As a financial professional doling out life and money recommendations, professional liability insurance is an important part of the financial advisors’ back end resource suite. This product can be compared to your homeowners insurance. You may never need it, but if you do, you’ll be very happy that you have it.
What is Professional Liability Insurance?
This specialized insurance protects financial advisors against negligence and other claims alleged by their clients. Also known as errors and omissions (E&O) insurance, this insurance might cover negligence, malpractice or misrepresentation claims. In most cases, financial planners aren’t required to have a professional liability insurance policy, but when you’re practicing with the public, it’s important to be prepared for the unexpected claim which may cause you and your firm potential financial hardship. (For more, see: Property, Casualty and Liability Insurance— Professional and Director Liability.)
So, let’s assume you’ve decided this is an important coverage to obtain; here’s what you need to know about professional liability insurance:
- Purpose of the coverage
- Who is covered
- What services are covered
- What is excluded from coverage
- How to practice in accord with the professional liability policy
Why Get It?
Financial planners are at the pulse of their clients' lives. If a client loses money, through your fault or not, the consumer may sue you. Mistakes happen, and even when they don’t, clients can become unhappy with your services. Financial markets go up and down, and financial losses may spur an unhappy customer to call her lawyer. Lawsuits are time-consuming and stressful; the professional liability insurance policy can relieve some of these potential burdens. Successful businesses are prepared for the unexpected, and that's where professional liability insurance comes in.
Services and Coverage
The policy will specifically lay out what and who is covered. The policy will likely cover breach of fiduciary duty, lack of regulatory compliance, and legal coverage. In general, E&O insurance is structured to cover the professional when the advisor makes a mistake or is accused of malfeasance. Whether the advisor is legally responsible or not, the insurance will offset the cost of responding to legal claims. (For related reading, see: Asset Protection for the Business Owner.)
If you forget to inform a client of the time frame for a 401(k) rollover when they switch jobs, you may be at fault or liable for their penalties, fees, and/or taxes. The E&O policy will serve you well in this type of situation.
You may wonder what would happen if the front-end worker, or a consultant, working on behalf of the firm makes a mistake. Comb the insurance policy and understand who is covered. Sometimes, W-2 employees are covered, but not independent contractors. Knowing these small differences in the policy can translate into big bucks when a claim is made. (For more, see: Filling the Gaps in General Liability Insurance.)
What's Excluded From Coverage?
Understand your policy. Is discretionary advice excluded? This is surprise exclusion for many insurance brokers as it is specific to the financial advisory business.
Another potential exclusion may come up if your company is paying bills on behalf of the client. A client asked her advisor to handle billsto the nursing home for her husband’s care. Several years later, she discovers that your company significantly overpaid the nursing home, and she’s not able to recoup the overpayment. Your liability policy may not cover those bill paying services because they fell under the exclusion for discretionary advice.
Review all of the aspects of the professional liability insurance policy with the insurance broker and know what is and isn’t covered. A consent to settle is another clause that the advisor needs to understand. That way the planner avoids surprises when you are compelled to settle a claim instead of fighting it. Make sure the company policies are aligned with the insurance coverage.
The Bottom Line
As with any type of insurance, consult with a trusted insurance agent to find the best policy for yourneeds. Buy the policy from an agent familiar with the financial advisory business.Make certain you know the coverages and exclusions in the policy. Include coverage for employees as well. Learn about how to file a claim in advance so in the heat of a legal action, you are ready to proceed.
Finally, practice in a way that ensures office policies and procedures are aligned with the professional liability insurance. If the advisor understands the professional liability insurance product and claims process then when a claim is filed, they have the greatest likelihood of a successful resolution.
FAQs
The Best Professional Liability Insurance for 2024
- Best Overall: AIG.
- Best for Freelancers and Independent Contractors: Pogo.
- Best for Medical and Healthcare Providers: The Doctor's Company.
- Best for Lawyers: Embroker.
- Best for Small Businesses: Thimble Insurance.
- Best for Realtors: Hiscox.
