Hotline Support

WHAT A DIFFERENCE A WORD MAKES, IF THAT WORD IS “CLIENT”

HOW BROAD IS THE DISCIPLINARY PROCEEDING COVERAGE GRANT UNDER YOUR BD-RIA PROFESSIONAL LIABILITY INSURANCE POLICY?
January 25, 2019

The recent GPB Class action suit against 60 independent broker-dealers and several other defendants has revealed a significant gap in coverage for many unsuspecting insureds.  Some carriers have taken the position that there is no coverage as the action was commenced against an insured by a non-client.  Let me give you a specific example as it relates to the GPB class action.  In the Kinnie Ma “GPB” class action, the plaintiffs specifically pled in the complaint that:

Plaintiff and all of the members of the Class are not asserting claims against the specific Broker Defendant who directly sold the subject securities to such Plaintiff or that particular Class Member: they are suing only the remaining Broker Defendants for their substantial participation and assistance and/or aiding and abetting in the scheme, and in these unregistered public offerings.

In essence, the Kinnie Ma plaintiffs did not sue the broker dealer that they purchased their shares of GPB investments through, and with whom they had a “client” relationship with, they sued all of the other broker dealers for allegedly aiding and abetting in the scheme.   Accordingly, if the E & O policies issued to the broker dealer defendants only respond to claims made by clients of the broker dealers, the carriers have a legitimate declination of coverage position. 

A review of several E & O policies issued to independent broker dealers confirms that carriers address the “Client” issue differently.  Many policies state that the Professional Services be performed for a Client.  If there is no Client relationship between the Insured and the claimant, the carrier may disclaim coverage.   

A couple of examples of policy language that does not require the Insured-Client relationship are:

  1. Services which are provided by the Insured to others, or
  2. The policy lists the Professional Services with no reference to whom those Professional Services are provided to.

The tip here is, if your E & O policy defines “Client”, it will more likely than not require that the Professional Services be provided to a client in order for coverage to be triggered.  Review the policy definitions to confirm whether “Client” is defined and then review the definition of “Professional Services” to confirm whether the covered Professional Services need to be provided to a “Client”. 

If there is any confusion whether the Professional Services must be provided to a Client for coverage to apply, consult your broker to clarify.