Financial advisors should think of their errors and omissions (E&O) insurer as a partner who can provide assistance and a defence strategy in the face of a claim, not a fee collector, said Joanna Reid, senior vice president of Toronto-based Marsh Canada Ltd., who spoke at the 2016 Canadian Institute of Financial Planners' (CIFPs) conference in Orlando on Friday.
Marsh Canada, which offers E&O insurance to advisors, often gets questions from advisors who are concerned that their insurance rates will go up if they report a claim, Reid said. However, advisors should consider the negative consequences of not being upfront with their insurer. It's critical that advisors immediately report to their E&O insurer a client's claim against them or even a situation that may give rise to a formal claim, Reid said.
"Not reporting it could prejudice the insurer's position to defend you, which is never in your best interest," she explained. "If in doubt, just report [the claim]. It locks that insurer in and the most critical part of that is it gives you instant access to legal support to ask that question."
Insurers will depend on an advisor's extensive documentation of their interaction with their client should a claim lead to a lawsuit as there is no onus on the investor to prove his or her allegation and judges tend to favour the investor over the advisor, said Reid.
And don't depend on your clients to recall any permission they may have given you to move forward with particular decisions that resulted in a financial loss, warned Stephen Ritter, chief agent with the Canadian branch of Toronto-based Westport Insurance Corp., a company owned by Zurich-based Swiss Re Group. (Ritter is also a senior vice president within Swiss Re's corporate solutions arm.)
"A customer who loses money very quickly has memory loss in terms of how that initial discussion took place," he said. "Make sure that you document very carefully and very fully your files on those discussions."
Errors in the investment advice provided to clients are some of the most expensive claims within Ritter's own E&O business. It makes up 16% of claims brought forward by clients but 25% of total dollars paid by Ritter's firm to investors. The most expensive type of claim is inadequate assessment of clients' needs and objectives, which also makes up 16% of complaints but takes up 34% of costs.
Reid emphasized the importance of advisors understanding their own E&O policies and their obligations under those policies. This is critical as there has been an increase in claims brought forward against advisors especially over the past 10 years, she said.
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