What’s the Difference Between E&O, Fidelity Bonds and Cyber Liability?

When you face a complaint involving your advisory business, insurance can help you achieve a better outcome. But risks come in all shapes and sizes — and so do the policies that protect against them.

A competent broker will usually recommend E&O, Fidelity Bonds and Cyber Liability coverage. They’re all policies designed to protect advisors against key risks:

  • Professional mistakes
  • Employee dishonesty
  • Cyber incidents

But each of these risks is unique and so is the tool needed to protect against it. E&O protection is the right tool when it comes to professional mistakes. But it won’t help if you have a theft or a hack. These require Fidelity Bonds or Cyber Liability coverage, respectively.

Here’s a look at the difference between E&O, Fidelity Bonds and Cyber Liability for advisors.

E&O Coverage

Errors & Omissions (E&O) coverage is designed to cover the kind of professional mistakes that are most likely to occur today in the advisory business. E&O coverage protects against claims of honest mistakes, such as trading errors, advisor-client miscommunications, product suitability complaints, failure to disclose and breach of fiduciary duty.

It’s no exaggeration to say that E&O is the foundation for an advisor’s insurance protection. It’s the most commonly issued policy in the industry, and has been for decades. A mistake as simple as typing the wrong ticker symbol for a stock purchase can result in a tangible loss for the client if that stock then falls. E&O coverage can help an advisor cover the cost of such losses and damages.

E&O coverage is also a must-have for more complex claims of professional negligence, including those where no mistake was made. Excessive fee lawsuits alleging an advisor is working against a client’s best interest have become common. In such a case, E&O can help pay an advisor’s legal fees, settlements and judgements, reducing the risk to business and personal assets.

However, E&O doesn’t cover everything. Normal market losses, fraud and dishonesty aren’t covered, nor are incidents such as theft from a plan fund or a cyber attack. For these risks, advisors will need the protection that’s designed for these other risks.

Fidelity Bonds Coverage

Fidelity Bonds coverage is one of the other types of coverage protecting against risks not covered by E&O. This type of insurance is designed to protect advisors from internal and external theft risks. Fidelity Bonds can make whole any clients who are robbed through the firm, whether the theft involves dishonest behavior by an employee or fraud by someone from outside the firm.

Increasingly, Fidelity Bonds coverage is needed for external threats more than internal ones. Through email, web and phone, fraudsters have successfully submitted funds transfer requests and wire change instructions to drain millions of dollars in assets from client accounts.

Compared to larger financial institutions, advisors are often easy targets. Social engineering tactics are used to get past an advisor’s technical security. Fraudsters impersonate clients in emails, on websites and even on the phone, tricking firm employees into authorizing a distribution and wiring funds to a fraudulent account.

While better security protections can prevent some of these frauds, others may still get through. It is in these cases that Fidelity Bonds coverage is a must-have.

Cyber Liability Coverage

Cyber Liability coverage is another coverage type protecting against risks not covered by E&O or Fidelity Bonds. This coverage is designed to protect advisors from the threats posed by modern cybercrime. Just as no advisor could survive long in today’s world without computers, advisors can’t do without the coverage that protects those computers and their data from thieves.

Cybercrime involves a broad spectrum of issues, not limited to the monetary theft of firm assets or client assets that may be facilitated through a computer and protected by a Fidelity Bonds policy. Often, hackers are also after confidential data. This data can be sold on the black market, used to facilitate other computer frauds or encrypted and held for ransom.

Advisors can face the need to replace hardware and software, pay ransoms to regain control of their computer systems, or make clients whole after a data breach that exposes their private data to hackers. In certain cases, coverage may be needed to pay for regulatory fines and penalties. Costs for IT experts, public relations and legal defense also pile up, making broad Cyber Liability coverage another must.

Coverage for the Risks You Face

While it’s true that all businesses have to contend with the risk of a mistake, theft or hack, most businesses aren’t held to the same standard of liability as advisors and other regulated financial professionals. Under ERISA rules, liability can quickly rise into the millions or billions.  Professional as well as personal assets can be put at risk.

Risk profiles are on the rise for advisor firms everywhere:

To protect against these risks, it’s smart to have the right Errors & Omissions, Fidelity Bonds and Cyber Liability coverages. With these must-have products, you can protect your firm against outsized risk presented by the modern world.

When it comes time to obtain coverage, Lockton Affinity Advisor offers the products and service you need to protect yourself and your firm from these and other risks. Coverage is tailored to meet the needs of advisors and the threats you face.

Plus, fiduciary coverage is included automatically. This coverage meets ERISA standards, including services as an ERISA 3(21) and 3(38) advisor, ensuring any fiduciary duties you perform are covered.

Help protect yourself and your career today with insurance from Lockton Affinity Advisor.