You provide your clients with personalized professional advice as a World Financial Group insurance agent (WFGIA) or Transamerica financial advisor (TFA). Unfortunately, despite being fastidious in your work and attentive to your clients, mistakes and oversights can still occur, leading to potential lawsuits and significant financial consequences.
Errors and omissions (E&O) insurance, commonly referred to as professional liability insurance, is crucial in mitigating this inherent risk. Even if a claim made against you seems frivolous and without merit, the cost of defending yourself against that claim could be several thousand dollars, with the potential for settlements in the tens of thousands. E&O insurance is designed to provide you with financial assistance to cover the costs associated with legal defense, court fees, settlements, and judgments.
To illustrate the significance of E&O insurance, let's explore a few claim scenarios you may encounter.
Example 1: Failure to properly assess client risk
Services: Insurance agent
Scenario: As an insurance agent, you assisted a client in completing their application for a whole life insurance policy. Several years later, after the client's passing, their beneficiaries filed a claim for the death benefit.
Unfortunately, the claim was denied due to the client’s undisclosed medical conditions and lifestyle habits. The beneficiaries argue that you should have diligently and accurately recorded the client's information, which could have led to a different underwriting outcome and prevented the denial of the claim.
While you believe that you accurately completed the application based on the information provided by the client at the time, your lack of proper documentation poses significant challenges in substantiating, within a legal context, that the client provided misleading information during the application process.
Recommendation: This example underscores the importance of thoroughly assessing and evaluating clients and their specific circumstances prior to recommending insurance products or services. In addition, it is crucial to maintain accurate records of all client transactions, communications, and processes, regardless of their perceived significance. Accurate documentation of a client's medical history, lifestyle habits, and other relevant information is crucial for informing underwriting decisions and ensuring that the policy aligns with the client's needs and expectations.
Documentation may entail keeping copies of emails, text messages, and social media interactions. For phone calls, video conferencing applications, and in-person meetings, document the conversation in writing. This should be done as soon as possible following the discussion. Documentation should include dates, times, details of conversations, policy updates, and any other relevant information.
If agreed upon by the client, consider recording the conversation and saving the file within your client’s records.
Example 2: Failure to provide timely and adequate communication
Services: Financial advisor
Scenario: In this example, you are working with a client who consulted you for financial advice on maximizing their savings. After a consultation, you recommended investing in a group of professionally managed mutual funds.
Fast forward five years, and after a market downturn, the client files a claim against you, asserting that you failed to provide regular updates and did not inform them about significant market developments that could impact their investment portfolio.
Furthermore, you had only met with the client twice in the five years while serving as their financial advisor. The client claims that, as their financial advisor, you were negligent.
Recommendation: Regular communication with your clients is the cornerstone of any successful financial advisor-client relationship. Understanding the unique needs and expectations of each client is critical for determining the right communication style and frequency.
Communication preferences should be discussed and then documented during your initial conversations with clients. Establish how frequently each client would like you to conduct a comprehensive review of their account with them, and if they would prefer this done in person, via video conference, or by phone.
Additionally, confirm with clients if they would like to be contacted immediately to address time-sensitive matters, such as market volatility or economic uncertainty. Be sure to regularly confer with clients to ensure that they are satisfied with your current communication methods and frequency.
Example 3: Breach of fiduciary duty
Services: Financial advisor
Scenario: Your client, who is nearing retirement age, filed a claim alleging you committed a breach of fiduciary duty by failing to conduct thorough research and analysis on investment risks and returns, and recommended a variable annuity fund that did not align with their risk tolerance, financial goals, and time horizon.
The claimant argues that your breach of fiduciary duty resulted in missed opportunities and financial losses.
Recommendation: If you are a fiduciary, you are legally and ethically bound to act in your clients’ best interests. Therefore, it is crucial to consider a client's planned retirement age, risk tolerance, and financial goals before making any recommendations regarding financial products or services.
Example 4: Misrepresentation of policy terms and conditions
Services: Insurance agent
Scenario: A client reaches out to you seeking assistance in obtaining financial protection for their family. Based on your recommendation, the client purchases a term life insurance policy.
During the consultation, you mistakenly assured the client that the policy would remain in force for the entire 30-year term with fixed premiums throughout, and that it would accumulate cash value over time, which the client could access if needed. After four years of paying insurance premiums, the client inquired about the policy's current cash value.
To their surprise, you informed them that the policy did not accumulate any cash value and that the premiums would significantly increase after the initial five-year period. This revelation left the client feeling deceived, as you had misrepresented the terms and conditions during your initial discussion of the policy options.
Recommendation: To avoid misrepresentation claims, you need to develop and maintain expertise in every product or service you recommend to your clients. There may be changes to policy terms and conditions over time, and it is your responsibility to stay current with changes.
When consulting with a client, take the time to explain new product or service offerings in a careful and thorough manner, ensuring there is a clear understanding of what is covered, as well as the terms and conditions, fees, and expenses associated with it. It is of utmost importance to maintain honesty and integrity, refraining from distorting the truth about a product or service to secure a sale.
Conclusion
The potential financial consequences of not having E&O insurance should not be underestimated. Without E&O insurance, you may face significant financial strain due to legal defense costs, settlements or judgments, and financial losses resulting from professional errors, omissions, or negligence.
It is crucial for financial advisors and insurance agents to protect themselves against potential liability and financial loss by obtaining comprehensive E&O insurance coverage. If you haven't already, complete your enrollment in Marsh's Agent E&O program online in just a few minutes.
All agents of WFGIA and its subsidiary agencies with an active provider appointment, and all TFA representatives must have E&O insurance through Marsh. Participation is mandatory under your Associate Membership Agreement (AMA) or Agent Agreement. (Please note: Because of state law, WFGIAs and TFAs in NY are exempt from this policy.)
*Hypothetical scenarios provided for illustrative purposes only. The E&O policy contains exclusions, limitations, and other provisions not referenced and should be consulted for full coverage terms, conditions and requirements.