What exactly does RIA E&O insurance cover? Are all policies alike?

By Kenneth Golsan
This month’s RiskTip addresses one of the most repeated questions: What Exactly Does RIA E&O Insurance Cover?

While some harmony exists among the seven or so key underwriters’ insurance contracts in the RIA E&O errors and omissions liability marketplace, the prudent answer is – “It Depends” (some say the two key words an attorney learns in law school). Though seemingly a deflection, such is the only accurate answer.

The confusion emanates from the insurance industry’s “governing body” – the Insurance Services Office (ISO) – long-held position to forego and decline its establishment of a industry-accepted standard insurance contract whereby, normal to all other forms of business insurance (General Liability, Automobile, Property, etc.), all underwriters agree to issue an ISO recommended contractual form. Again, for almost all other forms of insurance, there is somewhat of a “commodity” nature to a policy’s terms, definitions, exclusions, limitations, conditions, etc. The RIA insurance buyer is not so fortunate!

Because there is no standard form, the buying process for RIA professional liability contains a heightened level of complexity and risk. One could even claim that the process of purchasing E&O is risky itself! To coin another phrase: “It doesn’t matter who you are insured with – until it does!”

Standard Coverage: In nearly all cases the contract of insurance provides coverage for negligence, unsuitability and breach of fiduciary duty while acting as an investment advisor under the 1940 Act. Also, there is often coverage for simple clerical mistakes – failure to supervise, and/or transactional errors or omissions. Many questions still remain: How does the insurance respond to Trade Errors? Commission products? Alternative investments? Referrals to third party managers? Insurance work and/or advice? Are all employees covered? What about independent contractors? Then, what about past history (prior to insurance purchase) – Prior Acts? Each insurance contract speaks to these areas differently. Which contract suits your particular practice?

Another layer of complexity presents itself due to the nature of how claims are brought forth and what “triggers” a claim. Most contracts require a written demand, yet some respond to an incident trigger. In the case of a written demand it is critical that the claim letter be written in a fashion that will trigger a response on the part of the insurer. For example, a claim that a trade error was made and a correction is requested may not trigger a claim, yet if negligence/breach of fiduciary duty is alleged the insurance carriers will likely respond and begin the defense/settlement process.

As a father of three young boys, I tell them to “Stop, Look and Listen”. Not just for crossing the street, but might that be applicable to other areas in life? Golsan Scruggs incorporates an RIA bio and practice risk-analysis process we call ia360 to each and every client. This process helps us understand your practice and analyze coverage issues so that a proper solution is structured. Whether us or an alternative insurance representative, good to “Stop, Look and Listen”.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors.. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.