Robert S. Kutner, Esq. Partner, Casner & Edwards
Having defended real estate brokers and salespersons against more than 1100 claims during the past 33 years, I am surprised when learning that an office is operating without professional liability insurance, also called Errors & Omissions Insurance. E&O insurance is simply a type of malpractice insurance.
E&O insurance reduces the financial risk to real estate professionals for payment of claims and defense costs. In today’s litigation climate, it is as essential for the well-being of licensees as health insurance. While E&O insurance is not mandatory for individual licensees in Massachusetts, it is mandatory for firms that operate as “limited liability companies” or “limited liability partnerships,” 254 CMR 2.00(12). Minimum coverage amounts are $50,000 times the number of individual licensee or officers of the entity per claim and $150,000 times the number of individual licensee or officer in the aggregate for all claims in a policy year. Regulations provide alternative minimums of $300,000 per claim and $1 million in the aggregate in a policy year.
What Risks Require E&O Insurance?
Statistics gathered by the NAR indicate that nationally more than two-thirds of the claims involve the condition of a property. Most frequent are claims for misrepresentation (57%) followed by nondisclosure of defects (12%), breach of fiduciary duty (10%) and discrimination. Others include: water penetration or mold in a basement, garage, or attic; septic system defects; misstatements concerning the number of dwelling units or bedrooms; easements or zoning compliance; (4) insect infestation or damage; and (5) fair housing violations. These claims are generally asserted on common law misrepresentation and for violation of the Massachusetts Consumer Protection Act, known as Chapter 93A. An average claim may seek compensatory damages of $15,000 to $50,000, but on occasion may rise to six figures. Defense costs and expenses often range from $5,000 to $50,000, but can go far higher. Chapter 93A provides that a successful claimant shall be awarded attorneys’ fees from a person or firm that committed an unfair or deceptive act. Conversely, a person who
successfully defends a Chapter 93A claim has no right to recover defense fees and costs. Should a 93A violation be found to have been “willful or knowing” punitive damages of double or treble the actual loss are awardable. More than 95% of claims against brokers are resolved without a trial. Such claims are draining both emotionally and financially, particularly if the licensee lacks professional liability insurance.
Who Is Insured?
Policies differ on who is an “insured.” Not all policies will cover personal assistants, particularly if they are not “employees” of the broker who is the “named insured.” Related entities or teams may not be covered, even though they may have common ownership. Coverage for the entity may be crucial to agents who have formed special business structures through which they operate. To avoid coverage issues, the particular entity, each licensee, and all other related entities or teams should each be named as an insured.
What Is The Scope Of Coverage?
Unlike aspirin, E&O policies are not all alike! The typical policy provides that the carrier will “defend” (pay for a lawyer) and “indemnify” (pay a settlement or judgment) when a covered claim is made. The definition of what constitutes a “claim” may differ, but it generally involves a demand for money or services due to professional malpractice. Complaints to the Board of Registration for license law violations do not generally trigger coverage, since a loss of money or property is not claimed. A separate rider may be obtained for the defense of license law complaints.
What Exclusions Exist?
Most E&O policies for brokers will only cover services relating to the sale or rental of property and will exclude claims for property management services. They frequently exclude: claims for nondisclosure of pollution or environmental contamination; claims relating to the sale of properties owned by a licensee; and exclude claims arising from fee disputes. Most E&O policies exclude coverage for bodily injuries claims, for operation of a motor vehicle and for disputes arising from employment of or association of licensees. It is against public policy to provide insurance coverage for acts
of intentional wrongdoing, including punitive damages and discrimination. While the standard policy language may identify exclusion, it is possible to purchase a rider covering certain types of claims. Check with your insurance agent to be certain. Because bodily injury claims can be large, but are excluded from most E&O policies, it is generally wise to obtain a separate comprehensive general liability (or businessowner’s) policy. Coverage for employment based claims may be obtained through an Employment Practices Liability policy or a Directors and Officers policy. Some carriers offer riders to provide coverage for environmental pollution on properties as well as for discrimination claims. Most attorneys also recommend obtaining optional coverage for discrimination or civil rights claims, even though only defense costs will be paid. It is considered against public policy to insure a person against intentional violations of the law.
When Does Coverage Apply?
Most E&O policies provide coverage on a “claims made” basis, rather than based upon the date the wrong act or misstatement was made. In other words, the policy must be in effect on the date the “claim” is received by the insured, regardless when the sale occurred. Buying an E&O policy today will not necessarily protect you for all past transactions. Coverage for “prior acts” is generally excluded, unless the policy states otherwise. Some E&O carriers will provide coverage for “prior acts” if the broker has been continuously insured. Because of the risk of exclusion of prior acts, care should be taken when changing carriers to ensure that there is no lapse in coverage. Again, check with your insurance agent. It should also be noted that the statute of limitations for violation of Chapter 93A is four years. That period may be extended if it is shown by the claimant that the violation was not reasonably discoverable until a date within four years of filing suit.
How Much Coverage Is Available?
The dollar amount is generally selected by the insured. E&O policies often have coverage limits of $250,000 to $1 million, but higher limits should be considered, depending upon the market value of properties being marketed. Maximum coverage amounts may be identified for each claim, but an aggregate amount may be set for all claims made against the insured during a particular policy year. Some policies will also reduce the coverage limit available to pay a settlement or judgment by the amount spent to defend the claim. The insured will usually be required to pay a deductible that ranges from zero to $5000 per claim.
Who Controls The Defense?
Control over the defense may be an important aspect of any policy. Often carriers presented with excluded claims will provide a defense, but will only do so after sending the insured a “reservation of rights letter.” This allows the carrier to deny coverage later if intentional misconduct is shown to be the basis for liability. Control of the defense is also crucial if the carrier wants to settle, but the licensee does not. In such a situation, the policy may contain a “hammer” clause, allowing the carrier to limit available coverage to the amount for which it could have settled the case, but for the licensee’s refusal.
How To Choose Among Carriers?
When choosing a carrier, the premium and deductibles may differ. Some carriers offer discounts for use of standard disclosure forms. Some set premiums on an annual basis, while others base the premium on the number
of transactions. Before selecting a policy, the financial soundness and claims handling reputation of the carrier should be considered. Ratings of companies may be obtained through services such as Best’s Directory. With a little homework, the right choice will be made.