GREG SEVERINGHAUS: Hello. My name is Greg Severinghaus, and I'm an underwriting manager at the insurance company Markel. Today, I just want to take a couple of minutes to talk to you about Errors and Omissions insurance, or what we typically call E&O.
E&O is a form of professional liability insurance that covers honest mistakes. Maybe you entered the wrong ticker symbol or misunderstood the level of risk your client was comfortable with, and the client suffers a loss to their portfolio. No one wants to make mistakes, but they do happen. In fact, they're pretty common. About 70% of the claims that come in at Markel are for E&O. What's important is that an honest mistake doesn't lead to an unfair demand or a lengthy lawsuit that puts the future of your RIA firm at risk.
There are two ways E&O insurance can directly help an RIA firm. There's defense, which is money spent to defend against a lawsuit, and damages, money paid to clients to settle a dispute.
Indisputable claims, such as entering the wrong ticker, can often be paid out quickly. More complex cases might include both defense costs and paid damages.
As with any insurance, E&O can transfer risk away from your balance sheet or personal assets. There are circumstances where a fiduciary lawsuit could pierce your corporate assets and go after your personal assets, such as your home. With insurance, you pay a premium as a regular expense instead of absorbing potentially big losses that may impact your financials.
The typical RIA firm carries a one million limit per claim with premiums that can range from 2,000 to 20,000 per year, depending on size and scope. Larger firms might carry a policy with a higher limit, which can cost an additional 5,000 to 10,000 per million-dollar limit increase.
What E&O insurance doesn't cover is stock market drops or the return of fees. It also doesn't address risks covered by other forms of insurance, such as bodily injury or harassment. That's why E&O insurance is a good starting place, but probably not the only type of insurance your firm needs.