Insurance industry experts say the errors and omissions insurance regime for independent advisors needs a fix.

Insurance companies and some provincial regulators require that advisors selling life, health, and property and casualty insurance have E&O insurance on their practices. This coverage is designed to compensate a client in the event the client is awarded damages in a court case resulting from errors in service or product selection by the advisor.

However, clients are often left in the lurch after discovering that awards cannot be paid because the advisors have no — or insufficient — E&O insurance.

“I don’t think there’s any dispute that there’s a fundamental flaw in the E&O structure,” says Harold Geller, a lawyer with Doucet McBride LLP in Ottawa. “This a routine issue that I deal with. We always seem to have cases that fall in this gap.”

Although the problem also theoretically applies to advisors licensed with securities and mutual fund dealers, often those dealers apply a third layer of compliance to the E&O coverage regime.

No E&O claims experience data are made public by the life or property and casualty insurance sectors, but Jim Bullock, a financial advisor and the registrar at the Peel Institute of Applied Finance in Toronto, says the percentage of cases in which courts side with clients only to find there’s no insurance available to cover their losses is “significant.”

“I’d say it’s between 10% and 20%,” says Bullock, “and I’ve heard as high as 30%.”

Bullock, who was on the committee that drafted E&O regulations in the early 1990s, says that in general, life insurance agents don’t understand the E&O policies they buy because these contracts are different from those in the life and health insurance worlds.

“They don’t understand,” he says, “that if they get sued today on a case that they sold 10 years ago, it’s the errors and omissions insurance that they own today that’s important — not the policy that was in force then.”

Geller, who also represents advisors in legal cases, often reminds advisors to buy E&O insurance coverage after they’ve retired or stopped practising.

Several issues create the E&O gap. Often, advisors let their E&O policies lapse or the issuing insurer voids the policy or the advisor hasn’t bought the right coverage.

For example, the late renewal of an insurance licence by an advisor could void his or her E&O policy. Consistent, unbroken licensing is necessary to maintain a policy.

Similarly, if an agent renews his or her insurance policy late, that advisor is technically unlicensed until the policy is renewed. Having E&O insurance is a condition of licensing.

Advisors can choose from two general types of E&O insurance: claims-based or occurrence-based. The former are cheaper and need to be in force when a claim is made. The latter cover the insured for claims made on past professional work, but are more expensive.

A raft of policy riders is available, but they’re also costly and not purchased very often. These include so-called “run-off” or “tail” riders that can cover the insured after he or she has given up his or her licence or for gaps in professional standing.@page_break@However, Bullock says, fraud riders described by typical E&O policies were originally written for property and casualty agents and may not describe the activities that constitute fraud in the life and health insurance sectors. Traditional E&O insurance might cover fraud in instances that apply to the P&C, life and health businesses — for example, the theft of monies intended to pay premiums. However, a policy might not cover fraud wherein an unscrupulous advisor forges a signature to take out a loan against a funded universal life insurance policy on part or all of its value.

Maintaining E&O insurance also creates challenges for dealers and managing general agencies, says Ron Dick, vice president of Toronto-based PRL Benefits Ltd. and former president of Dundee Insurance Agency Ltd. of Toronto for 10 years. As an independent advisor licensed in every province, Dick has a 45-page E&O insurance contract with several riders that covers potential liabilities.

Often, he says, advisors who change firms — especially if they’re dismissed from one — will find themselves without E&O insurance because the insurance had been provided through the dealer. “The only way you can get around that if you’re a dealer or an MGA,” Dick says, “is if the advisor has a contractual requirement to purchase run-off insurance coverage to protect the public.”

He suggests that the provinces impose a uniform system of E&O insurance that requires an insurer to inform the local licensing body of a lapsed policy within 30 days, which would prevent major gaps in coverage. The licensing body, he adds, should also require certain riders to be in effect to protect the public against disruptions in licensing.

The challenge for dealerships and MGAs such as Dundee is that if an advisor’s policy lapses, the liability falls to the MGA. And to the extent that the owners of smaller MGAs are actually agents themselves, Dick adds, they would own E&O insurance that may or may not provide secondary coverage for advisors contracted to the MGA.

Rowena McDougall, senior manager of public affairs at the Financial Services Commission of Ontario, notes that when insurance advisors are licensed in Ontario (and upon licence renewal), they are required to carry E&O insurance with a minimum one-time liability of $1 million; but legislation doesn’t stipulate the extent and type of coverage beyond that. Several provinces require advisors to maintain that amount of E&O coverage plus a fraud rider. But not all provinces even require E&O coverage. McDougall adds that annual random audits in Ontario show 95% or more of advisors have E&O insurance.

E&O coverage is one issue under review by insurance regulators in a report issued in February that seeks comment on the regulatory oversight of MGAs, the main channel through which life and health insurance products are sold in Canada. The report was published by the Canadian Council of Insurance Regulators, which represents all territorial and provincial licensing bodies.

The report notes that MGAs, which at a minimum provide administrative and compensation distribution, are generally licensed as advisors themselves — to the extent that their principals are also advisors. The CCIR report asks: “Do you think that the existing licensing regime and the level of required E&O insurance is adequate for the functions of an MGA in today’s marketplace?” The industry has until April 6 to respond. IE