Do you know what’s covered in your Errors and Omissions insurance plan? Digging into the details and fine print of your plan is crucial to making sure you have the protection you need, especially if you are transitioning to a new broker/dealer. For example, advisors are rarely aware that unless they take appropriate action when they move to a new broker/dealer, they typically will no longer be covered for business transacted at their former firm, until they are faced with a claim made against them. The result is typically damaging and expensive.

When evaluating a plan, most advisors assume that plans with similar costs will have similar coverage. Most advisors look at price as the determining factor in quality of coverage, when in fact, cost is far from an indication of the quality or extent of coverage. In reality, even plans from the same company with similar costs can have notably different coverage.

Advisors are also typically unaware that most policies today are written on a “claims-made” basis, which means that you’ll only be covered for what’s in your policy at the time a claim is made, rather than at the time you sold the product. For example, if you were served with arbitration in 2010 for something that happened in 2008, only your current 2010 policy would cover you for that arbitration. That coverage may be quite different from the coverage you had in 2008.

Advisors who don’t know or understand the details of their E&O policy can end up in financial trouble. “Between 0.5 percent and 1 percent of advisors will have claims filed against them in a good year for the markets,” according to Rob Erzen, vice president and E&O broker with Arthur J Gallagher & Co, a risk management services firm. “That number will increase to between 3 and 4 percent in a bad year. And while these may not seem like high percentages, over a 20-year career these odds stack up against you.”

Here are just a few of the things you could find yourself on the hook for in your time of need:

1. “Prior Acts.” When changing broker/dealers, most advisors don’t realize the importance of evaluating their options; they need to make sure they are covered for activity at a firm after they’ve left it. If you are changing firms, you have a few different options to make sure you are covered for any future claims that may be brought against you from the time spent at your previous firm.

Very few broker/dealer policies cover former reps for claims that are reported after they leave. To bridge this gap, you may have the opportunity when you change firms to purchase what is known as Extended Reporting Coverage (or Tail Coverage), to cover potential claims that may come in against you after you’ve left that firm. This type of coverage is not typically offered automatically, so you’ll need to ask the b/d you are leaving for it specifically.

Another way to cover prior exposures when you move to a new b/d is to obtain “Prior Acts” Coverage on your new b/d’s policy. If you are not covered as a former rep on your prior b/d’s policy and did not buy Extended Reporting Coverage on that last policy, then obtaining Prior Acts coverage is crucial.

Also note that Prior Acts coverage is limited to what is covered on your new firm’s policy. For example, if you sold an approved product at your last firm, but your new firm has not approved and, therefore, obtained coverage for that product, then you will not be covered for any prior acts related to that product.

2. Private Placements. E&O policies sometimes exclude private placements, as well as other products that may have gone sour. Because of the private placements can be risky, obtaining E&O coverage for them has never been easy. The 2008 financial meltdown has made it even more difficult.

Despite attempts by b/ds to maintain coverage for products that may have gone sour, an “insolvency exclusion” excludes from coverage products that have become insolvent. Because of this insolvency exclusion, many b/ds who sold private placements have found themselves uncovered and are now no longer in business. For example, in 2009 the SEC filed a lawsuit against Provident Royalties, charging the company and its founders with fraud over $485 million of private placements sold through b/ds. Those private placements are now insolvent and those b/ds are faced with arbitration and lawsuits.

Check which products are covered when you are changing firms and annually when your policy renews.

3. Your B/D’s Deductible. If you are faced with arbitration, you may end up being responsible not only for your own deductible, but for your b/d’s deductible as well. For example, while you may have a $5,000 deductible on your E&O policy as an advisor, your b/d may have a $50,000 deductible. Because of a provision in your independent contractor agreement stating that liabilities brought onto the b/d as a result of your activities can be charged back to you, your b/d can require you to pay its deductible if your actions brought about a claim against it.

4. “Outside” RIAs. If you have your own outside RIA business approved by your b/d, your b/d’s policy would have to specifically endorse your “outside RIA” activities on its E&O policy in order for those activities to be covered.

5. Insolvent Carriers. According to Erzen, prior to the crash of 2000, there were approximately 12 E&O carriers. By 2004, there were only 4. Today, there are 7. This kind of volatility means that it’s important to verify the solidity of your carrier and its coverage. Make sure your E&O carrier is ranked with an “A” or better AM BEST Rating.

These are just a few of the items buried in your E&O policy that can get you into trouble if you don’t pay attention. E&O policies are mind-bogglingly complicated, and the list of what the average advisor doesn’t know is long. Advisors should make no assumptions about what is covered in their plan. If you don’t scour your paperwork when you switch firms and when your policy renews, you may find yourself exposed.

Jodie Papike is the executive vice president of Cross-Search, a third-party, independent broker/dealer advisor and executive placement firm. For more information, please visit www.cross-search.com.