© 2011 The Magnes Group Inc. E&O INSURANCE: THINK YOU KNOW IT ALL? THING AGAIN…

© 2011 The Magnes Group Inc.

E&O INSURANCE:

THINK YOU KNOW IT ALL? THING AGAIN….


Key Discussion Items:

Financial advisor/client relationship Financial advisor/regulators E&O Insurance Coverage Structure – Definition of

Professional Services Outside Business Activities Claims Arena – Common Allegations Risk Management Tools What To Do If…. Questions


Financial Advisor/Client Relationship

Financial advisors are increasingly the target of E&O claims, particularly in the wake of the financial crisis

Fiduciary Relationship There are more complex transactions and

there is more reliance on the advisor as the professional in the relationship

There is also more willingness to sue


Financial Advisor/Regulators

Not only can clients commence a civil matter against an advisor/agency/dealer alleging negligence, they can also file a complaint with the regulatory body, ie. FSCO, MFDA, OSC

If the regulatory body commences an investigation, this can be a very time consuming and expensive process for the advisor/agency/dealer


What is Errors & Omissions Insurance?

▪ Transfer of Risk Mechanism

▪ Contract of Indemnity (called an Insurance Policy)

▪ Parties of the contract: Insurer and Policyholder (also known as Insured)

▪ Subject to the terms and conditions of the contract:◦ Insurer will defend the policyholder◦ Pay compensatory damages on behalf of the policyholder for:financial loss incurred by a third party as a result of an error or omission made by the

policyholder in the rendering of PROFESSIONAL SERVICES.


What is Errors & Omissions Insurance?

▪ Can also provide regulatory investigation coverage toadvisor/agency/dealer

◦ First Party Coverage ◦ Sublimit of insurance may apply

▪ Advisor E&O policies – Vicarious Liabilityextension to the Agency and/or Dealer

Extended Reporting Period Coverage (Tail Coverage)

Referral Arrangements


Why Is E&O Insurance Purchased?

▪ Mandatory Requirement of Licensing

▪ Mandatory Requirement by Insurers, Agencies, and/or Dealers

▪ Transfer of Risk Mechanism – protect your business and your assets

▪ Sleep Insurance


Definition of Professional Services in an E&O Insurance Policy

Definition in Financial Advisor E&O Insurance Programs

Defined by licenses and/or registrations held, ie. Life/Accident & Sickness Insurance Agent Mutual Fund Registered Representative Exempt Market Dealer Representative IIROC Registered Representative

Product Defined or Practice Defined?

Other licenses held by advisors, such as but not limited to: RIBO License Mortgage Broker License Non Medical Travel Insurance License

Outside Business Activities


Definition of Professional Services in an E&O Insurance Policy

▪ Definition in a Corporate E&O Policy

Individually customized based on operations Can cover all operations, or one aspect of

operations

▪ Sample Definition:

Professional Services: means those services performed by any of the Insureds solely in the conduct of the Policyholder’s business as described in Item 7 of the Declarations

Declarations:Item 7: Managing General Agency

Mutual Fund Dealer


Claims Arena – Common Client Allegations

Allegations commonly heard are: Failure to assess the client’s true risk

tolerance and failure to adequately explain the risks

Failure to determine and understand the client’s personal circumstances and objectives

Unsuitability of product or investment Breach of fiduciary duty - advisor putting

own interests ahead of those of the client Misrepresentation of how a life

insurance/investment product works causing a financial loss to the client


Client Allegations (cont’d)

Certain allegations are fairly easy to deal with – advisor made an error, causing the client a financial loss.

Much more common and complex are claims where a client alleges misrepresentation, but on investigation:

either there was no such misrepresentation made,

there was a misunderstanding, or the determination as to whether there

was or was not a misrepresentation is unclear, usually because the advisor and the client have differing versions of what happened and what was discussed


Client Allegations (cont’d)

For example, our claims department often hears clients say that they were conservative investors when they complain about their investments going down in value, yet their KYC documentation reveals they were 100% high risk investors

On the life side, we hear that clients have disclosed their full medical histories to their agent, and then there is a surprise when the claim is denied by the insurer

In hearing both sides, sometimes it is hard to understand that the advisor and the client were at the same meeting because their recollections vary so much


Risk Management Tools

1. Follow Standard Practices

2. Document Everything

3. Retain Documentation

4. Know Your Products

5. Know Your Clients

6. Manage Expectations


What To Do If…

• You have an uncomfortable feeling about a transaction/conversation with a client

• You detect an error has been made even if unbeknownst to the client

• Your client complains about the services you have rendered or the way the investment has been performing

• Your client states something to the effect of “I am going to seek legal advice / contact my lawyer”

• You are in receipt of a letter from a lawyer or you have been served with a statement of claim…

Contact your insurance broker immediately


Why Report to Insurer ASAP?

The issue is fresh in your mind Any witnesses can be interviewed A repair or fix might be possible It is a requirement of your insurance policy

to report any incident, allegation, or claim upon knowledge of same

Liability and damages can be assessed and controlled

You want to do nothing to prejudice your insurer and in turn prejudice your coverage

Make no admissions Make certain your file is well documented


Questions

Documents

© 2011 The Magnes Group Inc. E&O INSURANCE: THINK YOU KNOW IT ALL? THING AGAIN…