Swift changes in U.S. trade policy and uncertainty in tariff policies have led to market volatility and a significant increase in trading activity in securities markets. For asset managers, these market swings bring increased risk of trade errors. Understanding the applicability of insurance to mitigate these risks is critical for asset managers.
Historically, market volatility presents a range of challenges for the asset management industry. The increased trading activity witnessed during these times can often be followed by trade errors. In 2020, for example, the fear created by the pandemic caused significant volatility in the markets and generated a costly uptick in trading errors.
Trade errors can present themselves in a myriad of ways. Common categories include, but are not limited to, data entry errors, missed deadlines, failure to execute, miscommunicated trade instructions, collateral management failures and breaches of mandate. When such errors occur, asset managers expect their insurance coverage to respond, but the implicated policies and the conditions necessary to access them, may warrant additional clarity.
When asked whether a loss is covered under a policy, a common refrain within the insurance industry is, “It depends.” That’s because it does indeed depend upon the circumstances of the loss itself, the extent to which the asset manager is legally liable, and the terms and conditions of the specific policy being reviewed. With that in mind, it’s worth commenting on a few notable insurance policies that may respond and some of the provisions that may be invoked, in the event of a trade or trading error:
This coverage is typically afforded as part of the asset manager’s errors & omissions policy. It is intended to reimburse the manager for those amounts it proactively pays to make a harmed investor whole, so long as the loss results from the manager’s error or omission (e.g., a trade error). Cost of Corrections doesn’t require a third-party demand for coverage to apply. Insurers offer this proactive loss mitigation coverage in the hope it will avoid more costly litigation.
Unlike cost of corrections, a third-party claim is required to trigger coverage under an E&O policy, and such claim must allege an error or omission in the performance of, or failure to perform, investment management services (e.g., a trade error). E&O claims are generally brought by investors or regulators, and coverage usually applies to defense and legal expenses as well as any resulting judgments or settlements.
Note: Privately held asset management firms typically include both directors’ & officers’ liability (D&O) and E&O under the same policy. If a claim also includes allegations that the directors and officers committed a wrongful act in their capacity as such (e.g., failing to implement and effectively oversee trading processes), blending the two coverages under one policy mitigates the risk of “finger pointing” between E&O and D&O insurers.
Although it depends which of these policies, if any, will respond to a trade error, or to a claim arising out of the trade error, there are steps insureds can take to increase the likelihood of insurance recoveries. Conducting a proactive and thorough review of one’s insurance policies is important and will help mitigate surprises in the event of a loss. Within these policies, certain provisions are particularly relevant and worth reviewing in the context of a trade error, including but not limited to, the following:
It’s worth noting that coverage may differ depending on geography, market conditions, risk profile and claim history. Organizations should discuss with their broker the breadth of the coverage provided by their insurance policies in relation to these coverage considerations.
WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
