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Direct Insurance contract or group plan?

When we buy insurance for the first time, our goal is usually to get just what we need and move on to more urgent things. This is a natural tendency, particularly, if we are in the initial set up of a firm either as a new advisor or breaking away as a billion dollar company. Today we are going to identify two categories of coverage, one you may not have known exist and the most common plan. We will look at the good, the bad, and the ugly of group plans. Then we will look at when a group plan might be a good fit for you.

Two Categories of Coverage

When you purchase insurance through an insurance broker and it lists your RIA on the declaration page, you have purchased an insurance contract where the carrier is obligated directly to your organization – the RIA. When you purchase group insurance – the most common plan – it covers RIAs through their Broker Dealer. This is where the declaration pages name the Broker Dealer and you can get a certificate of coverage with your name on it. In this situation the Broker Dealer is the sponsor of the coverage and they have the rights and responsibilities to manage the insurance coverage. A group plan can also be built by an insurance broker for the benefit of a selection of RIAs.

The Good: The most positive thing about a good group plan is that the costs can be lower than direct coverage with an insurance carrier. There is no magic here, it’s just that they are NOT doing a complete underwriting process and they are assuming you are just like the group. With little underwriting comes few questions to get the insurance started. The insurance carrier controls the risk and cost by adding exclusions that are designed around the group.

The Bad: The bad is that you have no control over the choices of coverage and your rights are limited. In a few situations you may be able to add or remove endorsements but for the vast majority, a group plan is a cookie cutter situation where you can take it or leave it. As a group plan you may see one million in limit with multiple million in aggregate coverage. Most contracts have a causal connected clause so if a claim has a root cause associated with another claim it will fall under one claim, diminishing the ability for the carrier to pay for your defense when you need it most.

The Ugly: The ugly is hidden within the process. There is minimal underwriting and exclusions are written that allow the insurance carrier to easily deny a claim. In fact some group contracts have exclusionary language that is broad and vague. This can get extremely ugly in a claim scenario where you believe coverage is in effect but the insurance carrier intends an exclusion (See my post from early June).

With all of these potential down sides why is group coverage ever purchased? The easy answer is that most of the time an advisor may not know they have other options that can be price competitive or they don’t know the difference. You have made it this far so now you know there is a difference.

Is a Group Plan Right For You?

Good risk management is more than just buying insurance. For smaller start up firms a group plan may be the best choice. If you are just like the rest of those in the group, your bigger risk is getting to stability, and you don’t mind handing over control to the plan sponsor.

Today’s BPI Advice: Many firms start with a group plan to control costs but once you have grown beyond 20 million in AUM you need to know the specific differences. Don’t just check the box know what you have in coverage.

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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