It's critical for financial advisors to ensure they protect their practices properly against potential liability as errors and omissions (E&O) insurance claims are on the rise in the financial services sector, said E&O experts at the Canadian Institute of Financial Planners annual conference in Vancouver on Friday.
In fact, claims against advisors are occurring increasingly frequently, said Steve Ritter, senior vice president and head of agents in Canada with E&O insurance provider Westport Insurance Corp.: "We've seen, over the past 10 years, a significant increase. During the financial crisis, our claims count doubled."
Many of the claims made are unsuccessful, and do not result in any finding of advisor wrongdoing, Ritter noted. Nonetheless, he said it's a reminder that advisors need to ensure they're prepared for the possibility of facing accusations of wrongdoing given that there are many disgruntled clients out there.
Advisors should ensure they have an E&O policy in place that sufficiently protects their practice in the event of that scenario, said Joanna Reid, senior vice president with insurance brokerage Marsh Canada Ltd.
Specifically, it's critical for advisors to understand exactly how their policy works and what it covers because the features and limitations on E&O policies can vary considerably, she said.
"The importance of understanding the key provisions really can't be understated," said Reid. "Coverage can differ quite significantly from policy to policy, and it's up to the advisor to review and understand how these differences affect your overall practice."
Reid highlighted three key questions advisors should ask about their coverage:
1. Is the policy "claims made" or "occurrence-based"?
There are two types of E&O policies: claims made and reported policies; and occurrence-based policies. Claims made policies cover claims that are made during the policy term, even if the alleged error occurred before the policy came into force. In contrast, occurrence-based policies cover claims pertaining to alleged errors that occur when the policy was in force, regardless of when the claim is made.
Most advisors' policies are written on a claims made and reported basis, Reid said. Still, she said many advisors are unclear as to what their policy covers.
"That's probably the No. 1 question or issue that arises," she said.
2. Does the policy have a retroactive date or full prior acts?
It's important to know when your coverage under the policy begins, Reid said. If your E&O policy has a retroactive date, that's the first date from which the insurance policy will provide coverage. Any business that you conducted prior to that date, Reid said, will not be covered by the policy.
In contrast, policies with a prior acts provision cover claims arising from business that took place any time prior to the inception date of the policy.
3. Does the policy have an extended reporting period?
Advisors who have retired or left the industry are still susceptible to claims and allegations that they made errors during their practising years, Reid noted.
"Liability does not cease just by virtue of the fact that you have retired, or are no longer practising," she said. "Claims can come against you well into your retirement years."
By opting for a policy with an extended reported period (ERP), advisors can ensure they're protected against these kinds of claims even when they're no longer actively practising.
ERPs are typically purchased as a one-time transaction at the time of retirement, and advisors can choose their desired length of the extended period, up to unlimited coverage, depending on the policy.
Most advisors who retire do not purchase ERP, Reid said, adding that this leaves them exposed to potential liability.
"If you have not purchased an extended reporting period, and a claim comes forward, you are basically on your own," she said. "You have no policy in which to trigger coverage under."