Registration and Compliance
EMD Insurance Requirements (Part 2)
Published: 03/18/2010
By Peter A. Dunne, Brian P. Koscak As discussed in Part 1 of this Special Series involving Insurance for EMDs (i.e., Exempt Market Dealers), on March 28, 2010, every EMD must have in place the minimum amount and type of insurance coverage as prescribed by National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103). Part 1 also discussed the various insurance requirements under NI 31-103 as it applies to EMDs.
This article discusses the benefits of obtaining insurance through the EMDA Insurance Program (defined below) and provides examples of the cost of insurance for four EMDs based on the number of people (i.e., employees, agents or dealing representatives of an EMD). We would like to thank Mr. Peter Bryant, a registered insurance broker in the Province of Ontario and a Partner at Jones Brown Inc., the broker of record of the EMDA Insurance Program who provided the information below.
EMDA INSURANCE PROGRAM
In March 2010, the Exempt Market Dealers Association of Canada (the EMDA) established a group financial institution bond (FIB) insurance program underwritten by CHUBB Insurance Company of Canada (the EMDA Insurance Program) that offers its members preferred group rates and coverage.
Benefits of the EMDA Insurance Program
Peter Bryant, a Partner at Jones Brown Inc., advises that EMDA members benefit by having a special group EMDA Insurance Program since the coverage is not only competitively priced, but is also broader in scope than the standard coverage provided by insurers for EMDs on a non-group basis.
Mr. Bryant advises that as part of the EMDA Insurance Program, the following coverage extensions are provided at no additional cost to EMDA members:
- Revised "manifest intent" wording under the "Fidelity/Employee Dishonesty" insuring agreement that provides a marked improvement from the standard FIB wording. With standard FIB coverage, the fidelity insuring clause has a "two-part trigger." In order for coverage to respond, fraud must be committed by an employee with the manifest intent to: (a) cause the insured (i.e., the EMD) to sustain a loss; and (b) to obtain financial benefit for the employee. The subjective nature of determining an employee’s "manifest intent" and whether both claims triggers have been satisfied has resulted in contentious claims discussions with insurers. Under the EMDA Insurance Program the "manifest intent" wording is removed and the word "and" is replaced with "or," making the claims trigger more easily interpreted. The simplified wording does not rely on judgment of an employee’s "manifest intent" nor does it require that the employee both gain financially and causes the company to sustain a loss;
- A $25,000 limit for "Audit Expense" coverage for the costs associated with retaining an expert to determine the amount of a loss (e.g., hiring a forensic accountant to determine the quantum of a loss);
- "Computer Systems Fraud" coverage for loss resulting from a fraudulent entry of electronic data or computer programming within a covered computer system;
- Coverage for "Voice" and "Facsimile" initiated fraudulent transfers of funds;
- "Extortion" coverage for threats to persons and property of the insured;
- "Designated Representative Rider," which means that a loss has not technically been discovered by an insured until it is known to their designated insurance contact. This can help eliminate the insurer’s ability to deny a claim based on untimely reporting to the insurer if they believe it was known to the insured and not reported within the necessary reporting time periods; and
- "Stop Payment Order" coverage extension providing coverage for a loss that the insured EMD is liable to pay due to a failure to comply with a customer's request to stop payment on a cheque or other form of negotiable instrument.
Examples of the Cost of Insurance under the EMDA Insurance Program
Naturally, the cost of insurance varies based on the circumstances of each EMD applicant. However, Mr. Bryant has provided four examples below to assist EMDs in understanding the cost of insurance that would be required to satisfy NI 31-103 for EMDs.
The examples below are based on EMD registrants of varying sizes that do not hold or have access to client assets and are based on the minimum prescribed requirements. These would include EMDs that sell, for example, alternative investments such as hedge funds, private equity, real estate, commodities or other exempt products where the client invests directly with the entity managing the investment.
Example A: One Person EMD
- A one person EMD would need a minimum FIB insurance limit of $50,000 per loss.
- As part of the EMDA Insurance Program, the annual FIB premium would be $1,000 (plus applicable provincial sales taxes) at the minimum available deductible level of $5,000 per loss.
Example B: Three Person EMD
- A three person EMD would need a minimum FIB insurance limit of $150,000 per loss.
- As part of the EMDA Insurance Program, the annual FIB premium would be $1,300 (plus applicable provincial sales taxes) at the minimum available deductible level of $10,000 per loss.
Example C: 3 - 10 Person EMD
- A 10 person EMD would need a minimum FIB insurance limit of $200,000 per loss.
- As part of the EMDA Insurance Program, the annual FIB premium would be $1,550 (plus applicable provincial sales taxes) at the minimum available deductible level of $10,000 per loss.
Example D: 25 Person EMD
- A 25 person EMD would need a minimum FIB insurance limit of $200,000 per loss.
- As part of the EMDA Insurance Program, the annual FIB premium would be $2,000 (plus applicable provincial sales taxes) at the minimum available deductible level of $10,000 per loss.
Notes:
- For EMDs that hold or have access to client funds, the required FIB limit is based on 1% of total client assets. The premiums may differ slightly from the amounts above and would be competitively priced based on the procedures the EMD has in place for processing client transactions
- It is common for EMDs over a certain size to hold multiple registrations under NI 31-103 (e.g., EMD, Investment Fund Manager, Portfolio Manager). The EMDA Insurance Program can offer limits up to $25m to satisfy the maximum level of coverage required under any of the registration categories.
How to Obtain an Insurance Quote
An insurance application for the EMDA Insurance Program is available on the EMD’s website at www.emdacanada.com. As the EMDA Insurance Program is for members only, the EMDA website also provides instructions on how to become a member. Non-members can receive a quote for insurance but are required to become EMDA members in order to acquire the insurance since it is a group program.
If you are interested in obtaining a quote for insurance, contact Peter Bryant at Jones Brown by telephone at (416) 408-5037 or by e-mail at: pbryant@jonesbrown.com.
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Brian Koscak is a Partner at Cassels Brock & Blackwell LLP and a director of the Exempt Market Dealers Association of Canada.
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