What Agents Should Know About E&O

Are You Covered? | Dodging the E&O Bullet | Top E&O Claims

Errors and omissions (E&O) insurance provides agents and brokerage firms with protection from claims that “wrongful acts” were committed in the course of providing professional real estate services. The goal is to transfer as much risk as possible to the insurance carrier at a premium cost that is affordable.

This is one area that agents tend to ignore until they are forced to pay attention. And at that point, it may be too late to make much difference in the outcome. By reviewing your coverage and understanding how a claim is handled now, you may be able to minimize the legal and financial risks you’ll face later.

Evaluating Your E&O Coverage

As an agent, the first thing you’ll want to do is find out if you are covered. E&O coverage is not required for brokerages in the state of Arizona, and it may be less common than you assume. According to the National Association of REALTORS® 2009 Member Profile, only 13% of REALTORS® recieved E&O coverage as a benefit through their firm.

After determining that you are covered by E&O insurance, you’ll want to learn more about the policy. E&O coverage is not created equal. Each policy has its own standards and guidelines. Here are three things you’ll want to review:

1. What is on the certificate of insurance?

The brokerage’s certificate of insurance supplies basic facts about the policy, such as the name of the carrier. Is the carrier a reputable firm with experience in the real estate industry? What is the carrier’s A.M. Best rating (a reflection of its financial strength)?

The certificate should also list the effective date, deductible amounts and per-incident and annual limits. Consult with your broker or brokerage policy manual to determine how much of those costs you would be expected to pay versus what would be covered by the firm. You may want to ask about the policy’s coverage for defense (such as lawyer fees) and indemnity (damages) or about what would happen in the case of an uncovered claim.

Be aware that a broker may be protective of some E&O-related information. A broker would not want to disclose the E&O carrier to just anyone, for example, because it might put the brokerage at risk for having claims filed directly with the insurer.

2. What is covered?

“It’s important that agents know what actually is covered and is not covered under a policy,” says Trudy Moore, designated broker with HomeSmart. “Some assume coverage is basically the same for all E&O policies, which it’s not.”

Do you know if you’re covered when selling a home you own (solely or as part of an LLC)? Some policies exclude this from coverage; others allow it provided you follow certain steps, such as paying for a home warranty and/or inspection. Selling your own commercial or raw land is generally excluded—as is buying your own property (of any kind) and managing/leasing your own property.

When you act outside your regular practice area, you also risk not being covered. Say you’re primarily a residential real estate agent but a client asks you to sell a piece of commercial property they own. Or a friend asks you to manage their residential property as a rental while they wait to sell until the market recovers. Or you begin listing REO properties. “Whenever you step out of what you normally do, ask ‘Is my insurance coming with me?’” advises Lisa Robinson, an E&O insurance broker and president of Pinnacle Insurance Consultants.

Other common exclusions include fair housing or environmental issues—two big liability areas! Every policy has exclusions, and some can be added back to a policy for a fee. Better to find out what the exclusions are now than when you discover you need the coverage.

For details on coverage for loan modifications, short sales and REOs, see the sidebar: “E&O and Distressed Properties.”

3. When does coverage begin and end?

“Time frames are critical with E&O in a way that is unlike any other insurance policy,” says Robinson. The insurance most of us are familiar with tends to be occurrence-based. That is, if you were in a car accident in 2009 that resulted in a lawsuit in 2010, the policy in effect on the date of the occurrence (accident) would be responsible for responding to the lawsuit. E&O insurance, on the other hand, is claims-made. The policy in place when the claim is made should cover it—provided that the policy’s prior acts date is before the incident in question.

What is the prior acts date? Let’s say a brokerage purchased an E&O policy in 2000 and has maintained it faithfully since. The firm’s prior acts date would extend back to 2000. However, if a policy is allowed to lapse or cancel—whether as a strategic decision, because the firm goes out of business or for failure to pay the premium on time—all prior acts coverage is lost. In fact, even if the policy lapsed or canceled but was later renewed, prior acts coverage is generally lost. When changing insurers or cancelling a policy for other reasons, a firm may be able to purchase some level of prior acts coverage (also known as a “tail”) for a certain time period. If a brokerage is known to be closing, agents may consider banding together to fund a tail on behalf of the firm. Naturally, this can be challenging as it is expensive and not all agents may agree to participate.

What if you change brokerages? “E&O coverage is for the firm and for agents doing work on behalf of the firm,” explains Robinson. “When you go to company B and are sued for work done at company A, company A’s policy should respond to that.”

What’s the Worst that Could Happen?

Don’t underestimate the trauma of a lawsuit. “Some agents think, ‘What’s the worst that could happen? Maybe I’ll have to pay the $5,000 deductible,’” says Moore. “But the fact is that the lawsuit is going to take three to four years in most cases. And it really is painful to have people put in writing that you’re doing bad things, that you’re not honest, even when it’s not true.”

Beyond the personal impact, a seven-figure claim on a brokerage’s insurance loss run can have a real and sometimes devastating impact on the firm as a whole. As Robinson points out, there is no such thing as “insurance dollars.” The brokerage and its agents will end up paying for that claim in increased premiums and deductibles or decreased coverage over time.

E&O may not be the most entertaining topic in real estate, but in today’s litigious environment, it is too important a topic to ignore. Arm yourself with the facts—and be careful out there.

E&O and Distressed Properties

“There is a challenge in today’s market with short sales and REOs encouraging agents to step beyond their normal duties,” says Lisa Robinson, an E&O insurance broker and president of Pinnacle Insurance Consultants. Here are some things to keep in mind when helping homeowners who are underwater:

Loan Modifications. Most policies have not yet been tested in this area. When Robinson consulted with attorneys on the issue, she was told that “negotiating the terms of an encumbrance” is probably not in the scope of what real estate agents generally do and so might be excluded from coverage. Homeowners always have the option to ask a financial institution for loan, but the loan acquired through them come with a lot of regulations and risks which is one of the reasons why people are availing the services of Laatu Laina for collateral-free and long term loans.

Short Sales. Short sale transactions are generally covered by E&O provided that agents stay within their area of expertise. But if you dispense legal, tax or credit advice, you are likely on your own.

REOs. It’s important that your broker and insurance consultant review master listing agreements and understand your REO-related activities. Maintaining the property may put you in the position of a property manager. Rehabbing a property may move you into the role of a contractor. Are you covered for those duties?

E&O Questions from AAR Members on Facebook

Why doesn’t E&O cover ethics complaints?
Coverage varies by issuer, but E&O may, in fact, respond to an ethics complaint if it involves professional services rendered for a client (as opposed to agent-to-agent disputes). Department of real estate complaints may also be covered. In fact, a policy’s disciplinary coverage may even be “first dollar,” meaning there is no deductible to meet before coverage kicks in.

I have heard that some brokers overcharge agents for E&O. Is this true?
A brokerage’s “risk management fee” may include more than just the cost of E&O. This is because a broker is dealing with the total cost of risk—not all of which can be shifted to an insurance company. Brokers are responsible for transactions excluded from E&O coverage, for situations in which the agent is no longer around to fund their share and for legal counsel on issues that haven’t risen to the level of a claim. They also handle risk with transaction management procedures and staff and by bringing in continuing education. The total cost of risk goes beyond the annual premium, so a brokerage’s fee may reflect that.

Additional Resources

REO Business – Risk & Reward by Lisa Robinson
Arizona REALTOR® Magazine (April 2009)

NAR’s Field Guide to E&O Insurance

Real Estate E&O Insurance: Understanding the Basics
from NAR’s Risk Management Committee

E&O Insurance Providers
AAROnline.com