We all make them. Sometimes we just try to get too much done, too fast. Other times, we hire an inexperienced assistant who drops the ball. And in some cases, unethical advisors intentionally make them to gain a competitive advantage or to save money (not good).

I’m talking about mistakes, of course . . . or in the lingo of our industry, errors and omissions. Mistakes are common because, frankly, we are human. The problem is, today’s economy doesn’t forgive human error. Investors who have lost trillions of net worth understandably find it hard to overlook a mistake that costs them even more money.

For this reason, I’d like to urge you to put E&O insurance at the top of your 09 agenda. If you haven’t purchased high-quality coverage yet, do it soon. And if you already have a policy, take steps to prevent claims now.

Now, you may ask, “Do I really need E&O coverage?” For most advisors, the answer is an unqualified “yes.” Either their state requires it or the companies they write for demand it. But even if they aren’t required to have E&O, many advisors still buy it since they can’t afford to wage or lose a civil lawsuit. According to CNA Insurance, a major provider of E&O for financial professionals, the average 2007 E&O claim in one of their health insurance-focused programs was just over $20,000. This reflects legal fees and indemnity payments, but typically not litigation costs, since health claims are often settled. The average life or annuity-related claim is substantially higher, according to CNA.

But let’s say you win your case. Winning can be the same as losing after you pay legal fees. If you are ill equipped to absorb $20,000 to settle a claim or $20,000 to $100,000 to fight it, you clearly need E&O insurance.

Shopping for the right coverage is the obvious next step. I can’t do this topic justice in this column. But here are a few thoughts.

First, leverage your relationships with carriers, FMOs, and trade associations. Many of these entities provide E&O protection that can do the job. I say “can” because you want to make sure they are dealing with a financially sound, highly experienced E&O underwriter. You want to do business with an insurer that knows the ins and outs of E&O for financial professionals, that is adept at pricing risk, that has the resources to pay claims in good times and bad, and that isn’t on the brink of insolvency due to bad investments on their balance sheet.

Second, comparison shop. Prices can vary based on whether the policy is individually underwritten or group underwritten. Plus, in one instance, a carrier has been able to lower its premiums to recognize the unique low-risk status of an association’s group of agents.

Third, be sure to read the policy’s fine print. Make sure it covers your specific activities. For example, if you are an investment advisor representative (IAR), then a standard life/health agent policy won’t do. In addition, know the specific limits of liability for each claim, for your annual aggregate, and for the total aggregate covering all advisors in the program.

Two specific features to watch for: retroactive date and extended reporting period. You want the retroactive date to provide coverage back to the date of your first continuous period of E&O. You also want to be covered for errors and omissions committed while you were working even after you retire, change careers, become disabled, or die.

Once you purchase E&O insurance, try to reduce the odds of filing a claim. Here’s how:

1. Scrub your sales process until it shines. Practice full disclosure and pay special attention to your solicitation materials. A substantial percentage of E&O claims relate to product misrepresentation, so just don’t do it.

2. Make sure your business practices are top-shelf. Another major source of E&O claims is negligence. To avoid negligence, remember to document your operations in writing and make sure your staff knows how to follow procedures. Also make full use of checklists and calendars to assure timely completion of tasks.

3. Really listen to your clients. Make sure you know their concerns. If they are unhappy with you, find out why and resolve their complaints promptly.

4. Leave a paper trail. This is crucial. Always document the outcomes of key client conversations, decisions made, and coverages declined. If more agents did a better job here, E&O claims would be far less common.

5. Stay in your area of expertise. Only recommend products you understand and are fully licensed to sell. If you refer clients to other providers, make sure you can vouch for their competence and integrity.

Finally, reaffirm your commitment to ethics. This is crucial today because the public’s trust in financial products, institutions, and markets is so weak. If your clients honestly feel that you are a person of integrity . . . that you won’t knowingly steer them wrong . . . and that if you make a mistake, you’ll make good, they will be less likely to sue you.

Bottom line: nothing is 100% in life. But if you watch your ethics, buy E&O insurance, and E&O proof your business, you should be fine in 09.

Jeffrey S. Kopitz is president of the National Ethics Bureau (NEB), a membership organization of background-checked financial professionals. NEB promotes ethics to advisors nationwide. For more information visit www.ethicscheck.com and www.eoforless.com.

Reprinted from Life Insurance Selling

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