Professional Liability Insurance for Traders

Read our Advertiser Disclosure.
Contributor, Benzinga
February 5, 2024

Save big with Next business insurance + download their guide for FREE.

Professional liability insurance is a crucial protection for traders, allowing them to safeguard their investments and clients. In addition, without professional liability insurance, you may be required to pay the judgment amount of a lawsuit if you are sued. 

What is Professional Liability Insurance?

Professional liability insurance protects organizations that offer advice or services. Professional liability insurance also protects your assets if you're sued for professional negligence or malpractice.

Even if you did nothing wrong, professional liability insurance, commonly known as errors and omissions (E&O) insurance, covers you if you break your promises. Negligence, bad advice, paperwork errors and damaging recommendations are examples. Professional liability policies cover legal issues specific to each profession.

A dissatisfied client may accuse you of faulty work. Even if the claim is invalid, legal fees may be high. As a trader, you should do your best to avoid bankruptcy if you are sued. On the other hand, if a customer follows your counsel and makes bad financial decisions, it could result in costly lawsuits.

Why Do Traders Need Professional Liability Insurance?

In an ideal society, professional liability insurance would not be necessary because there would be no mistakes, errors in judgment or litigation. But, unfortunately, people do not inhabit an ideal world. If a client suffers a financial loss because of a trader's actions, the trader faces the risk that the client will file a lawsuit.

A common situation that professional liability insurance may cover for a currency trader is losing money on a trade. Professional liability insurance will shield you from claims seeking compensation for losses caused by negligence or errors.

Do Traders With Brokerage Clients Need Insurance?

Traders must proactively manage their risks with constantly changing regulations in the financial services industry. Accordingly, traders who act as brokers must register with the U.S. Securities and Exchange Commission (SEC), join a self-regulatory organization (SRO) and follow federal securities laws and regulatory requirements.

If you make a mistake or miss something during your duties as a trader, professional liability insurance may help cover the costs of defending yourself in court. In addition, professional liability insurance for traders can help pay for defense costs in the event of claims of negligence, errors in judgment or mismanagement of client assets.

Are General Liability Insurance and Professional Liability Insurance the Same?

Business owners can buy two types of business insurance: general liability insurance and professional liability insurance. General liability insurance covers lawsuits for bodily injury, property damage, advertising injuries and medical costs. Professional liability insurance only covers lawsuits about business mistakes and negligence.

When accidents or mistakes cause negligence lawsuits, your general and professional liability policies work together to keep your legal costs down.

Client contracts may require you to carry either policy. In addition, some clients may ask their professionals to have professional liability insurance if they get sued.

Types of Professional Liability Policies

According to the Insurance Information Institute (III), people can buy two kinds of professional liability insurance: claims-made and occurrence policies.

Claims-made policies are the norm in the insurance business. For a claim to be covered, the policy must have been in effect both at the time of the accident and at the time of the lawsuit. But an occurrence policy might be a good idea if you're considering changing careers or retiring. It protects you if a claim is made for something that happened during the policy period even if the lawsuit is filed after the policy ends.

Professional liability insurance will pay up to the policy's maximum for defending you in court against claims and paying judgments. However, most insurance policies don't cover intentional or dishonest actions or losses. You may also face fines from licensing authorities and other costs. How much professional liability insurance you need depends on the size of your business.

You can get professional liability insurance as an add-on to a Commercial Package Policy  (CPP). However, a home-based business policy or BOP does not cover professional liability.

Protection Yourself Against a Negligence Lawsuit

You can't always prevent a negligence lawsuit from being filed against you, but you can take smart precautions.

  • Make sure you get accurate information by asking your clients in-depth financial questions.
  • Make sure to record all your communications and meetings with clients accurately.
  • Let the client make an educated financial decision by providing all relevant details.
  • Protect sensitive customer data from hackers by evaluating potential partners carefully.

It is essential to keep track of changes in your client's life that could impact the financial advice you give them and to update their information regularly. In addition, you should get E&O insurance to cover your back when safety measures fail.

Other Types of Business Insurance Traders May Need

In addition to E&O insurance, financial professionals may need these other types of critical business insurance protection.

General Liability Insurance

General liability insurance (GL) covers third-party injuries and property damage caused by you or your workers. It can cover a customer's medical fees if they break their wrist after falling over an unsecured wire at your business. Without it, you or your company would cover your medical expenditures. GL insurance also covers libel and slander claims.

Business Income Insurance

Business income insurance reimburses disaster-related losses. Most calamities disrupt business and may force you to leave. The policy also covers temporary work location fees.

Umbrella Insurance

The umbrella denotes additional liability coverage. It prevents excessive losses when one of the underlying policies reaches its limits. Umbrella insurance protects a business against general liability and vehicle liability.

Fidelity Bonds

Employee dishonesty bonds are fidelity bonds. Clients are repaid if employees steal. Client contracts often need them.

Cyber Liability Insurance

If a financial expert's data is stolen, cyber liability insurance covers recovery, litigation and customer notification costs.

Workers' Compensation Insurance

Most states require employers to have it. This policy covers medical bills and lost wages for workplace injuries.

Compare Professional Liability Insurance

Businesses that give customers professional services and advice need professional liability insurance. Benzinga offers insights and reviews on these insurance providers of professional liability coverage. Use this list to begin your search for E&O insurance. 

The Importance of Professional Liability Insurance for Traders

professional liability insurance is an essential investment for traders seeking to protect their financial well-being and maintain the highest standards of professionalism. As you navigate the complexities of the financial markets, being proactive in managing potential risks sets you apart and ensures you can continue to thrive in an ever-changing industry.

Frequently Asked Questions

Q

What is E&O insurance?

A

E&O insurance protects those who provide professional services from claims of carelessness, breach of fiduciary duty or regulatory compliance issues.

Q

Why do traders need professional liability insurance?

A

Currency traders sometimes lose money on trades, which is why professional liability insurance might be helpful. This kind of insurance can protect you from lawsuits filed by people who lost money because of bad financial advice, misrepresentation, negligence, oversight or errors in judgment. 

Q

How much does professional liability insurance cost for traders?

A

The cost of professional liability insurance for traders can vary depending on factors such as the nature of the business, the types of services provided, the coverage limits, and the claims history. It is best to get quotes from multiple insurance providers to compare costs.

 

About Janet Hunt, Insurance Agent

Janet has been working in, and writing about, the insurance industry for over 20 years.