What You Need to Know About Professional Liability (E&O) Insurance for Financial Companies

In the high-stakes world of finance, even the smallest error can lead to significant client losses and potential legal problems. This is why Professional Liability insurance, often known as Errors and Omissions (E&O) insurance, is a crucial part of risk management for financial companies. 

Whether you are an investment firm, accounting agency, or any other financial service provider, this coverage is designed to protect your business from the unique risks associated with providing professional financial services.

We Have the Best Professional Liability Policies for Financial Companies

At Brighton Financial and Insurance Services (BFIS), we offer reliable business insurance policies including comprehensive Professional Liability policies tailored specifically for financial companies. Our policy covers legal defense costs, claims expenses, damages judgments, settlements, and more. We also offer competitive coverage limits that are tailored to meet the needs of your business. You can count on our industry experts to help you find the best coverage at the best price.

Contact us today to get started on your Professional Liability policy! We look forward to helping you protect your business from the unique risks associated with providing financial services.

What is Professional Liability Insurance and How Does it Help Financial Firms?

Professional Liability insurance is designed to protect financial companies from a variety of potential losses associated with providing services. This coverage typically includes:

• Breaches of professional duty – covers legal costs associated with claims that your company failed to provide the standard level of care expected for a given profession or industry.
• Negligent acts, errors, and omissions – covers legal costs associated with claims that you made an error or omission in providing services.
• Unprofessional conduct – covers legal costs associated with claims of unethical behavior or breach of contract.
• Breach of fiduciary duty – covers legal costs associated with claims that your company failed to act in the best interest of the client.
• Employment-related practices – covers legal costs associated with claims of wrongful termination, discrimination or sexual harassment.
• Cyber Liability – covers losses related to data breaches or cyberattacks, such as the cost of notification, regulatory fines, and other expenses.
• Product liability – covers legal costs associated with claims related to products or services you designed, constructed, manufactured, or sold.
• Business interruption – covers the loss of income due to service interruptions caused by a covered event.

In essence, professional liability insurance acts as a strategic tool for risk management. It not only provides financial security but also reinforces your company's reputation by demonstrating a commitment to professional responsibility and client protection. It's not just about protecting yourself when things go wrong; it's about proactively managing risks and ensuring the sustainability of your business in the long run.

Who Needs Professional Liability Insurance?

Financial companies of all sizes should consider purchasing Professional Liability insurance. Even if you are an experienced financial professional with a sterling reputation and exemplary record of success, mistakes happen and clients can still sue. This type of coverage is especially important for the following types of financial service firms:

• Investment firms that provide advice and services to clients.
• Accounting firms that prepare financial statements or handle tax returns for clients.
• Credit unions providing banking services to members.
• Commercial banks offering loans, mortgages, and other services to customers.
• Financial advisors who provide investment advice to their clients.
• Hedge fund managers handling investments for individual investors.
• Financial planners who advise clients on retirement and estate planning.
• Insurance brokers helping customers select the right policy for their needs.
• Securities brokers who manage investments for clients.
• Mortgage brokers offering loan services to borrowers.
• Retail stockbrokers providing financial advice and services to individual investors and traders.
• Venture capitalists investing in startups and other companies.
• Private equity firms investing in public or private companies.
• Financial consultants providing strategic advice to businesses.
• Tax preparers filing taxes for individuals and businesses.

You may also need Professional Liability insurance if you have a home business or freelance practice that involves financial services. Even if you don't provide direct financial services, you may still need coverage for activities related to advice-giving, such as consulting or marketing.

How Errors and Omissions (E&O) Insurance Works for Financial Institutions

To better understand how Errors and Omissions (E&O) Insurance works for financial institutions, let's delve into a few scenarios.

Negligence

Imagine you're an investment advisor who has recommended a particular stock to a client based on your analysis. Unfortunately, the stock crashes, causing a significant loss to the client. The client decides to sue you, arguing that you were negligent in your research and advice. In this case, E&O Insurance steps in, helping you cover legal defense costs and potential settlements or judgments.

Misrepresentation

Suppose you're a mortgage broker who unintentionally provides inaccurate information about the terms of a loan to a homebuyer. The buyer, relying on your information, signs the loan agreement and later finds out about the discrepancy. They decide to sue for misrepresentation. Here, E&O insurance is crucial as it can help absorb the financial blow of the lawsuit, including attorney fees and any damages awarded.

