E&O: Show Insurers the Right Stuff

January 1, 2005

Thanks to booming home sales, southern powerhouse Crye-Leike Inc., REALTORS®, saw its sales volume grow from $3 billion in 2003 to $3.7 billion in 2004 in third-quarter figures. Yet the premiums on its errors & omissions insurance have nudged upward only marginally in that time.

Company Vice President and General Manager Steve Brown, ABR®, CRB, who’s based in Memphis, believes Crye-Leike’s use of risk-mitigation seminars for its salespeople and last year’s addition of a customer-service component to its Web site have had much to do with the bottom-line friendly premium rate the company has been enjoying.

“We’ve had nominal premium increases in our past few policy periods,” says Brown, whose company has 2,850 sales associates and brokers in 80 offices in Arkansas, Florida, Georgia, Kentucky, Mississippi, and Tennessee. Brown won’t disclose what Crye-Leike is paying in monthly E&O premiums.

For most brokers, E&O premiums are a major expense each month. Estimates vary by carrier and by state, but typical, basic premiums range from $200 to $400 per associate per month, say insurance executives. So earning discounted rates through risk-management practices can be a big money saver.

E&O insurance providers have long granted clients discounts on their premium and deductible amounts for taking risk-management measures that could lead to fewer claims against company sales associates. These measures include systematic use of industry-standard contracts and disclosure forms and regular training for licensees on best practices for minimizing risk. Past claims history also plays a big role in a company’s premium structure.

Increasingly, though, insurance companies are also looking at how companies integrate customer service into their risk-management practices. Brown and other brokers say they’re taking customer service even more seriously than in the past, and their efforts are part of the reason premium increases have been lower than they’d otherwise be, they believe. They can’t confirm that, though, since insurance providers don’t disclose internal underwriting decisions to their clients.

Beyond risk management

Customer service involves practices aimed at customer satisfaction and not, as with risk management, claims reduction.

“Last year we added a toll-free customer-service phone number on our Web site that lets customers and clients call us directly if they have a complaint,” says Brown. “If we head off these disputes more quickly, we’re far more likely to avert a claim.”

Toll-free numbers are great, but for real estate E&O insurance brokerage Arthur J. Gallagher & Co., systematic customer service programs are even better. Insurance brokers help match clients with suitable insurance products. For the past year, the Itasca, Ill.-based insurance broker has been collecting claims and other data from several large real estate brokers that have implemented a customer-service program through Quality Service Certification Inc., a customer-relations management company in San Juan Capistrano, Calif. The exercise is intended to demonstrate a correlation between companywide implementation of a customer-service program and reduced claims likelihood. Crye-Leike isn’t part of that effort.

Until the data are collected, the connection is anecdotal, not empirical. But John Fuhrman, senior vice president at Arthur J. Gallagher & Co., believes the data will show a strong correlation. “Insurance companies are [already] starting to get the idea that improved customer service and focus on risk reduction in the real estate management process will, over time, lead to better results from an E&O standpoint,” he says.

Once the data are collected, Fuhrman will go on a “road show” to several large insurance companies to make the argument that real estate companies that implement customer-service programs should have systematic access to discounted rates on E&O insurance products.

“It’s not always the case that underwriters have the flexibility to account for a broker’s customer-service program,” says Fuhrman. “We’re seeking a more formalized process.”

The QSC program, launched in 2000 and now being used by about 500 brokerages, representing some 15,000 associates who’ve gone through the training, is built around the idea that customer service can be systematized. That enables brokers to build risk-reduction via customer satisfaction directly into office procedures in a measurable and repeatable way.

“Customer service shouldn’t be hit or miss depending on the inclination of individual associates. It should be a process salespeople follow to manage their customers’ expectations,” says Larry D. Romito, QSC president and CEO.

