Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.
Errors & Omissions: Reduce Your Risks, Reduce Your Premiums
Real estate is risky business, but that doesn’t mean you have to break your budget for an errors & omissions policy that meets your needs.
April 1, 2007
Errors & omissions insurance is a necessity, regardless of whether it’s required in your state, experts say. After all, just one lawsuit can jeopardize your career and financial stability.
“Going without E&O is taking a gamble,” says Greg Leffard, vice present at Hartford Financial Products, in Hartford, Conn. He’s seen defense costs for real estate lawsuits range from a couple thousand dollars to the mid $100,000s.
Misrepresentation and failure to disclose are among the most common claims, but even if you follow the law meticulously there’s no guarantee you won’t get sued. “Of all the claims we defend, one-quarter to one-third are situations in which the real estate practitioner has done nothing wrong,” says Karen Chambers, managing director of real estate professional liability for Travelers, an insurance agency based in St. Paul, Minn.
Unfortunately, staying safe comes with a price. E&O insurance premiums have been steadily rising, in part because of an increase in lawsuits and legal costs. But there are discounts if you can prove you’re taking steps to reduce your risk. “We like to see prevention methods in place,” Leffard says.
9 Ways to Reduce Legal Risk
Practitioners at large firms often obtain E&O policies through their brokerage’s preferred provider. However, in some cases it’s necessary to shop for your own insurance. Since premiums are determined by your individual situation and risk profile, there’s no one-size-fits-all policy.
As with other insurance policies, your desired deductible and level of coverage play big roles in setting your premium. But there are other deciding factors: Insurers look at the value of properties you sell, your transaction volume, gross revenue, and risk management practices, among other things.
If you engage in higher-risk business activities, such as providing property management services, doing commercial and raw land transactions, and selling agent-owned property, you can expect to pay a higher rate.On the other hand, if you go out of your way to prevent being sued, you can often find a discount.
Experts in E&O insurance share these risk reduction strategies, which could save you money on your policy:
- Meet the four requirements. Many insurers offer discounts or additional benefits if you meet four requirements for every transaction: Recommend qualified home inspectors use home warranties, standard contracts, and seller disclosure forms. “Insurance companies are obviously sending a message. Why not make these practices standard?” says Lisa Robinson, president of Pinnacle Insurance Consultants, a Scottsdale, Ariz.-based Insurance brokerage specializing in real estate E&O insurance.
- Create written customer service policies. Such policies show you’re organized and thorough, and will help you build strong customer rapport. Remember, clients are less likely to complain when they’re treated well. “Management can’t tolerate sloppy record-keeping or associates not delivering papers on time or returning calls,” says Bob Read, CRB, GRI, principal broker with RE/MAX Equity Group Inc., Lake Oswego, Ore., and author of Risk Hotline for Real Estate. “It’s important to have pro-active management and a policy of doing the right thing.”
- Take classes. Some E&O insurance providers offer discounts for continuing education and professional designations. “It shows commitment to the industry,” says Chambers. Education should focus on risk reduction topics such as ethics, writing listing agreements, and disclosure laws.
- Keep paper trails. Maintain transaction logs to record what you discussed with clients and save electronic copies of every document related to a transaction (For a list of items to include, see 12 Things Every Transaction File Should Have). Follow up client conversations with e-mails summarizing the phone or in-person discussion. “If a complaint comes up that leads to a lawsuit, the question then becomes: How defensible are you?” says Robert N. Bass, a Phoenix-based attorney specializing in broker defense. “You want a well-documented file to defend yourself.”
- Ask a lawyer for advice. Bring in a lawyer who’s experienced in litigating real estate matters to examine your risk areas and advise you on risk management policies. Lawyers also can conduct seminars at brokerages, Read says, whose company hired an attorney to keep practitioners up-to-date on hot issues and provides advice on staying out of trouble.
