Frequently asked questions about insurance protection for investment advisors

Remember that the annual aggregate limit may be quite high for a broker-dealer policy, but all registered representatives under the broker-dealer policy share it. Markel's investment advisor professional liability aggregate covers only your practice. Take this into consideration when you are comparing limits, premium, and coverage. The greater the number of insureds under the same policy, the greater the risk that the annual aggregate limit can be depleted thus leaving no coverage for any further claims reported during that annual policy period. This is also the reason that group broker-dealer coverage costs less than a limit dedicated to your practice.

If you are dually registered as a registered representative with a FINRA broker-dealer and as a Registered Investment Advisor at the federal/state level, and you conduct investment advisory activities “away from” your registered FINRA firm, obtain your broker-dealer’s approval and confirm the broker dealer’s position on NASD 94-44. NASD 94-44 requires broker-dealers to oversight these “outside RIA” activities. In some cases, the broker dealer E&O program will not cover these outside activities even if they are approved. Check with your compliance officer at your broker-dealer.

Markel is a leading worldwide underwriter of property and casualty reinsurance and specialty insurance with over $2 billion in policyholders’ surplus. For Markel’s rating, visit markel.com.

Some insurers of investment advisors offer coverage only for fee activities. With Markel, your policy can be structured to cover both fee activities and product sales coverage. Read Exclusion 27 carefully since alternative investments are generally not covered. Markel “bundles” coverage for both fee and commission activities in one policy to allow for a wide range of variation in the nature of practices. It is not uncommon for practitioners to gradually move their practice from fees and commissions to fee-only or to ask for coverage tailoring.

Claims-made step factors are increases in premium that are not based on an individual risk characteristic (e.g. revenues, staff). These factors increase the premium in each of the insurance company’s three renewals even if the insuring characteristics have not changed. This can lead to “fully mature” rate which is much higher than the first year’s premium. Markel does not utilize claims-made step factors. We have created a level rate structure to avoid the sharp increases on renewal caused by claims-made step factors. Renewal rating is no different than new business rating. The premium is driven by such factors as number of financial advisors, annual revenues, the limits, and deductible chosen and the type of services rendered.

It is critical to determine if awareness of potential loss (incident) constitutes a claim as defined in the policy. While all policies have the requirement to report incidents that might potentially give rise to a claim, the question is whether the policy language includes incident reports within the definition of claim, thus, triggering coverage under the policy. If there is no incident trigger, a carrier may take the incident report but advise you that there is no coverage under the policy until a written demand for damages is received from the client. This is a critical point since the earlier the carrier can intervene in a potential claim, the greater the likelihood of mitigating the severity of the claim. Markel investment advisors professional liability policy contains a provision that explicitly provides a loss control and investigative expense provision. This allows us to elect to spend our own funds investigating and defending such an incident. This investigation is at the company’s expense, is not subject to the deductible, and does not reduce the applicable limits of liability. Further, once you report an incident, it is considered a claim made and reserves a slot for any future written demand for damages rising from the incident.

Markel's investment advisors professional liability policy is a “right and duty to defend” contract which is the strongest defense provision available. Other defense clauses used in the industry are an “option but not duty to defend” which allows the insurance company to decide whether it will assume/manage your defense and may provide defense on an indemnity basis (you manage and pay for the defense and the insurance company reimburses you). Additionally, when defense is offered it may be portioned based upon whether parts of the claim are considered covered vs. non-covered acts. Markel's investment advisors professional liability coverage is “right and duty to defend,” includes defense on the whole claim, and “pays on behalf of” you in a claim. Our policy contains a consent to settle clause so be sure to ask about this to assure you have the right to consent to settlement before it is finalized.

If you are replacing existing coverage, make sure your retroactive date on your expiring policy is preserved on the replacement policy or you purchase an Extended Reporting Period (tail) from the E&O program you are leaving. You must pursue one of these two options in order to preserve your prior acts coverage. Never let a claims-made policy lapse unless you are no longer practicing or you have replaced coverage.

If your policy is cancelled or nonrenewed by your insurance company, does it contain language which gives you a contractual right (written into the policy language), which cannot be denied by the company, to purchase an extended reporting period endorsement (tail) of at least one year’s duration? Some carriers will give you a contractual right to an extended reporting period endorsement, but this period is only for 90 or 180 days after coverage termination or it may apply only if you are retiring or are disabled. Markel's investment advisor professional liability policy provides a contractual right to an extended reporting period endorsement of one year if we cancel (except for non-payment) or nonrenew your policy.

Ask if there are any affinity discounts for association members of groups like FPA, NAPFA, and others. Markel offers a multiple advisor discount if the aggregate limit is shared by more than one advisor. We also offer a fee-only discount to practices which do not engage in product sales.

Markel's investment advisors professional liability policy is portable regardless of changes in your brokerdealer or life company affiliations. Under a broker-dealer policy or a life company policy, you may lose all coverage once you change your affiliations. Your broker-dealer could also lose its insurance or change carriers. If you have your own policy, you retain control of your insurance. If you maintain your own insurance, in the event of a covered claim, you will have your own defense counsel separate and apart from the defense counsel for the broker-dealer. Under the claims-made policy form, you will maintain your original “retroactive date” (date on which you first obtained claims-made coverage) as long as continuous coverage is maintained in effect without lapse. This will preserve coverage for your prior acts back to the original retroactive date. Consider the importance of portability and the preservation of your prior acts coverage. When insurance is controlled by someone else acting on your behalf, or by the claims experience of other practitioners, the result may be the loss of your coverage.