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As a stockbroker or owner of a brokerage firm, it’s your job to execute trades successfully and provide securities advice to your clients. Whether you are pushing them to buy stock in a new company or convincing them to drop shares in a venture that is struggling, your input has a significant impact on your client’s bottom line.
You can research the market and stay on top of companies on the exchange, but there is no way to predict how prices will change with absolute certainty. If you are wrong or make a mistake, you could be partially responsible for costing a client millions of dollars or more. A client you’ve lost money for may pursue legal action if they feel that you are at fault for their misfortune. Therefore, it’s in your best interest to look into the right financial vehicles to protect you and your business, namely business insurance.
Insurance policies for professional businesses like your brokerage firm can cover the costs of potential lawsuits against you, as well as prove your financial security to other companies that might want to do business with you.
You may be interested in purchasing insurance for your brokerage firm if:
- You would like to insure your services and practice against claims of poor performance or errors in your work
- You store sensitive customer or employee data
- You employ others
- You provide benefits to your employees, like health insurance or a 401(k)
- You work in an office that you lease or own and store valuable equipment or property in that office
What insurance coverage do I need as a stockbroker?
The best insurance policies for a brokerage firm often overlap with more general business insurance coverages. From professional liability insurance to general liability insurance, there are a number of insurance types that are applicable to stockbrokers. In particular, brokerage firms should consider professional liability insurance, as they may be held liable for any professional errors or mistakes. Listed below are the major insurance coverages you should pay attention to.
Professional Liability Insurance
Professional liability insurance, also known as errors & omissions insurance, protects your brokerage firm against allegations of mistakes or poor quality work by an unhappy client. If work you’ve done or advice you’ve given to a client in the course of your business as a stockbroker causes a financial loss, the client may be motivated to sue you or your firm for damages. The legal costs associated with your defense and the value of any cash settlements are covered by this insurance.
- Errors/Negligence: A broker at your firm is instructed by a client to sell a stock at a price of $24.50. The broker, however, inputs the sell price incorrectly and ends up executing the trade at a price of $23.50. This error ends up costing the client hundreds of thousands of dollars, and the client sues your firm for damages.
- Lawsuits without merit: Your brokerage firm successfully and accurately executed all of the trades that a client had requested. As a result of his trading, the client loses over a half million dollars. He is angry that your firm didn’t “talk him out of” his investment decisions and wants to sue.
Commercial General Liability Insurance
Commercial general liability insurance protects your business if you physically injure another person or cause damage to someone else’s property. While generally not required by law, general liability insurance is widely considered essential for most business. If you are renting office space, general liability insurance may be a requirement of your lease.
- Property Damage: A client visits your office for a scheduled meeting. He trips on a loose piece of carpet in your office, knocking his backpack to the ground and damaging his laptop. He decides to sue you for the $1,800 it would cost to replace his damaged laptop.
- Bodily Injury: A vendor is delivering computer paper to your office. While he is carrying a ream of paper up the stairs to your lobby, he slips on a patch of ice and injures his back. He decides to sue your firm for medical expenses.
- Personal and Advertising Injury: You accidentally publish a piece of libelous information on a competitor in a Facebook ad. General liability insurance would cover any resulting lawsuit.
Commercial Property Insurance
Commercial property insurance provides protection for property that your business owns or is responsible for, including office space, furniture, equipment, computers, artwork, and other property that you use to run your business. Commonly covered causes of loss include fire, lightening, wind, hail, explosion, and vandalism.
- Buildings: Your brokerage firm owns the building it occupies. During heavy rainfall, a leak springs in your roof, causing significant water damage to your building.
- Contents: The water getting into your building from the leaky roof also ends up damaging valuable electronic equipment, including computers and printers.
- Property of Others: You borrow a copy machine from the business next door to you. A hailstorm shatters the window above the copy machine, and the storm eventually ruins the machine.
Cyber Liability Insurance
Cyber liability insurance protects your brokerage firm from financial losses due to data breaches, hacking, viruses, and other cyber mishaps. This type of insurance is particularly important in today’s hyper-connected, digital business environment.
- Data breach lawsuit: An employee clicks on a phishing email, exposing your company network to hackers. Hackers are able to access confidential client files, which include personally identifiable information (PII). Your clients are not happy, and some decide to sue.
- Client notification costs: A hacker gains access to your firm’s database of client information. You are ordered by law to notify every client through mail that information that is relevant to identity theft may have been stolen. You must hire another worker to take on the responsibility of mailing notifications and answering questions on the phone for the next three months.
Valuable Papers and Records Coverage
As a stockbroker, you may hold valuable papers and records like financial records. Though it is always best to make copies of important documents and back them up by digitizing them, mistakes can happen. Valuable papers and records coverage will reimburse you for the monetary value of important documents or the cost of repairing and replacing them. A standard commercial property insurance policy will have some coverage for these valuable documents, but the standard policy will likely not be sufficient to cover the value of certain papers and records or the significant cost it would take to replace them.
- You have a filing cabinet where you keep client financial records. A fire breaks out in the building and destroys them. You will need to work overtime and hire extra help to piece the information back together again.
Workers’ Compensation Insurance
Workers’ compensation insurance is required in many states for businesses that have employees. It provides financial benefits to your employees if they suffer from a work-related injury or illness. In return for agreeing not to sue your business, an injured worker can receive funds for medical expenses and partial lost wages. Examples of covered expenses include slip-and-fall accidents, carpal tunnel syndrome, and injuries while driving for work-related purposes.
- One of your employees is running to his computer to place an order for 100 shares of Exxon stock when he trips over a misplaced chair and injures his ankle. His medical expenses are covered by workers’ compensation.
- An employee of yours drives his car to a client’s house for a scheduled meeting. On the way to the meeting, he is rear-ended by another driver and suffers whiplash. Workers’ compensation would cover his medical fees.
As a stockbroker, you are responsible for accurately and successfully executing trades and selling investments to your clients. The work that you are involved with has the potential to create huge gains and losses for your clients. Any small mistake or error on your part can lead to financial damages for a client and an ensuing lawsuit for your firm. Moreover, your firm is susceptible to the risks and liabilities that all businesses face, from a client injuring himself while visiting your office or a natural disaster damaging your office building. In order to better safeguard you, your business, and your employees, consider looking into the variety of insurance coverages that can provide your firm with comprehensive financial protection.