- Use board-approved forms — not your own. When it comes to disclosures and purchase agreements, it’s critical to use the approved forms. “Insurers prefer forms that have been scrutinized by the industry,” says Ron Jenson, an independent insurance broker who specializes in real estate E&O insurance at Sentry West Insurance Services, Salt Lake City, Utah. Also, don’t change the language in standard contracts.
- Have your broker review and sign off on every transaction. An extra set of eyes can prevent problems and catch mistakes.
- Make sure everyone on your team is licensed and insured. Your “team” includes appraisers, lawyers, inspectors, and anyone else involved in the purchase or sale of a home. Each of these team members should be properly licensed and protected by their own E&O insurance. “It gives us an outer shield of protection and insulates us from claims that we negligently referred clients to someone,” says Bass, also vice president and general counsel for Phoenix-based Dan Schwartz Realty Inc.
- Stay within the scope of your expertise. Don’t advise clients on issues outside your area of expertise, such as taxes and legal topics.
Smart Shopping Tips
If you’re not already insured, the first step to finding an E&O carrier is to contact an insurance broker who can help you analyze your insurance needs. An insurance broker can make side-by-side policy comparisons and shop all the E&O providers to locate the best product, insurer, and price for you, Robinson says.
“We’re akin to a buyer’s agent in real estate, only we work on behalf of the insured,” adds Robinson, who considers E&O to be the most complex policy in the insurance industry.
Some real estate boards provide lists of local E&O brokers, but often the best way to find a competent broker is through word-of-mouth, experts say.
When shopping for an E&O carrier, follow these tips:
- Look for experience. Be sure your insurance carrier has at least three years of experience providing real estate E&O insurance. Do adjusters specialize in medical malpractice and do just some real estate work? “There’s value in dealing with adjusters who understand the real estate business,” says Bass.
- Check for the ‘Best’ ratings. A.M. Best Co.’s ratings are recognized as a benchmark for assessing insurers’ financial strength. Your insurer should have a rating of A or better.
- Know the exclusions. Many policies have exclusions for complaints related to fair housing, civil rights or discrimination; mold disclosure; environmental hazards; agent-owned properties; and intentional, dishonest, malicious, fraudulent, or criminal acts. You may be able to get coverage on some of these items for an additional cost. Learn more about exclusions.
- Seek membership discounts. Through its REALTOR® Benefits program, the NATIONAL ASSOCIATION OF REALTORS® has negotiated member discounts with E&O provider Geo. F. Brown & Sons. Inc. Your local and state associations also may offer discounts or endorsements of insurance providers.
- Don’t shop solely on price. You could miss out on critical coverage if you choose an E&O policy on price alone.
- Know how frivolous complaints are handled. Some companies settle them quickly, but such complaints still could adversely affect your risk profile and cost you higher premiums in the long run.
- What’s the prior-acts date? The prior-acts date, also called the retroactive date, covers wrongful acts committed in the past. It’s the earliest date that a wrongful act could have been committed and still be covered under a policy. When changing insurance carriers, you’ll want to make sure your new carrier offers the same prior-acts date as the existing carrier.
- Cover the basics. Don’t forget to ask the basics: What does the policy cover? Who does the policy cover (an especially important question if you’re a broker or if you have an assistant working for you)? What’s the policy’s per-claim limit and aggregate limit? Are defense costs part of that limit? What’s the deductible? How quickly are claims processed?
- Never let your policy lapse. There is no grace period with E&O, so be certain you have continuous coverage. If you don’t, you’ll lose your prior acts coverage. Bass says one of his broker clients let his policy lapse and was unable to pay damages on a lawsuit that stemmed from a mistake a practitioner in his office made. The broker was forced to declare bankruptcy and his real estate license was revoked.
- If you’re a broker … Find out if your policy covers all types of professional services delivered by your company. Also, as part of your company’s independent contractor agreement with salespeople, are individual agents obligated to cooperate and defend against claims or lawsuits if they arise, even after they leave the company? If not, that would be smart to add to the agreement, suggests Bass.