As a general rule, you'll want enough liability insurance to cover your net worth. That's equal to the value of all the cash and investments you have plus the things you own, minus your debt. There's less incentive to sue you if you have a low net worth, so you may not need any additional coverage.
What is included in a professional liability policy? ›
Professional liability policies typically cover legal defense costs associated with defending against claims of professional negligence. These costs can include attorney fees, court costs, and expert witness fees.
Should teachers get professional liability insurance? ›
Savvy educators know it's prudent to guard their livelihood with professional liability insurance that provides protection above and beyond what their employer or union may provide.
Is it good to have professional liability insurance? ›
You should have professional liability insurance if you provide services to clients for a fee. It protects your business against claims of mistakes or professional negligence, even if they're unsubstantiated. Professional liability insurance is also called errors and omissions insurance.
Is liability insurance any good? ›
Should I get liability or full coverage car insurance? Typically, it is advisable to purchase full coverage car insurance. Liability insurance will not pay for damages to your own vehicle after an accident where you are at fault. It will also not cover damages due to theft, vandalism or acts of nature.
How much does a $5 million dollar umbrella policy cost? ›
A $5 million umbrella policy costs around $375 to $525 per year, on average. Every policyholder's umbrella insurance premium will vary based on their personal risk factors, so individuals who own more cars or properties will be more expensive to insure, as will people who are particularly likely to be sued.
Is a 1 million umbrella policy enough? ›
Umbrella insurance policies begin at $1 million and go up from there in $1 million increments. This might seem like a lot, but when it comes to lawsuits and insurance claims, things can add up fast. And if at least two of these apply to you, you might need more than the $1 million minimum coverage: You own property.
Which states have no fault insurance? ›
No-fault insurance states
In total, there are 12 no-fault states in the U.S. They are Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah. The minimum PIP insurance requirements for these states is as follows.
How to choose a professional liability insurance? ›
Find a reputable insurance company — one that is fully licensed in all jurisdictions, is financially stable (check the A.M. Best rating), provides support with claims, provides confidential ethics and risk management consultation (such as The Trust's Advocate 800 Program), and has competent and convenient customer ...
What Is Professional Liability Insurance Coverage? Professional liability insurance protects businesses when employees make mistakes in the professional services they've provided to customers or clients. This coverage is also known as errors and omissions insurance (E&O).
What does professional liability insurance protect you from? ›
Professional liability insurance is a type of business insurance that provides coverage for professionals and businesses to protect against claims of negligence from clients or customers. Professional liability insurance typically covers negligence, copyright infringement, personal injury, and more.
What is educators professional liability insurance? ›
A commercial general liability policy will cover a teacher's legal fees and judgments resulting from claims of bodily injury, emotional distress, or property damage due to non-professional negligent acts. It also covers personal and advertising injuries, such as wrongful invasion of privacy.
Why is professional liability insurance important for teaching candidates? ›
Professional Liability insurance for teachers and education professionals protects you against lawsuits and claims of negligence, mistake, and misrepresentation.
What is the difference between professional liability and liability insurance? ›
Only general liability insurance can spare your business from lawsuits over a visitor slipping and falling on your commercial property. And only professional liability insurance can shield you from the high cost of alleged professional mistakes that cause a third party financial losses.
Is professional liability the same as business insurance? ›
There are two basic types of business insurance: general liability and professional liability. They cover different types of risks. There are some other names for these types of coverage, and some other kinds of policies for specific risks.
What is the difference between commercial liability and professional liability? ›
Only general liability insurance can spare your business from lawsuits over a visitor slipping and falling on your commercial property. And only professional liability insurance can shield you from the high cost of alleged professional mistakes that cause a third party financial losses.
Is professional liability insurance the same as business liability insurance? ›
General liability covers physical risks, such as bodily injuries and property damage. Professional liability insurance covers more abstract risks, such as errors and omissions in the services your business provides.
Is professional liability insurance the same as employers liability insurance? ›
There are two key things an individual professional liability insurance policy does that an employer's policy may not: An individual professional liability insurance policy like those NSO provides covers you as a nurse 24/7–an employer's policy only covers you when you're on the clock.
