Expert: DOL Rule To Force Agents To Consider E&O Coverage

Cyril, most insurance professionals have been required to carry E&O by the carriers they represent for at least a decade or longer. It is a pre-requisite for licensing with most life and annuity carriers, and has been for some time. Further, I ran a Broker/Dealer and a RIA firm for almost 2 decades and know that the vast majority of firms (like ours) mandated E&O coverage as a pre-requisite for doing business. In the litigious society we live in today, going without E&O is not a smart business decision.

The concern is not that E&O will be required, as in most cases it already is. The REAL concern is the cost of E&O going forward for the financial professional – can they afford the premiums. Insurance only professionals can purchase E&O coverage for about $600 a year. For a B/D or RIA Rep, its between $1500 and $2000 a year. Given the increased exposure producers will have under the DOL Rule, the exposure to an E&O carrier will also increase – resulting in a significant rise in premiums.

A secondary concern will be the caveats the E&O carriers place in their policies. For example, if securities fraud is alleged in a lawsuit, many E&O carriers will not cover the claim (as they frequently exclude certain acts like this). So a financial professional may have E&O, but the limitations and restrictions are such that the E&O carrier collects premiums but is able to escape the obligation to pay a claim and defend the financial professional who has been named as a defendant in a lawsuit.

Given the onerous obligations of the BIC Exemption, and the potential for class-action status in litigation, the liability exposure of the financial professional significantly increases, as does the exposure for the E&O carrier As insurance is subject to risk-based pricing, the cost of coverage will naturally increase as does the potential risk being covered. The unintended consequence could be the pricing of E&O policies in a post DOL world could price many insurance professiionals out of the business.