
▪ Sample Definition:
Professional Services:
means those services performed by any of the Insureds solely in
the conduct of the Policyholder’s business as described in Item 7
of the Declarations
Declarations:
Item 7:
© 2011 The Magnes Group Inc.
Managing General Agency
Mutual Fund Dealer
Claims Arena – Common Client
Allegations
 Allegations commonly heard are:
 Failure to assess the client’s true risk
tolerance and failure to adequately explain
the risks
 Failure to determine and understand the
client’s personal circumstances and
objectives
 Unsuitability of product or investment
 Breach of fiduciary duty - advisor putting
own interests ahead of those of the client
 Misrepresentation of how a life
insurance/investment product works
causing a financial loss to the client
© 2011 The Magnes Group Inc.
Client Allegations (cont’d)
 Certain allegations are fairly easy to
deal with – advisor made an error,
causing the client a financial loss.
 Much more common and complex are
claims where a client alleges
misrepresentation, but on investigation:
 either there was no such
misrepresentation made,
 there was a misunderstanding, or
 the determination as to whether there
was or was not a misrepresentation is
unclear, usually because the advisor
and the client have differing versions of
what happened and what was discussed
© 2011 The Magnes Group Inc.
Client Allegations (cont’d)
 For example, our claims department often
hears clients say that they were
conservative investors when they complain
about their investments going down in
value, yet their KYC documentation
reveals they were 100% high risk investors
 On the life side, we hear that clients have
disclosed their full medical histories to
their agent, and then there is a surprise
when the claim is denied by the insurer
 In hearing both sides, sometimes it is hard
to understand that the advisor and the client
were at the same meeting because their
recollections vary so much
© 2011 The Magnes Group Inc.
Risk Management Tools
1.
Follow Standard Practices
2.
Document Everything
3.
Retain Documentation
4.
Know Your Products
5.
Know Your Clients
6.
Manage Expectations
© 2011 The Magnes Group Inc.
What To Do If…
• You have an uncomfortable feeling
about a transaction/conversation with
a client
• You detect an error has been made
even if unbeknownst to the client
• Your client complains about the
services you have rendered or the way
the investment has been performing
• Your client states something to the
effect of “I am going to seek legal
advice / contact my lawyer”
• You are in receipt of a letter from a
lawyer or you have been served with a
statement of claim…
Contact your insurance broker immediately
© 2011 The Magnes Group Inc.
Why Report to Insurer ASAP?
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The issue is fresh in your mind
Any witnesses can be interviewed
A repair or fix might be possible
It is a requirement of your insurance policy
to report any incident, allegation, or claim
upon knowledge of same
Liability and damages can be assessed and
controlled
You want to do nothing to prejudice your
insurer and in turn prejudice your coverage
Make no admissions
Make certain your file is well documented
© 2011 The Magnes Group Inc.
Questions
© 2011 The Magnes Group Inc.