Common E&O Claims and How to Avoid Them

Every financial advisor, insurance agent, or other financial services professional should have E&O insurance. E&O, or errors and omissions, protects you from claims by other people that you either did something you shouldn’t have (an error) or didn’t do something you should have (an omission). As you pay your E&O insurance bill each month or each year, you may wonder what people actually get sued for. Here are some of the most common E&O claims and, perhaps even more importantly, how you can avoid them.

Poor Investment Returns

Anyone who has ever seen a TV commercial or read a magazine ad for a financial product knows that “past performance does not indicate future results.” But that doesn’t stop people from suing for poor performance. It’s pretty common for an investor to think that they are being shortchanged, especially if the markets are up or their neighbor is getting better returns than they are.

Misrepresentation

When a financial advisor is selling a new type of investment to a client, the client often hears what they want to hear. This could mean that they don’t consider that their returns could vary from the historical performance of a stock, or that they ignore the risk that an investment could lose money. In the case of an insurance policy, the client may not hear that certain situations may not be covered.

Insufficient or Inadequate Coverage

Insurance agents frequently find themselves facing and E&O claim because the client feels they were not sold adequate coverage for their circumstances. The challenge of striking a balance between coverage and cost is one that every agent struggles with, and one that many consumers don’t understand. The least expensive policy always seems like a good idea until you have a claim.

Avoiding E&O Claims

The three most important steps you can take to avoid an E&O claim are: document, document, document. Write down everything you discuss with your clients, whether that conversation is held in person, on the phone, or via email. Keep a copy of your notes in the client’s file, whether that is on paper or electronic.

When you present or describe new products to a client, make sure you explain both the advantages and disadvantages clearly. It’s tempting to hand over a prospectus that you know the client won’t read, but that practice could come back to bite you. Outline the most important points and make sure the client understands them.

If you are recommending a product to a client and they decline to purchase it, it can be a good idea to have them sign a disclaimer. The disclaimer should describe the product and your rationale for recommending it, and indicate that the client declined to purchase it. Keep the signed disclaimer in the client’s file. This is particularly important for things like long-term care insurance. In this case, the client may feel that the coverage is not worth the cost. Years later, the client could be confined to a nursing home, paying thousands of dollars a month out of their savings. The client’s children may come to you to ask why you never sold them long-term care insurance to protect the children’s inheritance. If you can show them the signed disclaimer, you may be able to head off an E&O claim.

You Can Win in Court and Still Lose

Even if you explain and document everything, you could still be sued. If that happens, you may very well prevail in court, especially if you’ve followed the above steps to protect yourself. But even if a judge finds in your favor, you will still have spent the time and money necessary to defend yourself. Your E&O policy may protect you here as well, as most policies will cover defense costs.
When it comes to protecting yourself against E&O claims, the best defense is a good offense. Carefully explaining your recommendations, documenting all your conversations, and maintaining good client records will go a long way toward preventing claims on your errors and omissions insurance.

All information provided in this blog is for informational purposes only. The sources used are presumed accurate. CalSurance Associates, Brown & Brown Program Insurance Services, Inc. and Brown & Brown, Inc. will not be liable for any errors, omissions, losses, injuries or damages arising from its display or use and will not assume responsibility for any misguided information. No guarantees are implied.