Each day, investment bankers may be tasked with conducting due diligence on potential investments; managing IPOs; offering financial advice on mergers and acquisitions, valuations or private equity transactions; creating reports, models and forecasts; negotiating deals; or completing a host of other tasks that directly impact the bottom lines of businesses.
As a trusted investment ally, each of your clients’ financial futures rest largely in your hands – a tremendous responsibility, to be sure. In this high-pressure field, mistakes do happen.
But it’s not only errors and omissions that cause problems. Cyber failures, embezzlement, other crime, and property disasters that shut down your business are also of great concern.
Here we’ll look at some of the most essential types of insurance an investment bank needs to keep operations running smoothly even if trouble strikes.
Errors and omissions basics
Your success is intricately tied to client success, and you are held to strict standards of care. This includes your confidentiality, accuracy and fidelity.
If your professional performance is ever called into question and a client files a lawsuit against you claiming you mishandled a transaction, you can turn to errors and omissions insurance (also referred to as bankers professional liability insurance). It will help with legal defense costs, settlements or judgments, as well as any income you miss because your time is required to establish your case or attend court. Some policies will also cover the cost of services required to repair your professional reputation.
Remember that there can be financial consequences even if you haven’t done anything wrong. The legal costs required simply to defend your innocence can be astronomical, so talk to your insurance professional about limits (the amount the insurance company will pay per occurrence and in aggregate over a year). Your firm may benefit from the extended protection an excess insurance policy provides.
An excess liability insurance policy adds monetary coverage to the underlying E&O policy so that, if there is a very costly lawsuit that eats up all the money payable under the E&O coverage, you won’t have to pay the remainder out of pocket.
Recognize that claims can come years after an alleged error. This only reinforces the importance of continual E&O coverage, even for prior acts.
- A claims-made policy covers liability claims that are filed during the term of your policy or a previous E&O policy with the same insurer continuously held from prior years.
- An occurrence-based policy covers alleged professional errors that occurred when the policy was in effect – even if the claim is filed after the policy ends.
Crime insurance
The lure of money can sometimes draw people astray. Since investment banking firms handle so much money and are so deeply involved in the sale of bonds, the securing of capital from investors, and the transfer of high-stakes stock and finances, it is wise to have insurance to help recompense your firm or other victims. Fidelity bonds are the most common protection.
There are two types of fidelity bonds that most apply to investment bankers: an employee dishonesty bond and a business services bond. The first protects your firm from losses due to employee theft, embezzlement, etc. against your company. A business services bond compensates your clients for their financial losses due to theft committed by one of your employees.
There is also crime insurance, which is a broader type of policy that covers your financial losses from employee theft as well as theft of your assets by non-employees, such as fraud or forgery that results in monetary loss to your firm, computer hacking that transfers your assets to an unauthorized account, and email or other communications fraud that leads employees to send money to an unauthorized recipient. While some of the activity it covers occurs over computers, crime insurance is no substitute for cyber risk coverage.
Cyber insurance
Cyber insurance comes in two main varieties, both of which are crucial: first-party and third-party coverage. First-party cyber insurance protects your firm against losses due to cyber theft from your business, hacking that shuts down your operations, and cyber attacks that steal or lock down your data or systems. Third-party cyber insurance focuses on compensating victims of a cyber attack on your company that steals their data and causes them financial harm.
With all the extremely private and proprietary information you store and transmit – and your heavy reliance on computer networks for communications and calculations – cyber first- and third-party insurance seems indispensable.
Other safeguards
In addition to professional liability, you may face other professional risks that require insurance, including directors and officers (D&O) liability insurance. D&O is tailored specifically to each firm that buys it, so your policy will reflect the number of board directors and senior executives in your company, your firm’s revenue, and your compliance and internal policies and procedures.
D&O insurance has multiple “sides,” or parts, to it. One protects your firm from the costs of director and officer missteps. Another helps pay for legal defense and settlements or judgments particular to each named director or officer so their personal assets aren’t in jeopardy. Talk to your JAISIN advisor about the many details and options, since there is no standard D&O policy.
Of course, almost all businesses with employees need workers’ compensation insurance. This is state-based coverage, so it varies depending on where your firm is registered. A key question to address is how employees are covered when working out of state or traveling abroad for business. If you have offices in multiple states, make sure to work with a broker or agent who is versed in the workers’ comp laws in all those locations.
You also need a general liability insurance policy to help pay if a non-employee is injured on your premises, and you should have commercial property insurance to help with the costs of repairs or replacement if your building or its contents becomes damaged or destroyed by a fire, storm, vandalism or other covered hazard. You can often have business income protection added in case a covered peril causes a business interruption and loss of revenue.
Your investment banking firm is running on all cylinders all the time. But taking the time to get a comprehensive set of insurance policies from your trusted JAISIN insurance professional will keep you from stalling even if serious problems arise. Call or email us today!
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