The most central provision in any professional liability policy for broker-dealers, their registered reps and insurance agents may very well be how the underwriter defines "professional services." If your E&O policy is the show, this could be its headliner. It generally defines the products and services that will trigger the insuring agreement of the policy and should accordingly receive a good deal of attention when the policy contract is negotiated and constructed.
A provision that gets less attention during policy design and negotiation is the one that defines "interrelated (or related) wrongful acts." Though not necessarily a headliner, this definition can have serious consequences for the underwriters and the insureds and deserves some consideration, ideally before a claim or series of circumstances shines a spotlight on it.
Most policy forms include somewhat vague language that lends itself to subjective interpretations leading to differences in coverage outcomes that can be significant. Typically, the policy has some version of the following:
Some policies may also allow interrelation for such acts that are "similar" or "repeated." For a provision that can alter coverage dramatically, this is rather fuzzy language. (How similar are you to your sibling? Not at all? But you probably came from the same mother and grew up in the same household and resemble each other physically).
When notice is given to the E&O insurer, the answer to whether the matter that is the subject of that notice constitutes a single "claim" on its own or is in some way related to other matters that have been previously noticed to the insurer will depend on how the definition of "interrelated wrongful acts" is construed and applied. As each "claim" under the policy carries a single retention or deductible, so too is that claim subject to a single limit of liability. As such, it is easy to see how this provision may cut both ways – interrelation could be good news for a series of lower-valued matters as the insured would have one retention for a number of customer actions, but on matters that present exposure in excess of the policy's per-claim limit or sublimit, concerns about exhausting the available coverage outweigh the benefit of paying only a single deductible. In the latter case, paying multiple deductibles seems to be a good deal if it increases the available insurance by double or more.
This dilemma of single limit versus single retention has become a more common coverage issue in the past several years, particularly in the context of troubled or poorly performing securities sold or recommended by investment professionals. For example, when the failure of a so-called alternative investment product, such as a non-traded REIT, generates a flood of investor actions against registered representatives and their affiliated broker-dealers, should each investor's action be treated as a single claim or rather be grouped together with "similar" investor demands, solely because they involve the same product? Does it matter that the product sponsor initiated bankruptcy proceedings or that the SEC has appointed a receiver? A common strategy used by investors' counsel is to group together in a single action various investor clients of theirs who may have varying investment profiles and other distinguishing characteristics — should that affect the E&O coverage result?
This issue has been around for longer than investor claims became a predominant concern among E&O underwriters. Insurance agents insured under E&O policies may sell the same product again and again. But selling a variable life insurance policy does not and ought not mean all customer complaints involving that product should be treated as a single claim. But what if the underwriter identifies a pattern and practice or simple fact shared by all such complaints? For example, an agent may have sold to many customers over several years larger policies using the value of older policies (a practice called "twisting" or churning" or improper replacement in extreme examples). This is a common, and not necessarily inappropriate, practice in all situations. Should all such complaints be viewed as one claim forever more, limiting that insured agent to perhaps a single limit of liability of, say $1 million?
There is no one way to answer these questions. Different insurers have adjusted matters like those described and reached different coverage conclusions, sometimes with a difference measured in millions of dollars. And the interesting point is that these insurers were all interpreting and applying comparable, if not identical, policy wording.
For those insureds seeking greater clarity on their coverage, here's the thing: there is no right answer. Some insureds have tried to make the somewhat vague language around interrelated wrongful acts less fuzzy, introducing automatic triggers to a certain coverage outcome (e.g., all matters involving the same product by the same issuers that has become insolvent or subject to receivership or bankruptcy proceedings will be treated for coverage purposes as a single claim, regardless of the individual investors' circumstances or theories of liability). Again, this can cut both ways, depending on the value of all such matters. So, unless an insured can predict whether they will have liability exposure greater than their applicable limit or instead face only smaller valued claims by aggrieved customers, who can really say whether more certainty in the policy language will ultimately mean more insurance recoveries or more uncovered losses?
As for the standard language used in these E&O policies, it is broad enough to allow in most instances for a good faith, if not compelling, case for interrelation and thus the applicability of a single retention. For insureds with a higher retention relative to their limits of liability, this could generally weigh in their favor. For those insureds for whom the retention is a considerable financial burden, and those whose product and service offerings are not deemed high exposure, the broader standard language around interrelated wrongful acts can generally be in their best interests. This is a discussion every insured should have with their insurance adviser.
When the circumstances of a claim are presented, it is critical to review them carefully in consultation with your insurance adviser and counsel to determine the best course of action when communicating with your E&O insurer. It also pays to know your underwriter and the propensities of the insurer's claim adjusters in these claim scenarios before even placing coverage with that market. In the end, the difference in outcomes could be measured in millions, so make sure to reach out to your insurance broker and trusted advisers before renewing your E&O policy. Go over your firm's risk profile and the nuances of coverage, including those related to interrelated wrongful acts. Here at WTW, we welcome those conversations that could very well make a meaningful difference in managing your risk.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
