RIA E&O Quick Hits: Defense Provisions

You’ve likely heard it from us before: “RIA E&O is the Wild West.” Underwriters put forth different provisions on how they define their “Right” or their “Duty” to provide defense to the insured. Like most types of liability insurance, most costs are incurred greatly from attorney fees. Hence, it’s equally important for both a broker and buyer to understand your risk profile and the provision that’s most suitable. Keep in mind there are perks and drawbacks to both provisions.

Provision 1: Duty of Insured (Right Only)

This provision is thought to be the lower standard of the two. Most carriers state it is the duty of the insured to defend itself. As daunting as this can sound there is a positive to Right Only. The carrier is taking a “hands-off” approach which can allow the RIA more freedom during the selection of defense counsel and handling of the claim.

The disadvantage is the insurer could deny defense costs for any uncovered allegations. This is also true if there is a grey area of whether coverage should or should not be afforded.

Provision 2: Duty to Defend (Right & Duty)

Carriers who provide Duty to Defend, either in their base form or by endorsement, are held to a higher defense standard. The ability for carriers to deny certain defense costs towards uncovered allegations depletes.

It becomes the duty of the insurer to incur defense costs on behalf of the insured. Therefore, an insured may be limited in how they put together a legal team. As a buyer, you want to make sure your broker is well-versed in this process and understands if counsel is pre-selected by an insurer on your behalf to represent you. The good news? Most carriers do and are inclined to use high-caliber securities litigation defense.

Conclusion:

There are two provisions underwriters use regarding defense standards: Duty of Insured and Duty to Defend.

The variance of terms and conditions continues to prove why RIA E&O is the Wild West of Insurance. Therefore, it’s imperative that an Investment Advisor has the proper provisions crafted for their specific risk profile.

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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