What Kind of Insurance Do RIAs Need?

Registered investment advisors spend much time discussing with clients the various types of insurance policy they should consider purchasing, be it life, disability or long-term care. Advisors who run small businesses also should avail themselves of several types of insurance as a way to better protect their business and themselves. (For more, see: 5 Mistakes That Can Ruin Your Life (Insurance).)

Workers’ Compensation

Almost every state in the nation requires owners of businesses to purchase workers' compensation insurance to protect employees at their place of work. Workers compensation works by providing relief to employees who are injured on the job or come down with a serious illness or disease caused by their workplace environment. The insurance may be used to help cover the cost of hospital bills and medical expenses that an employee may be hit with, and it also provides disability payments to employees who become unable to work due to their work-related injury or illness. Some policies also cover rehabilitation costs. (For more, see: Disability Insurance for Business Owners.)

An employee looking to be reimbursed by workers compensation insurance must to be able to show that the injury, disability or sickness they sustained was, indeed, caused or related to their situation at work. Employees are not, however, given the onus of proving that the incident or disability sustained happened at work and is the fault of their employer.  

Most incidents of employees being injured at work or becoming ill at work, due their workplace environment, are not office-related. These types of accidents typically occur in a factory or warehouse setting, where the employees are using heavy equipment or dealing with toxic chemicals. Still, the purchasing of a workers’ comp policy is required for all business owners. (For more, see: Don't Get Sued: 5 Tips to Protect your Small Business.)

The upside, however, is that the insurance company is then on the line to pay any medical, indemnity and death benefits that are required under the law, rather than the employer being forced to foot the bill. Premiums do vary, depending on the industry within which the employees are working and the wages being paid to them. Because employment-related injuries are typically rare at white collar jobs, insurance premiums are relatively low for these businesses, compared to workplaces that involve any type of manual labor. That said, if a single claim is made on a policy it will significantly affect the premium to be paid going forward. (For more, see: How Insurers Determine Premiums.)

Professional Liability

Professional liability insurance may be one of the most important types of insurance an RIA can purchase. Most financial advisors will never come up against a liability suit or face accusations of errors or omissions related to their advisory work with clients. But it does happen. Investment advisors can and have been accused of failing to render appropriate professional advice to someone they work with, resulting in a suit. These types of professional liability claims are not only costly to the advisor, but they are also difficult to defend. That’s why it would behoove any financial advisor to buy some professional liability insurance, so you are covered in the rare case you're faced with such a case. (For more, see: What Advisors Must Know About Professional Liability Insurance.)

Commercial General Liability Coverage

A standard commercial general liability (CGL) insurance policy covers a business against a variety of liability claims related to bodily injury, property damage, and personal injury on the job. It also can cover employers in cases of slander and libel, piracy of information, false advertising and personal injury. (For more, see: Protect Your Company from Employee Lawsuits.)

Employers can certainly buy a standard CGL policy, but many insurance providers veer away from the standard industry policy and design their own policies with varying rates, policy terms and conditions attached. When purchasing this type of insurance, RIAs should review all policies carefully.

Some advisors turn to an insurance broker to help in providing guidance when reviewing these types of policies. In general, however, most CGL policies will cover any damage to an office space that has been leased out. But take note, these policies do not cover the property an employer may have purchased to use in the space, such as computers, desks or fax machines. To have that type of property covered, an RIA should purchase a business owner policy (BOP), which will insure the property located in an office the business owns. (For more, see: Will Insurance Keep Your Business Safe?)

Bottom Line

Registered investment advisors devote a lot of time informing their clients about the various types of insurance they should consider purchasing. But they’d be remiss not to consider the various types of insurance they themselves need to have in place when running a small business. (For more, see: Insurance Coverage: A Business Necessity.)