401(k) Specialist Issue 4 - 2021 - 36

401(k) FIDUCIARY
Coverage for an IAR's Business Entity. Many
Investment Advisor Representatives (IAR),
who are insured under a master RIA policy,
have their own agencies or corporations.
Not all E&O insurance policies extend coverage
to these entities. In order to confirm
whether or not an IAR's business entity
is insured under the master E&O policy,
it is necessary to confirm who or what is
a Named Insured under the policy. If the
IAR is an insured under a master policy
issued to a broker-dealer or RIA, and that
IAR owns or controls a corporation, partnership
or other business entity, most, but
not all, insurance carriers will extend coverage
to that business entity, provided that the
liability of the business entity arises out of
the Professional Services of the IAR insured
under the E&O policy. Again, get written
confirmation from the insurance carrier
about its intention to extend coverage to
the business entities of insured IARs.
Coverage for " Social Engineering " Claims.
We have all heard about that unfortunate
advisor who receives an email from a client,
who happens to be out of the country,
requesting a transfer of funds from their account.
The funds are transferred, according
to the instructions, only to learn that someone
hacked into the client's email server.
No worries, one of the policies in force will
cover this loss. Right? Wrong!
Many of these " social engineering " claims
were picked up under the RIA Professional
Liability policy, before the insurance carriers
began adding specific exclusions under their
policies for these types of losses. If an RIA
had a cyber security policy, many of these
policies did not cover social engineering
claims as it was the client's server that had
been breached, not the RIA's.
Depending on the breadth of coverage
under a fidelity or crime policy, some coverage
may be available to the RIA for this
type of loss. Coverage for a social engineering
loss can be negotiated into either an
E&O policy or a cybersecurity policy, and
preferably both. Carriers that have agreed
to extend coverage for social engineering
losses will typically do so subject to a
sub-limit of liability. The same is true under
a cybersecurity policy.
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ISSUE 4 2021 | 401kSpecialist.com
Coverage for Multi-Employer 401(k) Plans.
Great news, the SECURE Act of 2019
introduced entirely new retirement plan
fiduciary structures called pooled employer
plans, multiple employer plans and group of
plans. An analysis of the new plan structures
indicate that although the regulations are
narrower than industry members had hoped,
the new plans could still support growth
for advisors' businesses by allowing the
aggregation of new and existing clients in
the same geographic area into one common
401(k) plan.
Most carriers
will not offer
choice of
counsel to their
insureds, so
ask which law
firms are on the
panel counsel
list. Your broker
should be
familiar with the
firms that the
carrier retains.
Many RIA Professional Liability insurance
policies contain exclusions for claims
arising out of Multiple Employer Welfare
arrangements. This type of an exclusion may
operate to exclude claims arising out of the
multi-employer 401(k) plans the advisor
creates for the small-business clients. It is
critical to confirm whether your Professional
Liability policy contains this exclusion
and efforts should be made to carve-back
coverage for these 401(k) plans.
Cyber Security Insurance. You do have
cyber security insurance, right? No RIA
should be operating these days without this
essential insurance. The SEC, Department of
Labor and individual state insurance departments
are very focused on cyber security
protocols and whether a firm has insurance
for this very real vulnerability.
Choosing the Right Policy
If you have a few options for coverage,
don't assume that all of the policies are the
same and that the least expensive will satisfy
your needs. Your broker should carefully
perform a side-by-side comparison with
all of your policy options. Your choice will
depend on the scope of coverage offered
under each policy, the limit of liability and
retention options offered and the price.
Only you will know what would work best
for your firm.
You must also consider the reputation of
the carriers for claims handling. Once the
underwriter has written and issued your
E&O policy, you typically will have little
contact with the carrier unless you have a
claim. Are the claims handled internally or
by a third-party administrator? Most carriers
will not offer choice of counsel to their
insureds, so ask which law firms are on the
panel counsel list. Your broker should be familiar
with the firms that the carrier retains.
The above is not an exhaustive list of the
terms, conditions, or provisions you need
to be aware of when you are considering
an E&O policy. You must read your policy
in its entirety and follow up with your
insurance broker if you have any questions,
concerns or confusion about the policy language.
Although ambiguity in an insurance
policy is typically held against the insurance
company, you want to purchase an E&O
policy that is as free of ambiguity as possible.
If any portion of the policy requires
clarification or a declaration of the carrier's
intent, get it in writing.
Lilian Morvay, JD, is the founder and CEO of Independent
Broker Dealer Consortium and Registered
Investment Advisor Consortium, a legal, insurance,
compliance, regulatory and cyber security consulting
network organization dedicated to Independent
RIAs and BDs. She has over 30 years of legal
and insurance experience, is a licensed insurance
broker and has held an annual risk management
conference for Independent BDs and RIAs for the
past 12 years.
http://www.401kSpecialist.com
401(k) Specialist Issue 4 - 2021

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