Your financial advisory firm – whether you employ registered investment advisors, wealth managers, financial planners or stock brokers – faces numerous exposures to complaints that an employee has violated the law or done wrong by a client. If your firm breaks securities law, makes a mistake on a form, or is negligent in meeting your professional standards, you could be accused of professional misconduct and sued for ensuing economic losses.
Fortunately, there are insurance policies designed to protect your firm and employees from some of these risks. The most important is professional liability, but commercial general liability, property insurance, employment practices liability, employee crime, and workers’ compensation insurance will all factor in the mix. A JAISIN insurance professional can help you design a package that best fits your practice.
Professional liability insurance
Professional liability insurance, or errors and omissions (E&O), is an essential coverage for financial advisors. Because you give advice to clients about where to invest their money, how to fund their kids’ college education, or when they can retire, you face significant liability exposure.
You have no control over market returns, but you might be blamed if you may make a mistake in rebalancing a client’s accounts or fail to execute a transaction as instructed. You could be derelict in delivering your part of a complicated estate plan, miss a key 401(k) rollover deadline, or neglect to check for recent changes in the law that end up increasing your client’s tax bill.
For all of these and other errors and omissions that could crop up in your dealings with clients, you need to protect your firm and employees from breach of fiduciary duty claims. In addition to possible regulatory action, including losing your license, you could face expensive civil litigation.
E&O insurance covers these types of claims and helps pay for your legal defense, judgments and settlement costs. E&O policies are sold with differing amounts of coverage, or limits, which are the maximum sums the insurer will pay out under your policy in a single year. Limits usually start at $1 million and go up according to a policyholder’s risk exposure. Premiums are based on type of business, size and location of the firm, and history of prior claims.
E&O policies are usually written for your firm on a shared-limits basis, which means a colleague’s lawsuit could severely diminish coverage for other staff. Advisors in your employ may wish to purchase an individual E&O policy. Moreover, liability policies are written on a claims-made basis. For coverage to apply, the claim must be filed while the policy is in force and the accused is insured by it. Advisors who leave your firm should ask specifically about tail coverage for problems that occurred while under your policy but that emerge after they move elsewhere.
Professional liability policies differ, but most cover errors and omissions, negligence, misrepresentation, breach of fiduciary duty, and lack of regulatory compliance. Some types of claims aren’t covered. For example, intentionally dishonest acts are excluded.
Getting the right coverage will depend on the type of products you sell and the advice you provide. If you’re an RIA, make sure you have coverage that is designed for your practice. Note that some insurers will not cover you unless you have completed Parts 1 and 2 of an ADV form for your RIA firm.
Commercial general liability
Your financial advisory firm also needs commercial general liability (CGL) insurance, which covers bodily injury to others and damage to their property that occur as a result of the operation of your business. Like E&O insurance, CGL helps pay for your legal defense and settlement costs.
For example, if a client gets hurt on your premises, your CGL policy would help with damages and legal claims. CGL also covers personal injury claims that include libel and slander, copyright infringement and misleading advertising.
Employment practices liability insurance (EPLI) is another policy you should consider if you have a staff. This coverage protects you against employment-related claims such as sexual harassment, discrimination, retaliation and wrongful termination.
Employment practices claims have become more frequent and costly and can be quite expensive to defend. Be sure to include EPLI on your list of coverages when you talk to your JAISIN insurance professional. Also ask about excess liability coverage, which provides payouts that add to your existing liability policy limits.
Commercial property insurance
You’ll also need commercial property insurance to protect your offices. These policies protect the structure and contents, including furniture, computers, office equipment and files. Covered perils include fire, theft, vandalism, burst pipes and certain weather events.
Business income insurance, often sold as part of a business owners policy (BOP), replaces lost income from a business interruption such as a fire or natural disaster. You may need it as well.
Workers’ compensation insurance
Most states don’t require independent contractors or self-employed people to purchase workers’ compensation insurance, but you’ll need this coverage if you have employees. Workers’ comp provides benefits to workers if they are injured or become sick on the job.
Premiums are calculated based on your claims experience and the type of business you operate.
Financial advisors have access to and store sensitive client information. Make sure you are protecting that information and following all cybersecurity laws that apply to personal information.
Cyber insurance protects your company from major financial losses due to network disruptions, breach of data, and loss of income if your business has to close. These policies cover client notification of a data breach, anti-fraud protection and credit monitoring for affected clients, and expenses such as ransomware costs and security investigations.
Fidelity bonds and crime insurance
In the world of finance, custodians of client and company assets sometimes commit theft or embezzlement. When they do, your firm could be at great financial risk. A fidelity bond (a kind of employee dishonesty insurance) can restore losses your firm experiences from an employee’s theft of company assets.
In addition, you may need to secure a crime insurance policy that includes client property coverage, which helps your firm with its liability for losses sustained by a client due to theft or forgery committed by one of your employees. Talk to your JAISIN insurance advisor about the details of these policies, since only those specifically included in the policy are covered.
Remember, one big lawsuit could destroy your firm. You can transfer some of that risk with good insurance. It’s an investment that could keep you in business even after the worst event. Call or email your JAISIN insurance advisor today to get a quote for your financial advisory firm today.
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