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What Does an RIA Claim Look Like?

We often get this question when a prospective client is purchasing E&O insurance for the first time, and any short answer will typically be unsatisfying because there is no “normal” claim scenario. The other challenge is that we can’t really look to any upcoming or pending claims as examples, for obvious reasons.  Today we have the unique opportunity to look under the hood of an RIA claim. Here are the details:

A Registered Investment Advisor and affiliated Broker Dealer collectively known as Allegis executed a put credit spread in August of 2015. This spread was based on the Russell 2000 index with a maximum potential gain of $313,600 and maximum potential loss of over $38 million. The trade resulted in the maximum loss which effected multiple clients where the firm had full discretionary authority. From the clients perspective they lost half of the aggregated value in their accounts. This generated multiple arbitrations and threatened lawsuits.

Initially there were eight clients that filed arbitration and threatened suits. By 2017 the count expanded to over 20. The clients claimed the RIA “made misrepresentations, mismanaged their funds, breached fiduciary duties, engaged in securities fraud, was negligent, etc.” The clients did not refer to the types of investments or trades. All of the client’s allegations where brought into one claim because the root cause of the claim had to do with the event of the August 2015 trades.

The RIA requested defense council and the carrier chose a different attorney to defend against the client allegations. Once the claim was active the RIA leadership reviewed the insurance contract and believed the activities to be covered because the policy stated coverage for “fully covered put or call options.” The carrier took the opposite position that coverage did not apply because “this insurance does not apply to any claim or defense expenses: … Arising out of the actual or alleged purchase, sale, attempted sale, solicitation or servicing of any of the following: … Commodities, any type of futures contracts, any type of options contract or derivative. However, this exclusion shall not apply to fully covered put or call options.”

From Very Bad To Even Worse

Not only was this a big claim, the carrier had denied coverage and defense of the claim. The single biggest mistake made by the firm leadership was that they did not appear to review or read the insurance contract prior to placement of the coverage. They could have purchased coverage for broad options trading strategies.  The firm member in charge of placing the coverage stated they had no personal knowledge of the options trading strategies. The broker who placed the coverage stated the focus was to find appropriate coverage at a competitive price for its customers. This gives us a second big mistake - if the primary focus is price you have lost the battle. Price is important but ultimately, in a claim scenario, nobody remembers that they saved a few thousand dollars.

The Final Resolution

The financial firm sued its carrier seeking payment for defense of the claims. That suit was denied in March of 2019. From start to finish it took over 3 years to close the book on this case. You may remember the volatility in the market back in the fall of 2015.  I would not be surprised if the trader who initiated the put spread felt like it was a black swan event that led to the losses. The point being that individual actions done with the best of intentions did not go as expected.

There are many more twists and turns in the story of this claim. Others have written compelling reviews of this case but here I have focused on issues that can help you think more proactively about your RIA business insurance purchase decisions. In this case, it is my opinion, not enough attention was paid to the technical aspects of the insurance contracts by the leadership of the financial firm nor the insurance broker. This is why you must first choose an insurance professional who understands both the technical aspects of your advisory business as well as the technicalities of the insurance contract.

 Today’s BPI Advice: We never know what will be alleged in a claim. The question you should be asking yourself is, “What is the plan if someone accuses our firm of breaching its fiduciary duty?”  Having insurance is not the right answer. Knowing “what” you have is key.


Cases studies, testimonials and other information on the website are for illustrative purposes only, and may not reflect the terms of any particular insurance policies nor the coverage of any specific claims.  Box Professional Insurance, LLC makes no representations of any kind regarding coverage or the specifics of any policy or claim.  See your insurance carrier and policy for details on coverage, exclusions and limits.

Chad Ramberg