Look at errors and omissions insurance as important protection for both you and your clients — and it’s good business

By Stewart Lewis | January 2007

It is good news for financial services professionals that regulators and advisor organizations are raising practice standards. But higher standards can be a double-edged sword. Financial advisors can expect the courts to hold them to those higher standards if clients sue.

That means it’s good business to have errors and omissions insurance. Look at E&O as protection for both you and your clients — it shields your assets and pays for your defence if a client makes a claim against you, and it provides funds to pay damages to a client should a court find you or your advisory practice at fault for that client’s losses.

“It’s important for consumers that advisors have E&O,” says Randy McGlynn, chairman of the board of the Advocis Protective Association and CEO of the Ontario Teachers Insurance Pla, which offers insurance to Ontario’s education community. “We see it as ‘consumer protection insurance’.”

Even though E&O protects an advisor’s assets.

Scott Robertson, president of Tasman Financial Services in Ottawa and vice president of the Institute of Advanced Financial Planners, agrees advisors should provide protection for their clients — the way another professional would. “You wouldn’t go to a doctor who didn’t have malpractice insurance,” he says.

“People who do financial planning are taking on a lot of responsibility,” adds Robertson, a registered financial planner. And people make mistakes, he adds: “When mistakes are made, advisors have to be able to provide something for the consumer.”

Advocis is the only advisor organization that makes E&O insurance a condition of membership. Other advisor organizations, including the Independent Financial Brokers of Canada and the Canadian Institute of Financial Planners, offer their members E&O packages as a benefit of membership — not as a condition.

Neither the Financial Planners Standards Council, which bestows the certified financial planner designation, nor the IAFP, which bestows the RFP, requires E&O. But, says Stephen Szikora, director of ethics at the FPSC in Toronto, specific licensing requirements of the various products that advisors offer call for E&O insurance. For example, E&O insurance is mandatory for insurance advisors as part of their individual life insurance licence requirements in Newfoundland and Labrador, Quebec, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.

And there is growing support for E&O insurance. In fact, it may soon be required for RFPs.

“The IAFP is looking into it carefully,” says IAFP executive director Larry Colero.

But before the IAFP makes E&O mandatory, Robertson says, the organization would like to see “a plan that would address all the needs our members have, one for more advanced financial planners.”

Szikora says advisors should make sure their policies cover all types of advice they give rather than just specific products. “A simple example would be the financial planner who offers tax preparation for his or her clients,” he says. “Ideally, any E&O coverage carried by a CFP professional would cover all the possible areas of discussion and services offered by the professional.”



With the markets performing well, advisors are facing fewer claims from clients wanting compensation for market losses. As a result, E&O premiums have been holding steady or even dropping.

Three years ago, the E&O picture wasn’t as bright. In the post-9/11 world, when markets were down, there was an increasing likelihood of clients making claims. Insurers started pulling out of E&O underwriting.

Five companies exited the Canadian E&O market, leaving only four to handle the business: ACE INA, Employers Reinsurance Corp., Liberty International Underwriters of Canada and American Home Insurance Co. One company, Trisura Guarantee Insurance Co. , has recently joined the list of firms offering E&O.

The problem with few insurers providing coverage, says Karen McGuinness, vice president of compliance for the Mutual Fund Dealers Association of Canada, is that, should the MFDA establish a rule making coverage mandatory for members, insurers could end up deciding “who can or can’t be in the business.”

Currently both self-regulators, the MFDA and the Investment Dealers Association of Canada, do not require their member firms to have E&O. The members of both organizations are covered by their respective investor protection funds — the MFDA Investor Protection Corp. and the Canadian Investor Protection Fund — in the event of bankruptcy. This protection is separate from E&O.

The setting of premiums and the administering of E&O plans are made more complicated by differences in provincial insurance regulations. McGlynn says the regulators should make an effort to relieve this problem by harmonizing their standards.