Errors and omissions (E&O) insurance is designed to protect you from liability claims related to the advice you offer your clients. While the Securities and Exchange Commission (SEC) does not require registered investment advisors to have E&O insurance, some states do. If you’re required to have coverage, or you simply want to protect your business, it’s helpful to understand the cost of E&O insurance.
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Average Cost of E&O Insurance for Financial Advisors
Registered investment advisors (RIAs) and financial planners pay a median of less than $220 per month, or $2,610 annually, for E&O insurance, according to data from Insureon.
This amount reflects a coverage limit of $1 million, with a policy deductible of $5,000. For perspective, small business owners pay $61 per month, or $735 annually, for E&O insurance on average.
How does the cost of E&O insurance compare to other types of insurance policies for financial advisors? According to Insureon, here’s what advisors pay on average for other coverage options:
- $35 per month/$240 per year for general liability insurance
- $105 per month/$1,260 per year for cybersecurity insurance
- $40 per month/$540 per year for workers’ compensation insurance
- $88 per month/$1,055 per year for fidelity bonds
As you can see, E&O insurance tends to be the most expensive coverage option for RIAs and financial planners. However, you might see the monthly or annual premiums as a wise investment if you consider what this type of coverage is designed to do for you.
Understanding E&O Insurance for Advisors
Errors and omissions insurance protects you against legal claims brought by clients who are dissatisfied or unhappy with your work. This type of policy covers claims associated with:
- Negligence
- Professional mistakes
- Failure to render services as required
If a client sues you for these types of claims, your E&O policy can help cover your lawsuit defense costs, as well as any financial judgments entered against you.
Having this type of policy in place can offer reassurance and peace of mind should you run into a negligence claim or another lawsuit brought by a client. Note, however, that an E&O policy only applies to your professional performance; it won’t shield you against other types of liability claims.
What Affects the Cost of E&O Insurance?
Numerous factors can affect how much you’ll pay for E&O insurance if you want or need to cover your advisory firm. The most important considerations for assessing how much you’ll pay for coverage include:
- Occurrence limits
- Aggregate limits
- Deductibles
Your occurrence limit is how much the policy will pay for a single occurrence or claim. The aggregate limit is how much the insurance company will pay over the life of the policy. Your deductible is the amount you’re required to pay when filing a claim before the insurance company will pay anything.
For example, you might choose a policy with a $1 million occurrence limit and a $5 million aggregate limit. Your deductible may be anywhere from $2,500 to $5,000.
How to Choose an E&O Insurance Policy
Getting multiple quotes can give you a better idea of what your firm would have to pay for E&O insurance. As you compare policies from different carriers, remember to consider:
- Occurrence and aggregate coverage limits
- Deductible options
- Policy discounts and benefits
- Exclusions
That last point is important, because you don’t want to purchase a policy expecting it to cover you for something, only to find out later that it doesn’t. Some of the most common exclusions for E&O coverage include:
- Negligence caused by intentionally dishonest or criminal acts, including fraud
- Damages or losses stemming from data breaches
- Bodily injury and property damage losses
- Losses stemming from ancillary services
Employment claims, including workplace harassment, discrimination or unlawful termination, would also be excluded, as would workplace injuries. These types of claims would be covered by other policies.
In terms of how much coverage you need, it can depend on several things, including:
- Your firm’s size and assets under management (AUM)
- The scope of services you offer and the types of clients you work with
- Your professional expertise and experience
- Geographic location
- Number of employees
Your firm’s risk profile can also play a part. If you have a judgment on your record from a previous lawsuit, for instance, that could result in a higher premium if the insurance company views you as a higher risk.
Frequently Asked Questions (FAQs)
What Kind of Insurance Do Financial Advisors Need?
Financial advisors can benefit from having several types of insurance policies, including general liability insurance, E&O insurance, workers’ compensation insurance, cyber insurance and commercial property insurance. These policies can work together to protect your firm against financial losses.
How Much Does RIA E&O insurance Cost?
Errors and omissions insurance for RIAs can have a median cost of $2,600 per year, according to Insureon. However, your actual costs may be higher depending on the scope of services you offer, the size of your firm and your geographic location.
How Much Should an E&O Policy Cost?
What you pay for an errors and omissions policy as a financial advisor should reflect the level of coverage you need and the deductible amount that your firm could comfortably pay should a client bring a claim against you. Reviewing your policy needs and budget can help you estimate an appropriate amount to pay for coverage.
Is E&O Insurance Worth It for Financial Advisors?
Errors and omissions insurance can be a worthwhile investment for financial advisors who are concerned about being sued by a client. These policies are designed to protect your business should you be on the receiving end of a lawsuit relating to negligence or professional inadequacy.
Bottom Line
The best way to assess the cost of E&O insurance for your financial advisor business may be talking to an experienced insurance agent who’s knowledgeable about this kind of coverage. Comparing different coverage levels, deductibles and premiums can help you find the right policy to fit your firm’s needs.
Tips for Growing Your Advisory Business
- Marketing your business can be challenging, as it takes time to find the right strategies and channels to promote your firm. If you’re looking for a way to simplify your efforts, partnering with an advisor marketing platform could make sense. With SmartAsset AMP, you can build a list of leads and use automation tools to nurture relationships with prospects. Schedule a free demo to learn how you could leverage this marketing tool for your business.
- Doing pro bono work is an opportunity to help people in need of financial advice while potentially making connections with wealthy philanthropists. As an added benefit, many volunteer organizations offer complimentary E&O insurance coverage to advisors who donate their time.
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