Other Areas of Practice

Part 9:  The Investment Advisors Guide to Errors & Omissions Insurance

  By Gary Sutherland, CIC, MLIS

Not every application that we look at neatly fits into one type of insurance criteria or policy. Sometimes applicants have other types of business ventures that co-exist with their main business activities.

Some polices allow for flexibility in the description of professional services, or they can be modified with manuscript endorsements to fit the particular need. This is generally done when the other professional services are similar in nature to the core business activities.

On occasion an insurance carrier will recognize services that are ancillary to the core business, and they will provide standard endorsements to create a solution for the other professional services.

Some standard business endorsements for investment advisors include:

– Mortgage broker
– Tax advice or return preparation
– Escrow agent
– Business consultant or advisor
– Divorce consultant or advisor
– Legal advisor

The difficultly lies when the other professional services are not similar and are outside the scope or breath of the advisor policy. Some examples that fall into this category include:

– Real estate agent
– Property and casualty agent
– Business broker
– Private banker

There also are professional service areas where it may depend on the nature of the specific services being rendered. Lawyers and CPAs can secure coverage under an investment professional’s policy provided that the services rendered are incidental as compared to their investment practice. Some areas of practice that may be included are the following:

– Wills and estate planning
– Trust documents
– Court appointed receiverships
– Tax returns
– Tax advice related to investments
– Structuring of ERISA plans
– Employee benefits
– Consulting within the investment arena
– ERISA Consulting

When the underwriter reviews the application, a key ingredient allowing for the inclusion of coverage for outside activities requires it that it meets the incidental component test in relationship to the core business services.

From the applicant’s perspective there can be pros and cons to providing coverage on one policy form. The applicant must conduct careful analysis weighing the strategic value of combing coverage and selecting the best fit to avoid coverage gaps.

We recommend considering all of the following when making this assessment.

– Ownership: this can be complicated if different owners are involved in the ancillary

– Limits and retention: a separate policy for the ancillary business may offer better terms than combining coverage with the core business policy. Limitations of coverage may exclude or significantly limit some professional services that are offered. Additionally, applicants run the risk of eroded limits if a claim hits from the ancillary service and reduces, or exhausts, the limits available for the core busines.

Claims: a paid claim may impact the premium or coverage availability (non-renewal issues) for the core business if a paid claim is made on the ancillary services.

Distinction of Professional Services: one of the biggest challenges to purchasing two separate polices is the ability to separate which “hat you were wearing” when providing professional services. If the claim does not clearly delineate core business services from any other professional services then you may have a fight between insurance companies.*

* Whenever possible we often recommend purchasing both polices from the same insurance company to avoid finger pointing.

Conclusion

Never make a coverage determination for an ancillary business service under an existing policy based on premium. Understanding the coverage limitations and/or enhancements of a stand-alone policy, and the impact on your core business should be the driver.

Our recommendations include:

1. Review the available policy endorsements to add coverage for ancillary services. Obtain a premium quote for a stand-alone policy. Weigh the coverage issues in conjunction with premium costs to make an educated decision.

2. Whenever possible utilize the same carrier if purchasing multiple policies for ancillary services. This potentially minimizes conflict between carriers when there is an overlap in services.

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Contact us for additional information:

Gary Sutherland, MLIS, CIC    Garys@mcgowanprofessional.com    508-656-1350