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October 22, 2014 at 07:00 AM
Have you ever forgotten to renew your errors and omissions (E&O) insurance? Or maybe money was tight, and you had to do without coverage for a while? Guess what . . . you created a ticking time bomb: an E&O coverage lapse.
If you have an E&O policy, you already know what it does. It protects you in the event an error or omission on your part triggers what could become costly accusations from clients (or their attorneys). It also helps with settlements and court costs, saving you time and money. But here’s what you might not know: Even lapsing your policy for as little as a day can leave you open to a financially devastating lawsuit, even though you currently have E&O insurance.
Here’s the problem. Most E&O insurance policies are written on a “claims made and reported” basis. They cover claims from past deeds that surface and are “reported” during the current policy period. This means your most current insurer is responsible for any and all damages, both past and present.
But here’s the twist. Even if you switch carriers, as long as you maintain continuous coverage (i.e., with no lapses), your most current insurer must cover any claims that surface, even if the original event happened when you were insured elsewhere. But watch out. If there’s a lapse in coverage, then no insurer is responsible for claims that arose before and during the lapse. Result: you will be completely uninsured for past acts, which can destroy your business should you get sued down the road.
A hypothetical case in point: Bob Jameson is a highly experienced retirement advisor. He’s proud of doing everything “by the book,” including keeping his E&O policy in force for 10 years. But in his 11th year, he moved offices and forgot to renew his policy. By the time he resurfaced, six months went by. “No problem,” he says to himself. He asks the insurer to reinstate him, which the company does. Problem solved, right? Wrong.
A year later, Bob receives a letter from an attorney representing a former client. Apparently, the client is very unhappy with a product Bob sold her eight years ago, which recently declined sharply in value. She is now alleging Bob misled her and is suing him for $250,000, her full capital loss.
“Good thing I got her to sign my proposal and suitability form,” Bob tells himself. “I’ll just report this to my E&O carrier and let them handle it.”
