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Common E&O Claims and How to Avoid Them
Common E&O Claims and How to Avoid Them
09.29.2022
Common
E&O Claims and How to Avoid Them
Every
financial advisor, insurance agent, or other financial services professional
should have E&O insurance. E&O, or errors and omissions, protects you
from claims by other people that you either did something you shouldn’t have
(an error) or didn’t do something you should have (an omission). As you pay
your E&O insurance bill each month or each year, you may wonder what people
actually get sued for. Here are some of the most common E&O claims and,
perhaps even more importantly, how you can avoid them.
Poor
Investment Returns
Anyone who
has ever seen a TV commercial or read a magazine ad for a financial product
knows that “past performance does not indicate future results.” But that
doesn’t stop people from suing for poor performance. It’s pretty common for an
investor to think that they are being shortchanged, especially if the markets
are up or their neighbor is getting better returns than they are.
Misrepresentation
When a
financial advisor is selling a new type of investment to a client, the client
often hears what they want to hear. This could mean that they don’t consider
that their returns could vary from the historical performance of a stock, or
that they ignore the risk that an investment could lose money. In the case of
an insurance policy, the client may not hear that certain situations may not be
covered.
Insufficient
or Inadequate Coverage
Insurance
agents frequently find themselves facing and E&O claim because the client
feels they were not sold adequate coverage for their circumstances. The
challenge of striking a balance between coverage and cost is one that every
agent struggles with, and one that many consumers don’t understand. The least
expensive policy always seems like a good idea until you have a claim.
Avoiding
E&O Claims
The three
most important steps you can take to avoid an E&O claim are: document,
document, document. Write down everything you discuss with your clients,
whether that conversation is held in person, on the phone, or via email. Keep a
copy of your notes in the client’s file, whether that is on paper or
electronic.When you present or describe new products to a client, make sure you explain both the advantages and disadvantages clearly. It’s tempting to hand over a prospectus that you know the client won’t read, but that practice could come back to bite you. Outline the most important points and make sure the client understands them.
If you are recommending a product to a client and they decline to purchase it, it can be a good idea to have them sign a disclaimer. The disclaimer should describe the product and your rationale for recommending it, and indicate that the client declined to purchase it. Keep the signed disclaimer in the client’s file. This is particularly important for things like long-term care insurance. In this case, the client may feel that the coverage is not worth the cost. Years later, the client could be confined to a nursing home, paying thousands of dollars a month out of their savings. The client’s children may come to you to ask why you never sold them long-term care insurance to protect the children’s inheritance. If you can show them the signed disclaimer, you may be able to head off an E&O claim.
You
Can Win in Court and Still Lose
Even if you
explain and document everything, you could still be sued. If that happens, you
may very well prevail in court, especially if you’ve followed the above steps
to protect yourself. But even if a judge finds in your favor, you will still
have spent the time and money necessary to defend yourself. Your E&O policy
may protect you here as well, as most policies will cover defense costs.When it comes to protecting yourself against E&O claims, the best defense is a good offense. Carefully explaining your recommendations, documenting all your conversations, and maintaining good client records will go a long way toward preventing claims on your errors and omissions insurance.
All information provided in this blog is for
informational purposes only. The sources used are presumed accurate. CalSurance
Associates, Brown & Brown Program Insurance Services, Inc. and Brown &
Brown, Inc. will not be liable for any errors, omissions, losses, injuries or
damages arising from its display or use and will not assume responsibility for
any misguided information. No guarantees are implied.
Written by
CS
Published September 2022