Failure to Deliver Services

Let's say you're running a fintech company that promises to provide a secure platform for money transactions. Due to a technical glitch, a client's transaction fails, resulting in a substantial financial loss. The client sues your company for failure to deliver promised services. In this scenario, E&O insurance can be a lifesaver, covering the costs associated with the litigation and any financial compensation that might be awarded to the aggrieved party.

These examples highlight how E&O insurance serves as a safety net for financial institutions, shielding them from potentially hefty financial losses arising from professional mistakes or oversights.

Discretionary Advice Is Often Excluded

Discretionary advice is often excluded from professional liability insurance for financial institutions because it involves a high degree of risk and uncertainty. Discretionary advice refers to the situation where a financial adviser makes investment decisions on behalf of a client without obtaining their prior consent or approval. This exposes the adviser and the financial institution to potential claims of negligence, breach of fiduciary duty, or fraud if the investment results are unfavorable or inconsistent with the client's objectives.

For example, if an adviser invests a client's funds in a high-risk venture without informing them of the nature and consequences of the investment, and the venture fails, the client may sue the adviser and the financial institution for losses and damages.

Another example is if an adviser deviates from the client's agreed investment strategy or policy without their knowledge or consent, and the deviation causes harm to the client's portfolio performance or risk profile. In both cases, discretionary advice is likely to be excluded from the professional liability insurance coverage, leaving the adviser and the financial institution liable for any legal costs and compensation.

Other Common Exclusions

While professional liability insurance for financial institutions typically covers errors and omissions, there are other common exclusions. These include:

Intentional Malfeasance: Coverage does not extend to activities considered as insurance fraud, fraudulent, dishonest, or criminal acts. For instance, should a financial advisor engage in illegal activities like embezzlement or theft from a client's account, the insurance policy would not cover any resulting claims.

Physical Harm or Property Damage: Insurance does not cover physical damages or injuries that occur outside the realm of professional services. To illustrate, if a financial planner were to be involved in an automobile accident en route to meeting a client, any injuries or damages incurred would not fall under the purview of this insurance. 

Contractual Liabilities Outside Professional Services: Certain obligations or liabilities stemming from contractual agreements unconnected to professional services are excluded. As an example, if a financial analyst agrees to a late delivery penalty in a contract, this insurance would not cover the said penalty.

Penalties from Regulatory Bodies: The insurance does not cover fines, sanctions, or penalties imposed by regulatory authorities for violations of laws or regulations. For instance, if a financial institution is penalized for non-compliance with anti-money laundering laws, the resultant regulatory action would not be covered by this insurance.

Prior Knowledge: Any claims arising from situations or events that the insured party was aware of before the policy period are not covered. For instance, if a financial advisor knew about a potential claim due to a mistake made in a client's portfolio before obtaining the insurance, the policy would not cover that claim.

Insolvency or Bankruptcy: Claims related to the insolvency or bankruptcy of the insured institution are not covered. If, for example, a bank goes bankrupt and clients lose their deposits, those losses would not be covered by the insurance.

War and Terrorism: Damages or losses resulting from acts of war, terrorism, or similar events are typically not covered. For instance, if a financial institution's operations are disrupted due to a terrorist attack, the associated financial losses would not be covered.

Nuclear and Pollution Risks: Claims arising from nuclear reactions, radiation, or contamination, as well as pollution and related environmental damage, are excluded. For example, if a financial institution owns a property that is found to be contaminated, the costs of cleanup would not be covered.

Claims from Related Parties: Claims made by business partners, shareholders, or employees are usually not covered. This means, for example, if a partner sues the financial institution for a professional error or omission, the insurance would not cover the claim.

These exclusions underscore the importance of thoroughly understanding your professional liability insurance policy and considering additional coverage if necessary.

How Much Does Professional Liability Insurance For Financial Institutions Cost?

There is no one-size-fits-all answer to the cost of professional liability insurance for financial institutions. The premium will depend on factors such as the institution's size, operations, coverage limits, and claims history. 

Generally speaking, premiums for this type of insurance can range from a few hundred dollars per year to several thousand dollars per year. Additionally, some insurers may offer discounts for certain risk management practices or for maintaining a good claims history. To get an accurate estimate of the cost of professional liability insurance, it is best to reach out to an insurance provider and discuss your specific needs.

Get a Professional Liability Insurance Quote for Your Financial Practice

If you're in the financial sector and looking for professional liability insurance, we can help. We work with leading insurers to get you a competitive quote on your coverage. To get started, simply fill out our online form or call us at 1-(888) 412-7630. Our team of experienced agents will provide free guidance and help you find the right coverage to fit your needs. Contact us today and protect your financial practice with professional liability insurance.