RIA Insurance Contract Issues and Claim Examples

With the recent decrease in asset prices and market volatility, RIAs have experienced a meaningful increase in claim activity over the past month. We felt it timely to share both a number of claim examples (three of which are trade errors) and E&O contract issues/exclusions which exist in the E&O marketplace and could result in denial of coverage from insurance carriers. We hope this brings insight and value to your firm in these uncertain times.

Below are some RIA Insurance Contract Issues and Claim Examples we have encountered while serving the RIA community and employing our RIASURE™ Process of understanding RIA firm’s exposures and analyzing their in-force insurance contracts. We hope that the awareness of these enables you to better protect your firm.

Insurance Contract Issues revealed through our RIASURE™ Process:

1. $5.9B RIA Firm – Private Placements Exclusion
During this firm’s RIASURE™ bio discovery phase, it was revealed that 15% of total AUM was devoted to private placements. Yet, the E&O insurance contract review phase uncovered a “Broad Private Fund Exclusion” which fully excluded any claims brought by clients concerning the roughly $885MM of AUM. Upon the firms’ engagement of Golsan Scruggs, we negotiated the removal of this exclusion and reduced the premium/rate by bringing greater clarity and understanding of the private placement exposure to the respective underwriter.

2. $1.2B RIA Firm – Prior Acts Exclusion
During the RIASURE™ contract review phase, we discovered that a “Full Prior Acts Exclusion” (amendment) had been added by the respective underwriter to their base contract via endorsement at renewal three years prior. The firm had increased their liability limits at that time as well. Yet instead of issuing the proper “Prior & Pending” language concerning the increased limit of insurance, the underwriter had fully removed 15+ years of prior acts coverage! Upon the firm’s engagement of Golsan Scruggs, the underwriter removed the Prior Acts Exclusion for no additional premium.

3. $3.8B RIA Firm – Inadequate Trade Error Coverage
During this firm’s RIASURE™ bio discovery phase, it was found that this firm regularly conducted large block trades across client accounts. It was identified during the insurance contract review that the limit concerning Trade Errors (aka cost-of-corrections) was quite low in comparison to the exposure. Upon the firm’s engagement of Golsan Scruggs, greater understanding of the strong controls employed by the firm regarding trading was given to the underwriters. The Trade Errors limit was increased by five times to adequately insure the exposure while reducing the firm’s premium by 5%.

4. $200MM RIA Firm – Trade Error and Specific Security Exclusions
This RIA firm employed a proprietary investment selection approach selecting and trading in individual public securities. Upon review of their current insurance contract we uncovered that (1) claims in any way relating to Trade Error were excluded, and (2) that any security that had been the subject of a class action lawsuit involving its securities was also excluded. Upon the firm’s engagement of Golsan Scruggs, we found an alternative underwriter that remedied these concerns.

5. $1.5B RIA Firm – Pension Consulting Limited Terminology
This firm provided ERISA Pension Consulting. Upon review, the RIAs current insurance contract was lacking proper Defense and Settlement conditions and contained narrow language concerning Pension Consulting activity. There was also a general sense that the current carrier did not understand the firm’s exposure. Upon engagement of Golsan Scruggs, we identified and shored up these contract issues while reducing the insured premium by 23%.

GS Client Claim Examples that have impacted the RIA community:

1. $1.3B RIA Firm – $3M+ Trade Error
Our insured RIA client conducted a major rebalance of one of their investment models across all clients invested in the model. The trade was erroneously entered into the system such that all cash from these client accounts was placed into the new model allocation rather than just the intended non-cash amount be employed in the model. The market turned sharply down by the time the insured discovered the issue. Their E&O policy paid the $3,000,000 limit under the cost of corrections provision and the insured paid an undisclosed additional amount to make their clients whole.

2. $225M RIA Firm – $300k Wire Fraud
Our insured RIA firm received a signed third-party wire request form from a client email account for a down payment on a new home. The advisor knew that the client was in fact purchasing a home and had talked with the client recently about this transaction. The client’s email had been hacked by a bad actor and the bad actor also sent an email posing as the title company with their own banking instructions to the advisor. The advisor initiated the nearly $300k wire with the custodian and the funds were transferred to the fraudster never to be recovered. The RIA did not have a crime policy with wire fraud coverage in place and was left to make the client whole on their own.

3. $450MM RIA Firm – $700k Failure to Execute
Our insured RIA firm announced via written correspondence to clients within a particular investment model that they were pivoting a bit to underweight one sector and overweight another by selling and purchasing specific funds. Two plus months went by and it was discovered that the trades were never actually placed. The resulting difference was a loss of $700k+ across the affected client base. The E&O carrier paid the entire claim subject to the deductible.

4. $250MM RIA Firm – $180k Trade Error/Breach of Fiduciary Duty
Our insured client’s Advisory staff failed to properly modify trade instruction software. The firm incorrectly included all firm accounts within a block trade in leveraged funds. However, three specific clients had given special communication and instructions for their cash balances in all accounts to remain as cash. The market moved rapidly down (exponentially so due to a leveraged investment product) resulting in losses to the three clients. The Clients brought suits against the adviser for breach of contract and failure to supervise.

5. $350MM RIA Firm – $85k Breach of Fiduciary Duty/Unsuitability (Defense Expenses Only)
One of our insured client’s Investment Adviser Representative (IAR) presented an opportunity to a client to purchase pre-IPO shares of a social media company which were held within a private partnership. After significant share price decline upon the IPO resulting in a mid-six figure loss. The claimant alleged that the IAR invested funds in the private partnership without final approval of the claimant. The claimant did sign forms to move forward with the investment but alleged that they were rushed through the process and did not receive complete explanation. The claimant alleged the IAR promised to call to further explain yet did not call and purchased the investment regardless. The claimant also alleged that the investment was unsuitable due to his limited understanding of investments and his modest net worth. The written demand requested the client be made whole by the advisory firm. Due to the shares significantly recovering in the weeks that followed, the claimant’s financial position improved, and the claim was withdrawn.

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.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our RIASURE process exists to serve that purpose.

Our RIASURE Review will analyze your fiduciary exposures, provide rate details and comparisons, and provide a contract comparison. No application required.

To obtain your complimentary RIASURE Review, please provide the following information or contact us at (800)273-5883. Fields marked with * are required.