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Why is Professional Liability insurance different for RIAs?

Professional liability insurance, also known as E&O insurance, is commonly unknown and misunderstood for financial advisory firms. Why? Because there are no standards for the contract. Knowing this helps us make the right decisions when evaluating insurance coverage. Let’s examine why there are no standards and what it means to you as a financial institution.

Have you heard this before? “We can build you whatever you need.” “All insurance has flexibility.” Yes, this is true but when we say there are no standards for professional liability insurance what we mean is that each insurance carrier writes a different contract. One carrier may define services to include financial planning and one may not. Consequently, one contract may or may not be better suited for you depending on the services you provide. For a claim, every word in an insurance contract, aka policy, has a degree of weight that could flat out deny a claim or greatly reduce the effectiveness of coverage. Last week’s post was a perfect example.

What is Insurance Services Office?

The trick to understanding your contract is in knowing Insurance Services Office (ISO). ISO is a division of Verisk (NASDAQ: VRSK). They provide analytics to the property/casualty insurance industry, which provides standard language for those insurance contracts. ISO has not given a standard contract for insurance carriers to use when it comes to financial firms. You can tell if an insurance contract is standardized by ISO. Look at the main policy contract, center bottom, for the “© ISO.” The most common business insurance that is standardized is your business general liability insurance, which is your slip and fall coverage.

a Lack of Standardization - good or Bad?

When you tell an insurance carrier that you need professional liability insurance, they send you to the Financial Institution division (FI). This is good until you realize that the FI division serves trusts, banks and financial advisors. We all understand the overlap of these financial institutions but we also know there is a massive difference between a trusts, community bank and your typical main street financial planner.

Is a lack of standardization good or bad? That depends on what you need. Most of the time I see it as good because it means coverage is infinitely more flexible. However, you must be cautiously aware when choosing an insurance professional because if they don’t know you or all the levers available you may be under-covered or over paying. All carriers work through insurance brokers so your first decision is to determine who is best suited to serve you and support the negotiation process.

Today’s BPI Advice: Remember lack of standardization means flexibility.  Choose an insurance broker that works with financial advisory firms every day because the better they understand you the better results you will get.

 

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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