Today more than ever, real estate agents operate in a competitive marketplace where disclosure regulations and other consumer protection laws have exposed them to an ever- increasing risk of liability. A negligent act, an error in judgment, or an omission of pertinent information can leave the real estate agent and the firm in financial jeopardy. Errors & omissions insurance can protect real estate professionals from harmful losses, but how do you know which type of coverage is best for your practice or how much to spend for adequate protection?
Know The Facts
Selecting suitable E&O coverage necessitates taking a careful look at a myriad of data within your company and within the insurance industry. This careful look can mean the difference between a reasonable premium and one that’s sky high; and coverage that truly protects your firm vs. coverage that could end up costing you and your company unnecessarily. As you begin to make inquiries on coverage, be aware that not all insurance companies are knowledgeable about errors & omissions policies. We recommend contacting a company with an E&O claims specialist, especially one who services only real estate, to discuss your needs.
Today, just about everyone can obtain errors & omissions insurance, although innumerable variables mean policies can vary considerably.
Initially, you will be asked whether the insurance is being sought for:
the entire firm; or for you as an individual.
Next, you must determine the type of policy you wish to obtain.
Once you’ve selected a policy type, the insurance company will use one of four basic underwriting and rating formats to determine the coverage, premiums, insurable limits and deductibles for your policy.
Each format requires some data sharing with the E&O provider, and, depending on the option you select, you’ll want to have appropriate annual figures available for:
Gross commission income;
Number of people affiliated with the company;
Transaction frequency, or;
All of the above, for an approach which combines all three methods.
Identify Your Exposure
The amount of errors & omission coverage you need has a great deal to do with the type of brokerage activities you offer and the professional manner in which you conduct your business. A careful analysis of your income- producing activities as a percentage of the company dollars or gross commissions will help to identify your risk.
Commercial brokers, as an example, are more likely to face a lawsuit than residential brokers because their revenue exposure is greater. Similarly, your history of claims or payouts for after-sale problems will help to determine the extent of coverage you should be seeking. Rental agents and property management specialists, by virtue of their business, are well advised to think about additional coverage to protect themselves from steering and discrimination claims.
Areas of Protection
Once you have a general understanding of your risk to legal liability, you can make a decision on the coverage most suitable to you or the firm. As a practical matter however, you should look for these general coverage components:
Defense costs and limits of liability, in which attorney’s fees will be covered over and above liability limit;
A per day dollar amount to be covered for loss of earnings for trial attendance;
Personal injury to full limit of policy limits;
Lock box coverage;
Owned property coverage - only coverage available if you own 10% or less of the property’s interest;
Sale of personal residence coverage. Additionally, you should evaluate whether or not you need these optional coverages:
Fair Housing/Discrimination/Steering liability - Pays up to $100,000 for defense costs, but fine won’t be paid if found guilty; *
Environmental hazards - Covers for full limit of policy up to $1,000,000;
Radon - Covers for full limit of policy up to $1,000,000.
Coverage varies depending on company. . Exclusions All E&O policies are not alike.
It is crucial to know what claims or limitations are placed on your coverage. Some areas of concern are: bodily injury, operation of a motor vehicle and unlawful discrimination. Finally, there may be subtle, but significant limitations on the scope of coverage of E&O policies for “prior acts.” Policies will differ but most offer coverage on a “claims made” basis. Only claims made during the policy period will be covered. It is important to review these issues before obtaining E&O insurance coverage to ensure your coverage meets your individual needs.
The Cost of E&O Coverage
Many factors determine the premium amount you will pay for individual and company policies, including the number of residential and commercial real estate transactions performed and the professional experience of the broker(s).
Typically, premium credits will be offered to agents and brokers who regularly practice risk reduction and loss prevention measures (i.e. a seller’s disclosure form), use home warranty plans, and pursue on-going continuing education and professional designation programs.
Factors that negatively affect your premium also exist. For example, part-time associates are a bigger risk to the firm than full- time agents, due to their lack of continued education and exposure to daily update meetings. Most E&O carriers offer a variety of payment methods to brokers and associates.
The most common payment plans are:
Annual - This premium is due in full once a year, interest free;
40/30/30 - This option requires a 40% premium down payment, with another 30% due in 90 days, and the final 30% due in 180 days, interest free;
Financing plan - A down payment of 10-20% of the premium is made, with the balance due monthly to a finance agency for the following 9-11 months. Interest is set at the current rate;
Per Transaction - The premium due at each transaction is based on the previous average number of closings, with an administration and/or membership fee added onto the premium amount. This generally is the most expensive option.
Making An Informed Choice
In 1998, the National Association of REALTORS® published the top 10 types of claims in the real estate industry, based on statistics maintained by Employers Reinsurance Corporation.
misrepresentation – 57% and
nondisclosure of defects – 12%.
Less frequently, claims are asserted for:
breach of fiduciary duty – 10%;
transactional processing issues – 7%;
property management – 5%; and,
negligent referral – 4%.
There is no simple answer to the question, “What type of E&O insurance do I need?” Ultimately, it’s your decision as to how much coverage is best, what it will cost you, and how you will pay for it. So consider your options. Contact the state insurance commissioner for a list of admitted or approved E&O providers. And, talk to real estate brokers in your area who can advise you as to coverage options and anticipated costs when selecting errors & omissions insurance for the first time.
Massachusetts Association of REALTORS®
256 Second Avenue Waltham, MA 02451-1139 781/890-3700
Customer Service Line 800/725-6272