What is Trade Error or Cost of Corrections Insurance?

cost of corrections insurance

Hedge Funds, Private Investment Funds, Investment Advisors, and similar financial service industry firms may have heard of trade error insurance, also called cost of corrections insurance.

In this video and post, I’m going to explain what it is, why it’s needed, and how to get it, coming right up.

So Trade Error or Cost of Corrections Insurance, what is it?

This coverage is an endorsement of a D&O/E&O policy for financial service firms such as a hedge fund, a private investment fund, or an investment advisor.

The endorsement covers the costs that the investment professional incurs to mitigate or correct the direct damages to an investor that arises from a trade error.

A Trade Error is broadly described as a securities trade that was executed incorrectly by the insured professional.

It could be triggered by purchasing or selling security other than what was specified by the written order or executing the wrong quantity of shares or dollar amount, or trading on the opposite side of the market than what was ordered.

The key intent of Cost of Correction coverage is of course to fix the problem trade and make the investor whole.

But from the insurance company’s perspective, it’s also there to help avoid a more costly lawsuit that may claim greater damages and incur legal fees and end up costing them more money.

Now, the Cost of Corrections Insurance / Trade Error coverage does not exist to pick up after sloppy business practices.

In fact, most of these coverage endorsements carry fairly high retention, which is similar to a deductible of $150,000 or more.

If a claim occurs, you’re forking over the $150,000 first, and your insurer kicks in up to the limit of coverage which can be $250,000 to $1,000,000 or more depending on the size of your fund, and the limit you select for your core D&O/E&O coverage.

One last point.

The window to report a claim and be considered by your insurer is relatively short – usually around 15 days.

That means if you incur a trade error, you need to notify your insurer quickly and provide the details of what transpired to them.

Failing to report this within the prescribed window stated in your policy can result in a declination. Something of course you want to avoid at all costs.

Have other questions on the Trade Error / Cost of Corrections Insurance? Or about D&O, E&O, and other coverages commonly carried by financial service firms?

Give me a call or drop me an email. I promise, no selling or hardcore gimmicks or nonsense.

Just some conversation where I can answer your questions and give you the peace of mind you’re looking for.

Thanks!

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