In today’s struggling economy and fragile real estate market, it’s more important than ever for REALTORS ® to be aware of the policy details of their professional liability insurance, known as errors-and-omissions insurance, or E&O. “There’s a direct correlation between a downturn in the economy and an increase in claims severity and frequency,” says Deborah Bindeman, CPCU, ARP, senior regional director of the Northeast region for Pearl Insurance, based in Gaithersburg, Md. “These days, more REALTORS® are shopping around because they know this is very important coverage for their business.”
But protecting your business is not simply about buying a policy. REALTORS® and brokers need to know what their policy does and doesn’t cover and the strategies they can implement to decrease their likelihood of being sued.
“There’s a lot of trust that your broker’s going to have a good E&O policy,” says Gary Rogers, CRS, ABR, with RE/MAX First Realty in Waltham, Mass., and past president of the Massachusetts Association of REALTORS®. But, he says, if REALTORS® don’t examine the policies, they may discover large deductibles or lack of coverage areas only after they’ve been sued. “It’s every practitioner’s responsibility to make sure they truly have the proper policy for them,” Rogers says. “Salespeople are much more sophisticated than they used to be, and we’re taking on a lot more responsibility for ourselves and our actions.”
Know the Lingo
Errors-and-omissions insurance covers agents’ actions during delivery of professional real estate services, such as discussing clients’ financing options, setting up MLS searches and showing homes. It does not cover property damage, bodily injury or personnel issues. E&O is mandatory in about a dozen states, and the amount of coverage needed depends on several factors, such as the types and number of transactions, average home values, number of agents working for the business and more. Typically, the broker or owner buys the coverage, which protects all those performing real estate services for that company, including the independent contractors licensed to that firm. It is important for agents to know if the broker has purchased coverage for them, who is responsible for the deductible and what is covered because agents may want to purchase additional coverage.
Most professional liability policies are “claims made,” which means that the coverage in effect when the claim is made — not when the incident actually occurred — covers the lawsuit, as long as the current policy includes all the “prior acts” of the company. This differs from homeowner’s and auto insurance, which are typically “occurrence” policies, or coverage at the time of the incident. Because most E&O policies are claims made, it’s important to avoid a gap in coverage, Bindeman says.
REALTORS® who cancel E&O insurance, due to retirement or a career change, for example, may want to consider buying “tail coverage” or “extended reporting” coverage. Tails lengthen the reporting time in case a claim is filed after the REALTOR® is no longer covered by regular E&O. “These are called long-tail lines because it could be months or years before a claim might be reported,” Bindeman says. “You need to protect yourself and all your past transactions for as long as your insurer will allow.” The typical extended reporting endorsement covers one to three years.
Before You Buy
When shopping for an E&O policy, Bindeman recommends brokers and REALTORS ® look for:
• A broad definition of covered services.
• A carrier that is “A-rated” or better.
• An “admitted program,” which means the carrier must follow state regulations and is backed up by the state guarantee fund.
• An actual “real estate” E&O policy, not a miscellaneous E&O policy or real estate endorsements added on to a general policy.
• How claims are handled and whether the policy owner has a choice of attorneys or must use the one assigned by the insurance company.
• A written “consent to settle” clause, which does not allow the insurance company to settle a case without the policy owner’s agreement.
• Defense costs paid outside the policy limit, which increases the policy owner’s coverage.
• Whether the carrier provides risk management services, such as seminars and articles.
REALTORS® should also be sure the policy covers all aspects of their real estate business, whether it’s residential, commercial or leasing, adds Marcie Roggow, CRS, CRB, of Sioux Falls, S.D., a real estate risk management specialist, expert witness and longtime REALTOR®. And don’t accept exclusions with no questions asked. “Ask for the coverage, and if they won’t give you the coverage, then go shop it to somebody else and see if you can get it, or if you can have two different companies covering you,” Roggow says.
Minimize Your Risk
REALTORS® and brokers can employ several risk-management strategies that not only reduce their chances of getting sued, but could get them a break on their insurance premiums. Number one on the list for brokers should be creating an office policy and procedures manual, Roggow says. The manual should outline how a broker supervises agents and handles client concerns. It should also detail agent requirements, such as the use of standardized state forms and consistent use of property condition disclosures. Brokers should let their insurance company know about the risk-management strategies they are using, because it may reduce their premium.
REALTORS® should also be careful not to step outside the scope of their professional experience. “You’d be surprised at how often that happens, and how innocently that can happen — a REALTOR® starts giving legal advice or tax advice or interpreting the condition of the home,” Bindeman says. “Those innocent misrepresentations can get them in trouble.”
With the glut of foreclosures in the current market, seller’s agents have been asked to take on more home-maintenance responsibilities. But before REALTORS® schedule repairs or hire a cleaning company, they should be aware that they are not covered by E&O insurance when they take on these maintenance roles. Bindeman’s best advice? Don’t accept that responsibility, or at least make sure the repair and cleaning companies carry their own insurance.
Rogers didn’t think much about his E&O policy until he began serving as an expert witness. In one case, the buyer’s agent kept copious notes of his interactions with the buyer — and not just the times when the buyer was unhappy. The agent’s thick notebook of dates and times led to the suit being settled out of court. “He did things 10 times better than I do in my practice, which taught me a lesson,” Rogers says. “His notes showed the hallmarks of what buyer agency is: accountability, diligence, confidentiality.”
Documentation of e-mail, phone and face-to-face conversations is absolutely vital, Roggow says. When she teaches riskmanagement courses, she jokes, “The one with the biggest file wins.” She worries particularly about agents who are texting clients, because there is no record of that conversation later. “The three most famous words in real estate used to be location, location, location,” she says. “Today, it’s document, document, document.”
Courtesy of Pearl E&O Insurance, MAR endorsed Member Benefit and Discount Partner. For more information, click here