Professional liability insurance that consultants must know

As financial professionals who provide life and money advice, professional liability insurance is an important part of the back-end resource suite of financial advisors. This product can be compared with your homeowners insurance. You may never need it, but if you need it, you will be glad you have it.

What is professional liability insurance?

This special insurance can protect financial advisors from the negligence and other claims of the client. Also known as error and omission (E&O) insurance, this insurance may cover negligence, malfeasance, or misrepresentation claims. In most cases, financial planners do not need to have a professional liability insurance policy, but when you are practicing with the public, it is important to prepare for unexpected claims that may cause potential financial difficulties for you and your company. (For more information, see: Property, casualty and liability insurance-professional and director liability.)

So, let us assume that you have decided that this is an important coverage; here is what you need to know about professional liability insurance:

  • Underwriting purpose
  • Who is covered
  • What services are covered
  • What is excluded from coverage
  • How to practice in accordance with the professional responsibility policy
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Why did you get it?

Financial planners grasp the pulse of their clients’ lives. If a customer loses money because of your fault, the consumer may sue you. Mistakes will happen, even if they don’t happen, customers will be dissatisfied with your service. The ups and downs of financial markets, and financial losses may prompt dissatisfied clients to call her lawyer. Litigation is time-consuming and laborious; professional liability insurance policies can alleviate some of these potential burdens. Successful companies are prepared for unexpected situations. This is where professional liability insurance comes in.

Services and coverage

The policy will specifically list the content and objects covered. The policy may cover breaches of fiduciary duties, lack of regulatory compliance and legal coverage. Generally speaking, E&O insurance is structured to provide protection to professionals when consultants make mistakes or are accused of malfeasance. Regardless of whether the consultant is legally liable, insurance will offset the cost of dealing with legal claims. (For related reading, please see: Asset protection for business owners.)

If you forget to inform the customer of the time frame of the 401(k) renewal when they change jobs, you may be at fault or be responsible for their fines, fees, and/or taxes. In this case, the E&O policy will provide you with good service.

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You might be wondering what happens if a front-end staff member or consultant working on behalf of the company makes a mistake. Sort out the insurance policy and understand the insurer. Sometimes, W-2 employees are included, but independent contractors are not included. Understanding these small differences in the insurance policy can translate into large sums of money when making a claim. (For more information, see: Fill the gaps in general liability insurance.)

What is not included in the coverage?

Understand your policies. Is discretionary advice excluded? This is an unexpected exclusion for many insurance brokers because it is specific to the financial advisory business.

If your company pays bills on behalf of customers, another potential exclusion may arise. A client asked her consultant to handle the bills for her husband’s nursing home. A few years later, she discovered that your company’s payment to the nursing home was obviously too high, and she was unable to recover the overpayment. Your liability insurance may not cover these bill payment services as they fall under the discretionary recommended exclusions.

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Review all aspects of the professional liability insurance policy with an insurance broker and understand what is not covered. Agreeing to the settlement is another clause that the consultant needs to understand. This way, planners can avoid surprises when you are forced to resolve the claim instead of fighting it. Ensure that company policies are consistent with insurance coverage.

Bottom line

As with any type of insurance, please consult a trusted insurance agent to find the policy that best suits your needs. Purchase an insurance policy from an agent familiar with the financial consulting business. Make sure you understand the coverage and exclusions in the policy. It also includes insurance for employees. Learn how to file a claim in advance so that you can continue in the event of intense legal proceedings. Finally, practice in a way that ensures that office policies and procedures are consistent with professional liability insurance. If consultants understand professional liability insurance products and the claim process, they are most likely to be successfully resolved when making a claim.

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