Insurer Golsan Scruggs says the stock market's slump in 2022 led to a triple-digit uptick in E&O insurance claim payouts on its RIA policies last year.

Registered investment advisors who hold errors and omissions liabiity policies with the firm saw a 213% increase in claims paid in 2023, according to Golsan Scruggs, a corporate insurance brokerage firm in Lake Oswego, Ore. 

The surge was driven by a 500% increase in claims over suitability, as clients complained that advisors put their money in investments that weren’t appropriate for their portfolios, the report said. The value of all claims paid by insurers against RIAs rose 85%, partly because suitability claims typically have higher payout amounts. The company declined to release the specific number of claim payouts and the total dollar values.

The second-biggest factor in the overall claims payout was wire fraud, which registered a 400% frequency increase in claims paid by insurers, the report said.

“We know from experience that claims follow the market, so we expected to see an uptick in actions against RIAs and claims paid given the historically poor market environment in 2022,” Kenneth Golsan, the firm’s co-founder and managing director, said in a statement. “But the size and severity of claims paid should be a wake-up call to advisors that liability claims can impact their business.”

Golsan Scruggs has been insuring RIAs since 1992 and now covers 2,000 firms; this is their first time publishing such claims data.

The claims data offer a “rare snapshot into the risks and liabilities for RIAs in a given year,” the firm said in a press release. Golsan Scruggs surveyed 2,042 U.S.-based RIA firms, with an average AUM of $400 million.

“There’s no authoritative body collecting data on claims,” Golsan said in an interview.

“2022 was a really bad year for markets and historically bad for bonds too. So, there was nowhere to hide,” he added. “And investors who thought they were in safe investments got upset when their accounts were down 20, 25% in a 60-40 blend (portfolio) or something like that.” 

Standard & Poor’s 500 Index slumped more than 18% in 2022, while the S&P U.S. Aggregate Bond Index fell 12%, as the Federal Reserve raised interest rates to fight inflation.

Despite the sharp increase in claims, RIAs viewed cyber fraud and privacy breaches as the most pressing corporate risk. The second-highest was regulatory compliance and audit risk. 

“Cyber [fraud] has proven itself to be a risk from which no one can fathom its true exposure,” said Golsan.

"Advisors underestimate their fiduciary viability exposure,” he said. “The majority aren’t purchasing sufficient [coverage] limits.”