Is Your Investment Adviser Protected Against Client Claims?

January 20, 2012

Does your investment adviser have errors and omissions insurance (“E&O insurance”) to cover you and your firm in the event of an error or if a client claims your firm made an error?

While investment advisers are not required by regulation to maintain E&O insurance, RIA Compliance Consultants strongly recommends that all investment advisers maintain E&O insurance that is determined to be sufficient to cover the advisory services practice of the investment adviser firm.  As you might anticipate, legal fees can accumulate quickly even in situations where your firm is required to defend a claim that you believe to be frivolous.  E&O insurance typically will cover any settlements or judgments and the associated defense costs relating to any professional claims, including, for example, claims alleging lack of suitability, investment losses, errors in financial planning engagements, and meritless claims.

An adequate E&O policy will cover the investment adviser firm and all of its employees and representatives.  Most E&O insurance policies offer up to $1 million in coverage annually, although investment adviser firms with higher amounts of assets under management are advised to maintain more coverage.  Investment adviser firms are advised to attain an E&O policy that is tailored to the advisory services offered by the firm.  You should carefully review E&O policy provisions with your legal counsel and insurance broker to make a determination that the coverage provided by the E&O policy is sufficient coverage for the advisory services that your firm offers.  As an example, many policies do not extend coverage to claims related to private funds.  If your firm provides advisory services related to private funds, it is strongly recommended that you ensure that the E&O policy in place provides coverage for such activities.  If there is no coverage for such activities, then you either need to obtain insurance that will cover such activities or alternatively, need to amend the advisory services offered to eliminate activities for which your firm does not have insurance coverage.

Posted by Bryan Hill
Labels: E&O Insurance