Chapter 3: Special Concerns
Part 1: Understanding Common Professional Liability Claims
Professional liability is probably one of the biggest risks you face as a broker, actuary, or claims adjuster. That's why it's important to understand the most common claims you may face so you can take the steps necessary to avoid them.
Professional Liability Triggers for Stockbrokers
According to an article by the Securities Fraud & Investor Protection Resource Center, these are the top situations that can land a broker in deep legal trouble:
Unauthorized trading (i.e., making a trade without permission from the client) is grounds for a successful professional liability lawsuit against your stock brokerage.
- Unauthorized trading. A client could claim that you made a trade that was not permitted. This is called "unauthorized trading," which is illegal. If the court buys their argument, you may be ordered to compensate the client for their economic losses. That's why you must always get your clients' permission before making a trade — even if the window of opportunity is small. Let's say you want to make a trade but can't contact your client. If you make the trade and inform the client about it later, the act is still considered unauthorized trading and could come back to haunt you in the form of a lawsuit.
- "Sure bets." While you may know that there are no guarantees when it comes to the stock market, at the end of the day, you're a salesperson. So you might inadvertently use some puffery and enthusiasm in your pitch. Experienced investors usually understand this, but some investors — particularly the inexperienced — may cry foul. Of course, there is a lot of gray area here. But your enthusiasm could be considered "aggressive sales tactics." If your advice sways the client to make the investment and they lose money, you may be found liable for "unlawful misrepresentations." The same holds true in a situation where an investor feels that you've downplayed the risk factor of a particular option.
- Churning. Churning is a form of securities fraud where a broker repeatedly buys and sells stock in an account in order to generate commissions. You could be found liable for churning even if you call your client and get permission before each trade.
- "Hot tips." It's important for brokers to realize that the line between acceptable tips based off research analysis and prohibited insider information is not always clear.
- Failure to maintain credentials. As a broker, you are held to the standards of the securities industry. You are a licensed professional who has passed several examinations that qualify you for the position. But if you, at any point in your career, fail to maintain your professional education, you could be found liable for negligence or broker malpractice. A poor-performing portfolio does not merit legal action on its own. But a series of professional mistakes and misjudgments on the part of the broker may raise a flag.
Professional Liability Triggers for Insurance Agents
Independent insurance brokers have other claims to worry about. According to a chart by the Independent Insurance Agents and Brokers of America (IIABA), the most common professional liability claims made against insurance agents stem from failing to…
Insurance agents are most often sued for failing to procure coverage for clients.
- Procure coverage. According to the chart, these are the claims made most against insurance agents. These suits usually happen when a client incurs a loss while you are trying to procure coverage. You can read about one such case in Boiardi v. Freestate, in which a client sued her agent for not procuring a homeowner's policy after a devastating fire broke out in her home.
- Adequately explain policy provisions. When a client feels that you did not explain the details of their policy well enough, you may see a professional liability claim in your future.
- Adequately identify exposures. After a natural disaster hits, a client may look to recoup their losses by suing your small agency. Say a client's house floods, and they find out that their regular Property Insurance policy does not cover flood damage. The client may claim that you "should have known" that flooding was a risk exposure and advised them accordingly.
- Recommend coverage types. This one goes hand in hand with the previous example. These suits usually surface after a client files a claim and realizes they don't have enough insurance to cover the damage. Because you are the insurance expert, clients can claim that you should have advised them to purchase a certain type of coverage.
- Provide timely notice of claim to provider. If a provider denies your client's claim because you failed to notify them in time, it's likely that you'll be facing a professional liability claim. And if your client misses the deadline, they could claim that you did not properly inform them of the policy's requirements.
As you can see — across all categories — many of these potential claims can be avoided by clear and frequent communication. And to avoid "he said, she said" scenarios, be sure to keep careful records of communication. If you can get it in writing, do.
The best ways to avoid a professional liability claim? Communicate clearly with your clients and keep thorough documentation of all your dealings.
Next: Part 2: Health Insurance for Independent Stock Brokers and Insurance Agents