Insurance agents know the policy by the name of E&O insurance. Doctors and attorneys call them malpractice policies, and security dealers call such insurance a blanket bond policy. Whatever the name happens to be, it is liability protection for professionals.
Financial planners have less to choose from when obtaining liability protection for their role as a professional. Currently, few companies who market the products used supply some of the liability coverage. The problem is the narrowness of these policies.
Insurance agents, for example, are covered for the actual insurance policies sold under E&O insurance, but not for sales of products that are not specifically insurance. This is an important point. We have seen lawsuits filed against agents who were selling revocable living trusts. Their E&O liability policies would not cover any liability, which resulted from these sales because it was not an insurance product.
Understanding Errors & Omissions Insurance SSC #18
Pro-Seminars International © 11/08 45
For any risk to be insurable, certain elements must exist. A very important element is the ability to determine what the loss could be. As a result, early E & O policies had so many restrictions that they were nearly worthless. A similar situation existed for financial planners. Until the E & O companies had more information and experience, financial planners and insurance agents who dealt with financial planning elements had little options for their liability coverage. Today, this is not the case. There are some good policies available.
An insurance company looks at several elements when putting together an E & O liability Insurance policy for sale:
1. A marketplace that will support the existence of the policy (enough people who will purchase it).
2. The loss must be able to be measured; the insurance company must be able to tell when a loss has happened, and the size of that loss.
3. The loss must be unintentional. No insurance company wants to issue a liability policy for intentional acts! Herein lies one problem. While the financial planner would surely say an error or omission was unintentional, the client may still sue on the basis that they consider it intentional. Intent could be a vital issue.
4. The quantity of losses must be measurable. In other words, the insurance company must be able to know that most financial planners will not be sued. If there is the possibility that large quantities of planners will experience a lawsuit, it is not likely that an insurance company would want to develop such products. After all, the end goal of the insurance company is a profit. They want to end up with a profit after all losses have been paid. If too many lawsuits are likely, the risk becomes uninsurable.
Financial planners can find liability protection, but there are fewer policies to choose from. Insurance agents (who are not financial planners) have more options, since E&O insurance has been marketed for many years.
There are two basic types of professional liability policies 1. Claims-made.
2. Occurrence policies.
A financial planner is most likely to find a claims-made policy than an occurrence policy.
A claims-made policy is more rigid since it covers only claims filed during the time the policy is in force. This is an important point, since many lawsuits are filed years later.
Understanding Errors & Omissions Insurance SSC #18 Pro-Seminars International © 11/08
46
Even if the claim is based on a date during the time in which the policy was in force, once the policy has lapsed, it will no longer cover the claim. An occurrence policy covers any occurrence during the time the policy was legally in force, even if that policy has now lapsed.
A concern with may agents and brokers is having trailer coverage’s to maintain in force after they have left the business.
Even though an occurrence policy is harder to come by, some professionals consider the value of them better. Most lawsuits do not happen immediately. They happen much later when the client or their family sees results that surprise or disappoint them. Since the 1970s, most liability insurance written for doctors and attorneys are claims-made policies. If the professionals keep themselves insured, a claims-made policy will be adequate. The secret to being protected, of course, is continued coverage. Primarily, policies now tend to all be claims-made policies.
Why would insurance companies prefer claims-made policies to occurrence policies?
While there are differing opinions, many feel claims-made liability policies offer more protection for the insurance companies. Such policies limit the duration for which the insurance company is liable. With an occurrence policy, the liability for the insurer could potentially go on forever, unless a clause limited it in some way. The asbestosis class action suits especially demonstrated this point. People who had been exposed 30 years ago were winning settlements against corporations exposing their insurance companies to huge payouts through occurrence policies.
While asbestosis is a well-known case, any product liability suit can develop at any time.
We have seen many examples of this over the years. There are likely to be many more cases in the future as today's products experience results that were not anticipated.
Insurance companies face another problem: the exposure theory. This holds that an insurance company can be held liable once a person is exposed, regardless of when the disease or disability actually becomes recognizable. Another theory is the manifestation theory, which states that the insurance company cannot be found liable until the disease can be diagnosed.
Yet a third theory, called the triple trigger theory, states the insurance company can be found liable from the time of exposure all the way through manifestation of the disease.
Understanding Errors & Omissions Insurance SSC #18
Pro-Seminars International © 11/08 47
Obviously, the triple trigger theory is the most damaging for the insurance company. Of the three, insurance companies would prefer to deal with the manifestation theory.
Because the courts place blame based on the exposure of many conditions, insurance companies face the problem of determining exactly when the occurrence happened. For the insured, this can also be a problem if they must prove coverage during occurrence.
Since professionals need to be covered continually, in many ways it can be easier to simply deal with claims-made policies.
Different professions have different policies. Each profession must be covered for the perils their profession faces. There will be similarities and differences in the various types. As previously stated, liability coverage for insurance agents is called E&O policies. E&O stands for errors and omissions. Such policies pay on behalf of the insurance agent or broker should a lawsuit arise. The policy, within the bounds of policy limits, will pay all sums for which the agent is found legally responsible due to any negligent act, error or omission of the insured or, if applicable, their employees in the scope of business conduct. It is important to note that this applies only to business as general agents, insurance agents, or insurance brokers. It absolutely would not apply to business that was not related to insurance products. While this might seem
self-explanatory, many agents now also deal with non-insurance products. These include such things as prepaid legal, and revocable living trusts.
Even when the issue is an insurance product, the policy will not cover lawsuits under all conditions. Some things are still excluded. Exclusions would include such things as dishonesty, fraudulent, criminal or malicious acts, libel, and slander. Of course, E&O policies do not cover such things as physical injury, sickness, death of any person, or property damage. This would be true even if injury or property damage happened directly due to the actions of the agent. E&O policies directly relate to the sale of insurance products in the scope of statements made or implied, and omissions of necessary information. The agent can be covered for liability to the clients themselves, to third parties who are involved, and to the insurance companies for which they work.
Liability amounts vary.
Obviously, the agent is covered only to the limits of the policy they own. Policies can vary in amounts. The standard in the financial services industry is from $1 million to $5 million, but it is best to carry as much as you can.
Understanding Errors & Omissions Insurance SSC #18 Pro-Seminars International © 11/08
48
It is not at all unusual for an agent to carry policies with limits in the millions of dollars.
Some license lines of insurance tend to be insured more often than other lines.
Property/casualty lines generally must carry professional liability insurance in order to work. The same is holding true with many life insurance companies, as more provinces are now requiring E & O Insurance in order to be licensed.
The insurance companies they contract with require it in most cases. In addition, because E&O policies are a type of property/casualty coverage, these agents better understand how they work. Property/casualty agents are accustomed to the
terminology, whereas life/health agents may be less schooled in the types of benefits offered by E&O policies.
Property/casualty companies may offer policies only for their agents, with policy clauses relating directly to this field of insurance. Life and health agents may need to contact their companies for professional liability policies, which relate to their areas of business.
Such policies can be quite specific, so it is important to understand whom the policy is intended to benefit.