And, with some advisors’ clients ‘at the edge,’ that raises a red flag for errors and omissions (E&O) claims against investment advisors.
That warning came from Thomas Wilson, a senior claims specialist with AXIS Capital, during an E&O session at the Independent Financial Brokers of Canada’s (IFB) spring summit. His firm is the E&O insurer for IFB members.
Wilson said an example of a client ‘at the edge’ is one who can no longer afford to hold an investment or pay their insurance premiums.
“Then the claim will come against you [the advisor] to say it was unsuitable,” he said. “Those are hard to defend, and they’re very frequent claims.”
Market volatility, he added, is increasing both the severity and frequency of claims.
“We know that clients…get very agitated, and frustrated and scared — emotional — when they see the markets going up and down, and they’ll look to the person who put them in a product to see if they can make it right.”
Given current market turbulence, this is one claims trend that advisors can expect to continue, he said.
E&O providers should also watch for claims involving incomplete documentation in files where the investment advisor and client have been working together for several years.
Wilson noted the rapport that develops between advisor and client can “run so smoothly for so long” that people become less diligent about taking notes or filling in forms.
That lack of documentation or departure from your standard practice is “a real exposure risk in any potential lawsuit,” he said.
Wilson also told the life insurance advisors to be prepared for claims, because they’re bound to come. Even meritless claims can arise, he said, and a lifeco may offer money to settle a low-merit claim to avoid risks like potential court costs.
The most common claims with life insurance involve misrepresentation and policy lapses.
With the first, “There’s only risk to the advisor if the insurance company wouldn’t have written the policy if [it] had the correct information,” Wilson said. The advisor would have to be proved negligent in providing that information.
With a policy lapse, one example is a case in which a policy was sold decades ago, and the beneficiary spouse received no payout because the policy had lapsed due to non-payment of premiums. In those cases, a spouse may allege they didn’t receive notice of the policy lapse, didn’t receive copies of the policy, or other things.
“It’s the kitchen [sink] of allegations,” Wilson said. “The claimant is suing the advisor for the full death benefit for a whole host of allegations,” to see which one sticks.
Further, abide by the ubiquitous advice to keep notes and documents. In another E&O case Wilson described, the client had meeting notes and the advisor didn’t.
“We were in a very difficult position for that claim,” which was ultimately settled, he said.
This article is excerpted from on that appeared on our companion website Advisor.ca. Read the full version here. Feature image by iStock.com/bunhill