Material Change: Understanding the Impact on Your E&O

By Kenneth Golsan
Expanding into new Investment Types?  Adding new Advisor Representatives?  Acquiring a Practice?

The business environment is ever changing, and this has never been truer in the arena of finance.  When opportunities arise we want to afford them consideration.  As an RIA, opportunities can arise to select new types of securities, add advisor staff, or acquire an industry practice.  While such proceedings present opportunity, one must be cautious.

How do such opportunities impact an advisor’s Errors and Omissions Liability (E&O) Insurance.

The above opportunities and many more situations may constitute what E&O underwriters refer to as “Material Change” in that it will influence the risk profile of the RIA practice.  And, naturally, all underwriters incorporate conditions and limitations within the insurance contract to protect themselves.

>Following is an excerpt from a major E&O carrier’s contract of insurance detailing what constitutes “Material Change” for these policy holders and the implications:

“Material Change” means:

a. change in legal name of the Named Insured;

b. Any consolidation, acquisition or merger of the Named Insured with any other organization or the creation of any subsidiary or affiliated organization;

c. A cumulative change of fifty percent (50%) or more in the numbers of owners, partners, shareholders, members, managers or employees as reported on the application for this policy;

d. The creation of an affiliation, association or relationship not disclosed on the application for this policy, with an otherwise unaffiliated organization which renders Professional Services on behalf of or under contract with the Named Insured; or

e. A material change in the risk accepted by the Company in the Named Insured’s business as described on the application for this policy and any and all supplemental attachments including the Form ADV.

NOTICE OF MATERIAL CHANGE

Any Material Change must be reported to the Company within fifteen (15) days of such change taking place. Within ninety (90) days of such report of a Material Change, the Company may, at its sole option, cancel the policy, or agree to appropriately endorse the policy subject to additional premium or terms and conditions that the Company deems appropriate.

Could the RIA Firm be in non-compliance of their E&O insurance “conditions to defend and pay for a claim”?  Could the current E&O Carrier cancel or non-renew coverage at a time when the firm may need it most?

Tread carefully when making changes and consult trusted professionals when capitalizing on business opportunities.