Early results

Even without complete data, the first fruits of Gallagher’s customer-service claims reduction effort are in. Last June, National Union Fire Insurance, a member company of American International Group Inc., a major U.S. insurance provider with operations in more than 130 countries, announced it would take into account a broker’s QSC program. Since then the insurance company has written policies factoring in the certification, but a spokesperson for Gallagher said in late October it was too soon to estimate the volume because the program was still just getting off the ground.

Fuhrman can’t say how much of a discount insurance providers will give the QSC brokers he’s working with, but he believes it will be in the double digits. One or two insurance products reflecting the reduced premium structure could be ready from insurers by the second quarter of this year, he believes.

For Gallagher it won’t be just any broker with a customer-service program who’ll be eligible for the discounts; it’ll be those who offer the QSC program. The reason: “The Quality Service Certification model makes it easier for us to convey the message to underwriters that this group of brokers has a consistent customer-service process,” says Fuhrman.

Systematizing quality service

Under the QSC program, a brokerage hires QSC to provide initial training to its associates in widely accepted customer-service techniques such as setting expectations and maintaining open lines of communication. QSC uses a third-party provider to obtain feedback from the associate’s clients shortly after closing about how well the associate met customer-service goals. The broker also offers a guarantee to clients that if they’re not satisfied, they’re entitled to amends, typically a cash credit to buyers and, for sellers, the opportunity to rescind a listing agreement.

The broker uses analyses of the feedback to identify customer-service areas that are consistently found to be weak, both among individual associates and in the company as a whole.

Associates and brokers who take the initial training have the option of being certified in customer service (by taking a test and paying a fee). They maintain that certification by scoring above a certain minimum performance level.

Among the details to be worked out: The amount of E&O discount might be tied to the percentage of associates in a company who become certified. A company with 75 percent of associates certified would receive a deeper discount than one with only 25 percent certified.

Gregory Scott, president of the Beazley Co., with 550 associates in 25 offices in Connecticut, who’s used the QSC program since 2002, says he can’t directly tie any effect to his E&O premiums. But he believes the program has helped keep his claims low, and that’s kept his premiums from rising.

“With many claims, people are just aggravated about the transaction and are left with a bad taste in their mouth,” he says. “That’s where a systematic approach to customer service can make a difference.”

“At the end of the day, satisfied customers are far less likely to sue,” Fuhrman says, “so instituting a system in that regard should lead to fewer claims and thus lower premiums over time.”

Risk management means E&O credit

You take risk-management practices, such as careful documentation by your sales associates, seriously. So does that mean you’ll pay less in errors & omissions insurance premiums than you otherwise would? The answer is yes, say insurance specialists, but how much less can vary greatly by state and by individual insurance underwriters.

As a rule of thumb, expect to receive a discount of 5 percent to 10 percent off your base premium for each of some half-dozen risk-management practices you institute, says Joan Schmalz, executive vice president of insurance provider Geo. F. Brown & Sons Inc., in Chicago, a REALTOR® VIP Alliance Program partner.

And expect to reduce your total premium between 15 percent and 50 percent, says Terry Cooper, vice president of sales at Pearl Insurance, based in Peoria Heights, Ill. Pearl provides insurance administration for American Home Shield, also a REALTOR® VIP partner.

The amount of the discount, if any is granted, will vary greatly by state, because each state imposes its own rules on how much flexibility underwriters have. And underwriters themselves exercise flexibility within their internal company guidelines on how to apply discounts, says Schmalz.

Risk-management practices that typically qualify for discounts, or premium credits as they’re sometimes known, include

  • Attendance by brokers and associates at loss-mitigation or risk-management seminars and state-required continuing education courses, including those covering risk management
  • Use of industry-standard contracts and disclosure forms
  • Absence of claims by the brokerage in the last few years, typically the last five
  • Purchase by the broker’s clients (or by the broker on behalf of clients) of home warranty policies

The home warranty policy is considered key to claims reduction because it gives buyers who discover an undisclosed property condition after closing the financial means to get it fixed. Without that, they’re more likely to make a claim against the brokerage, says Schmalz.

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