What provisions do you need to look for in an E&O policy?By Donna Glasgow | August 19 2011 08:05PM
Advisors should take a close look at key provisions in their errors and omissions plans to ensure that they are adequately protected in case of potential claims, explains Joanna Reid, vice president, consumer practice with Marsh Canada, who outlined some of these provisions during a presentation at CIFPs annual conference in June.
If you’ve been in the business for awhile and decide to change E&O providers, Ms Reid emphasizes that, “It is really important to know and understand whether your policy has full prior acts or a retroactive date.” When you sign on, the policy will cover all potential liability from the past.
Ms. Reid warns that there are E&O policies on the market that do not provide full prior acts coverage. “They’ll either put a provision that you need to have three years of continuous coverage without a gap, or they’ll say the most they’ll go back is five years. Those are very restrictive and I would suggest that if you can be off of that policy, get off of that policy.”
Be very attentive of retroactive provisions. For example, a policy may require three years of continuous coverage to provide full coverage of prior acts. If your policy has a retroactive provision, pay close attention to renewal dates. From an E&O insurer’s perspective, a gap of even one day is a gap of coverage, she says.
“If your coverage comes due on March 1st and you happen to be in Rio. You come back on March 2nd and you say ‘Oh you know what, I missed my renewal notice. I’m going to sign up today’….That gap of even one day has now just taken away all your prior acts coverage and your coverage will now commence from that day forward, March 2nd. Everything you did before that date will no longer be covered by the policy. It’s really important for you to understand if your policy has a retroactive date.”
Extended reporting period
There is going to come a time when you retire, but you are still exposed to liability long after leaving the industry. The extended reporting period (ERP) provision prolongs the period that you can report claims. There are various ERP options. Ms. Reid advises buying the longest period possible. The statute of limitations relating to advisor liability varies from province to province, “However, it is important to note that if you are selling a life insurance policy, for example, that the statute of limitations does not commence until the error is uncovered. On a life policy…this may be when that person becomes deceased…”
ERP is not a renewable coverage. It is a one time premium that an advisor pays and they choose the period of coverage. Depending on the policy, the period of coverage options may range from one year to unlimited. “Our recommendation is just buy the most that you can,” says Ms. Reid.
The ERP is the extension of the last policy that you bought, she adds, so advisors should be careful about lowering their E&O coverage limits as they approach retirement. If historically they’ve been buying $5 million of coverage because their business profile warrants it, but drop this down to $1 million as they wind down their business, then this will be the amount that they can purchase when it is time to effect their ERP to cover past acts. “You have to appreciate that you’re not just lowering your limit for this particular year, you are also lowering all your previous coverage as well.”
Advisors should also be aware of defence costs when looking at E&O policies. Defence costs can be included within their E&O limit or provided in excess. If a claim is made it may cost the insurer $200,000 to defend that action. If an advisor has a one million dollar liability limit with defence costs included, these costs would be deducted if a claim is made. If these costs are $200,000, this would leave them with only $800,000 left to pay any damages. However, if the defence costs are in excess, the advisor would still have the full dedicated million dollar limit to pay any damages, Ms. Reid explained.
When an advisor has their own registered firm in which other advisors or assistants are working with them, as the owner they have vicarious liability for the acts of their agents. Ms. Reid says, “You want to make sure when possible that your policy extends to provide vicarious liability to your firm and if you have your agents also participating under your policy, that they too can name your firm for vicarious liability under their policy.”
She adds that this does not negate the need to have separate entity coverage for the firm but it is potentially a first point of reference if a claim comes against the firm because you are employing an agent who may have made a mistake. “The policy that the agent has, where they’ve named your firm for vicarious liability, will respond to provide a defence for that agent and your firm.”
As mentioned, this is separate from entity E&O. It is possible that years down the road you are named in a suit involving a former employee. This could happen because the person was employed by you when they made an error that resulted in a claim years later. For such cases, you would need entity E&O insurance, Ms. Reid explains.
When should you report a claim or or potential claim? Ms. Reid says various policies will have different definitions as to what constitutes a claim. She said any kind of complaint from a client really should be taken very seriously, whether written or verbal.
“We get questions all the time as to, ‘If I reported every single complaint, I’m not even going to be able to get insurance next year.’ That’s not necessarily true…The reality is you are always better off to safeguard yourself. You’re not going to be penalized for reporting complaints or potential incidents.”
If a client complains and the advisor does not report it, there is a danger that down the road the client brings suit and the insurer could say that the advisor did not follow provisions in their policy about reporting in a timely fashion.
“The reporting in a timely fashion provision means that if a client has made you aware of a claim, especially if it is a financial situation where they’ve lost part of their investment, a reasonable person should know that that could potentially give rise to a claim.”
Ms. Reid adds that with respect to claims reporting, don’t discuss the claim with other individuals and don’t admit liability or incur expenses. “That’s why you purchased an E&O policy. The expenses will be borne by the insurer…you don’t have to go out of pocket to hire a lawyer to defend against those allegations.”