ERRORS & OMISSIONS POLICY COMPONENTS:
A typical E & O policy begins by stating the coverage that is being provided by the insurer. In this provision, the insurer asserts that they have the right to take the role of such critical areas of claim defense such as selecting the legal counsel, choosing mediators in the event of mediation, and to make payments of judgments or settlements and claim expenses as the insurer deems necessary. The insurer will also define how the coverage amount will be determined in the event of a claim.
Every policy will then define its “limits of liability” on any claim where they define the maximum amounts they will cover in handling and defending a claim against the broker. They will define such terms here as “damages” and “claim expenses”.
The E & O carrier will then usually define the deductible amounts that would be covered by the insured in the event of a claim. They will also define the items where there may be no deductible amounts. An example is one insurer establishes that there is no deductible for a Lock Box Claim.
The insurer will then usually define any areas where they may provide supplementary payments that must be incurred by the insured broker in defending against a claim. These could include costs for such items as premiums on appeal bonds, per diems for each day an insured attends a trial or hearing, post-judgment interest expenses and miscellaneous other expenses that may be contained in the body of the policy.
The policy will then define the territory where they will provide coverage for the licensee’s activities. This is usually related to the state where the broker is licensed and operates. There are brokers that operate in areas that are in proximity to state lines where they may need to obtain additional coverage. For example, if a broker is licensed in Arizona, Nevada, and California, it would be important to obtain endorsements for each state where they provide real estate services.
One of the most important areas of the policy is the area labeled “Exclusions“. Typical exclusions include fraudulent or dishonest acts, insolvency of the insured when the insured fails to pay or collect such costs as insurance premiums, escrow monies, earnest money deposits, security deposits, tax money or commissions. Other typical exclusions include claims for bodily injury, property damage, unfair competition on such issues as copyright infringement in advertising, libel or slander, discrimination such as those contained under the Fair Housing Laws, and on property owned by a licensee employed by the broker. In addition, other common exclusions include failure to maintain insurance, specified activities such as mortgage lending, transactions involving real estate syndications, pollution/mold/fungi, expected or intended injury by the insured, commission disputes, any prior acts committed by the insured obtaining a license, any fines or penalties or punitive damages identified as punishment and any act involving conversion or misappropriation of funds.
A typical E & O policy will also provide for extended claims reporting periods. An example would be an insurer providing an automatic extended reporting period in the event the licensee retires, allows the license to expire or goes on inactive status. Should the policy cancel in these events or not be renewed, a company may offer this automatic period for ninety days where the licensee will be covered for up to that period for any claims made during that period. Optional extended reporting dates area also often a feature here.
There will also be section where the insurer will provide definitions of terms used in the policy to clarify the terms and conditions of the policy to the insured such as “claim”, “claim expenses”, “damages”, “group policy period”, “individual policy period”, “insured”, “licensee”, “principal residence”, “professional services” and other terms.
Finally, the policy will usually have sections that address the following:
- Auditing Insured’s Records
- Insured’s Duties in the Event of a Claim or Circumstance
- The Insurer’s Right of Subrogation
- Changes in Policy Coverage
- Action Against the Company
- Bankruptcy, Cancellation Terms
- Non-Renewal Terms
- Conformity to Statutes
- And other terms and conditions deemed appropriate by the insurer.
Risk Reduction Techniques: Many brokers, working in conjunction with their E & O insurer have found it beneficial to incorporate risk management reduction techniques in their practices that can often lower premiums and enhance coverage in the event of a claim. These include:
Agent pre-hiring background searches and disclosures
Education and salesperson supervision measures
Assessing “high-risk” activities in real estate practice
Assessing the enforceability of “As Is” clauses as opposed to “Due Diligence”
Risk Reduction Techniques continued:
Defining Due Diligence – vicinity, market analysis, structural, component, environmental, inspections, etc.
Pre-Offering inspection reports
Component warranties and list of prior claims (C.L.U.E. reports)
Establishing guidelines for “customer” and “client” relations
Pre-Listing client disclosures such as the Seller Property Disclosure Statement (S.P.D.S.)
Agency Office Policy!
Brokerage Policy Manual
Sales Associate Agreements
Risk-Retention pool as part of the desk fees
Personal asset insulation
Broker control on mini-brokerages within the firm such as teams or groups – broker supervision and/or mentoring programs.
Incident reporting process and early resolution system
Having an “Attorney-on-Call” or hotline
Quality association affiliations
Professional education program for the sales associates
Strong brokerage review process
Other measures to ensure minimizing risks