On episode 70 of the CCO Buzz, we interview Jessica Thayer of Starkweather and Shepley Insurance Brokerage to learn more about the specifics of insurance coverage for investment advisers.
CCO Buzz: Hello and welcome back to the CCO Buzz! On this episode, we are joined by Jessica Thayer, Sr. Vice President and Practice Leader of Starkweather Financial Institutions Risk Solutions with Starkweather and Shepley.
Jessica, we’re so happy to have you here with us today! To start things off, why don’t you tell us a little bit about Starkweather and Shepley?
Jessica Thayer: Yeah, thank you for having me! Starkweather and Shepley is a firm based out of New Providence, Rhode Island. We are a 140-year-old firm and we have many different divisions within Starkweather and Shepley, but the division I fall under, as you introduced me as, is the Financial Institution, Risk Solutions Practice Leader. So we specialize specifically in financial institutions, including investment advisers, hedge funds, mutual funds, broker-dealers, banks, and private equity firms. And then within that we work with all the various insurance coverages and risk transfer products that that particular sector would need help with.
CCO Buzz: So what insurance coverage do you think advisors should consider?
Jessica: The big-ticket item, so to speak, or the one where we see claims (and when we do see the claims, they can be quite costly) is on the errors and omissions side. Also known as E&O coverage. So E&O coverage covers essentially all of the professional services that advisors are providing to their customers or clients. It’s quite broad as to the coverage it’s providing, what it doesn’t cover is illegal acts or fraudulent acts, which is against civil policy to cover.
And then, in addition to E&O coverage, there’s what we call directors and officers (D&O) liability. That can be a bolt-on to the errors and omissions coverage, it can be all under one policy form. And that covers anyone in a management position, so director, officer, [or] trustee. And that covers you for any acts that occur while managing the firm. So failure to supervise, or anything along those lines would all be covered under what we call the directors and officers liability.
There are a host of different coverages, I’m just going to talk about the top ones that we see and where we see most of the claims come in. The third one is cybersecurity. That is coverage that comes into play in the event of a data breech, or any sort of internet related risk. It covers notification costs, credit monitoring, public relations expenses, cyberextortion, as well as ransomware attacks. That coverage is constantly evolving so you always want to make sure you have the latest and greatest coverage, but that’s definitely a concern for a lot of investment advisors as well.
The D&O, the E&O and the cyber are really the big three.
CCO Buzz: And how do underwriters typically price E&O policies?
Jessica: You can get a good taste of what the underwriters are using for their risk factors when you look at the applications because they’re rating based on how you respond to those questions. But the application, and what the underwriters really hone-in on are your policies and procedures, whether you have a good compliance program, the type of investments that you’re working with, the type of clients you’re working with, and then obviously your loss history. If you have had claims, that can elevate the premium or the deductible levels that an underwriter is willing to offer. But it’s really a number of different factors, with your size and your loss history really being two of the biggest factors.
CCO Buzz: What are some common Errors and Omissions claims that you see?
Jessica: Errors and Omissions claims really can run the gamut, but our most common are allegations of breach of fiduciary duty, suitability claims, so claims where a client is alleging that the adviser failed to comply with an investment management agreement or investment policy statement. Another big area is investigations by the SEC. And that can trigger either the D&O or the E&O sections of the policy. You want to make sure you have the broadest definition of claim, because the definition of claim really indicates when the policy is going to be triggered, and you want it triggered as early on as possible in the investigative process.
Many insurers are willing to provide what we call Informal Investigations Coverage, and that would trigger the policy and the policy would come into play and reimburse you for costs earlier on in the SEC investigation. So that’s what we suggest.
And then Trade Error Coverage; that is typically an endorsement or a coverage that you want to make sure is either within your form or endorsed in your form. And that would allow you to be able to rectify errors before you actually have a claim against you for damages. So let’s just say you made an incorrect trade, or you traded outside the guidelines for a particular client. If you picked-up on that before the client actually sued you, you could rectify what the loss of that error was. [And that] can be covered by insurance.
So those are the most common ones that we see under a D&O/E&O policy.
CCO Buzz: You [previously] mentioned cybersecurity. Cybersecurity has been a big focus for regulators recently, [and] cyber breaches have been prevalent in the media. How does Cyber insurance work?
Jessica: Cyber insurance is a coverage that has really evolved. It started with only providing coverage for the actual liability. So if you were to not properly protect personally identifiable information, and your customers or clients were damaged and they sued you for those damages, that’s typically how cyber policies were initially designed.
Now they’re more holistic, so they’re covering a multitude of different items. Starting with the security and privacy liability, as I just explained, but also going a step forward and covering breach events costs, which would include legal expenses, public relation expenses, IT forensic expenses, and breach notification costs. It would also cover any system failure. If your systems were shutdown for a period of time and you lost revenue because of that, it would cover that. As well as cyber extortion, which is actually where we’re seeing a lot of claims. [This is] where your systems are infiltrated with ransomware, and they will not get your systems back up and running until you pay a certain amount. And cyber policies allow coverage for that now.
It covers you from beginning to end in terms of the beginning of the claim, when you maybe aren’t sure if data was breached. You can tell potentially that your system was infiltrated but you’re not quite sure to what degree. It allows you to have access to experts to make sure that they walk you through the process and get additional experts involved, whether that be forensics, or lawyers, to figure out what the downfall was to make sure additional hackers can’t get into the system. And then help you through the process in terms of notifications and making sure to mitigate any potential liability. So start to finish the cyber policy really is quite holistic in terms of how it guides you through the process and provides you the resources to be able to go from [the] start to finish of the breach.
So the important aspects of insurance really come into play in the event of a claim. You want to make sure your coverage is as broad as possible, and that your limit and deductibles are adequate given your risk exposure and size. So you want to make sure that you’re hiring the correct expert to help you and guide you through that risk transfer process. Starting at trying to figure out what your risks are, and then how to design the program to make sure it encompasses all the risks that you have.
Starkweather and Shepley is just that. We provide hands-on service, we work with you to identify the most appropriate and competitively priced coverage to address your firm’s liability needs. We’re available through our website, at http://www.starshep.com or you can call us at (781) 320-9660. We appreciate [you] having us on the show today, and we’re happy to help in any way that we can.
CCO Buzz: Jessica thank you so much for joining us here today and providing our listeners with your expertise. We hope to have you on the show again.
Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.