Matt Farley, of counsel to the New York office, was quoted in Reuters on the risks for financial advisory firms that purchase cheaper, less comprehensive professional liability insurance.
While coverage limits and exceptions can be daunting to decipher and steep premiums may tempt some firms to buy cheaper policies, a recent federal court ruling illustrates what could go wrong if a firm fails to line up proper coverage.
The U.S. District Court for the Eastern District of New York found that the policy of David Lerner Associates, a New York-based brokerage, did not cover claims stemming from performance of "professional services." The court said the insurer had no obligation to pay for the firm's legal defense in a class action lawsuit and separate regulatory action that led to a $12 million settlement to customers who bought into a $2 billion real estate investment trust. It is not clear whether Lerner misunderstood its policy or it was simply trying to save money.
While securities industry rules require brokerages to buy a fidelity bond (insurance that protects customer assets in limited circumstances), such a bond will not cover legal expenses for regulatory actions or rulings to pay customers in arbitration and court cases.
That is when a type of policy known as errors and omissions coverage, or professional liability insurance is useful. Matt emphasized, however, that "No one is going to insure you for your own deliberate conduct," referring to brokerages that commit fraud or illegal acts.
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