Purpose & Benefits of E & O insurance:
The Broker’s Policy Manual is required as per Commissioner’s Rule R4-28-1103. This, of course, sufficiently establishes the necessity of having a Broker Policy Manual.
However, every business has policies that it operates by to assist the company in being consistent with its business practices and therefore better ensuring the business’s success. The policy provides a point of reference when there is an issue that requires solving a problem.
In addition, the manual provides a level of legal protection if and when the broker has legal or administrative action taken against them. For a broker, this is probably the most critical benefit should a licensee allegedly commit a violation of the rules, statutes or policies and it is demonstrated that their acts violated the brokerage policies.
Commissioner’s Rule R4-28-1101(F) states that if a broker, reports a violation of licensee employed by the broker to the ADRE, that the ADRE will not take any administrative action against the broker. While it is true this will not protect the broker from legal liability, it can often be used by the broker’s legal representative in defending them against such litigation.
Also, many Errors & Omissions (E & O) providers require any broker to whom they provide coverage to develop and maintain such a manual.
Commissioner’s Rule R4-28-1101(G) does state that if a broker maintains only one office that employs a designated broker, has no more than one other licensed person and no more than one unlicensed person, the employing broker and designated broker are not required to develop and maintain written policies, procedures, and systems described in Subsection A of R4-28-1101(A).
Errors & Omissions Insurance:
Just as it is best to obey speed limits when one drives, the best way to avoid disaster in professional real estate practice is to not make mistakes. However, licensees operate in a “hazard area”, especially during more challenging real estate market times. Because of this, the odds are higher that at some point, in spite of every effort made by the broker or salesperson, a claim will occur in the seemingly same random manner as a lightening strike. The reality is that while the licensee may be innocent of the allegations made on the claim, the licensee may be crushed by the financial weight of having to prove their innocence. The reality is that even if the licensee and/or broker are proven innocent to a judge or jury, the legal fees may put either or both of them out of business.
For an agent or broker to rely solely on their innocence or ability to rebuild their business is not as realistic as one might perceive. The reality is that while the professional claim might not wipe out the broker’s resources, it is the uninsured professional claim that does it. Unfortunately, this often happens even if the broker/licensee should prevail against the claim. Legal fees, court reporters, investigators, depositions and so on mount considerable costs that the broker and/or licensee may never recover from.
In most real estate malpractice cases, the loser does not pay the winner’s attorney’s fees and the costs of litigation. The E & O insurance policies do pay for the defense fees and costs. Some do so in addition to the stated coverage and some as part of the stated coverage. This means that the more vigorous the defense, the less the remaining funds for judgment or settlement.
In Arizona, all licensees are required to report themselves to the ADRE within ten days of any adverse civil judgment or verdict against a professional license. The ADRE is not bound by any judgment exonerating a licensee and can institute an investigation and even bring an administrative prosecution even if the licensee was found innocent in the case. Licensees can also be sanctioned by the ADRE for activities, not in real estate that suggests issues in moral turpitude that might tend to migrate into professional activity. An example of this might be personal income tax evasion.
In professional real estate practice, particularly residential sales and management, a licensee’s odds of being claimed against are greater than those involved in an auto accident or greater than those of their house burning down. One normally has insurance in the event of such catastrophes and therefore it would make sense for a broker to maintain an E & O insurance policy for the brokerage and require that their licensees also maintain such coverage.
Some Statistics include the following:
- Sixty-five (65%) percent of all real estate litigation has E & O involvement in residential brokerage.
- Thirty-five (35%) percent of all real estate litigation has E & O involvement in commercial brokerage.
- The other ten (10%) percent of all other real estate transactions have no E & O involvement.Common causes of litigation:
- Negligence in determining or starting quality, condition, and repair (latent defects, valuation, size, a wrong lot, zoning, HOA, title claims, etc.) & negligent non-disclosures.
- Agency (Breach of Fiduciary) Claims
- Fraud, intentional non-disclosure.
- Statutory Claims (business practices, RESPA, others)
- Short-Sale Specific Malpractice (often negligence)
- Breach of Contract (covered varieties)