Asset Manager E&O Quick Hits: How About We (Not) Settle This?

Few people enjoy receiving an ultimatum, and even fewer relish the role of giving one. Insurance is often fraught with ultimatums. A crucial aspect that an Advisor or Fund Manager should frequently consider when comparing Errors and Omissions (E&O) insurance are the contracts regarding settlement and the wide-ranging implications of these conditions.

Why Is This Important?

According to FINRA, the average number of customer disputes between 2007-2023 is a staggering 4,064 per year. This figure only includes cases filed against Registered Representatives, not those who are solely registered as Investment Advisor Representatives (IAR). Therefore, the FINRA statistic is only a partial representation of, understandably, a much greater industry actuality. In this same FINRA data pool, nearly 70% of these cases, between 2020-2023, were resolved through settlements made by direct parties or in mediation; only 8.75% of cases were withdrawn. This indicates a client or limited partner can attempt to litigate and may allege non-related or baseless arguments against an Advisor or General Partner.  If nearly 75% of complaints are resolved by settlement, it is crucial to ensure your insurance broker clearly understands these implications from a contractual standpoint and can guide you through the claims process.

Listed below are the different contractual provisions the underwriting community uses with respect to settlement.

1) Consent of Both Parties

This provision, though not widely adopted by insurers, is considered the gold standard. It grants the insured full authority to accept or refuse a settlement. An insurer may recommend but cannot force an insured to agree to a settlement.

2) Not Unreasonably Withheld

This common language is broad in nature. It allows an insurer to not unreasonably withhold settlement from an insured or force an insured to settle. Based on our 25+ years of experience insuring investment companies, we find this language acceptable, though insured parties should be fully aware of their contract language.

3) Soft Hammer

Under this provision, should settlement be rejected by an insured, the insurer and insured are subject to splitting the legal fees, commonly seen as a 70/30 or 80/20 split.  This arrangement is best avoided if possible.

4) Hard Hammer (No Excess Beyond Consent)

This is an ultimatum, or perhaps a gamble. The insurer may recommend that the insured settle or agree to a settlement proposal. If the insured decides against the recommendation, the insurer may only pay up to the amount the insured could have settled for. All legal fees and any potential award in excess of the original amount are then self-retained by the insured.

Since uniformity in the Asset Management Liability Insurance space is non-existent and particularly fluid, settlement provisions within the policy contract are critical and can have a material impact if not structured properly by your representative insurance advisor.

For more detailed statistics and insights, refer to FINRA’s dispute resolution statistics.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

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