Errors and Omissions Insurance, or “E&O” for short, is arguably the most significant insurance coverage a real estate firm can possess. As a professional in the field, you seek to maintain the highest quality standard in your work while providing the best possible service for your clients. However, despite your best efforts, there may be some clients who end up dissatisfied with your work. We all make mistakes or errors in judgment, and this form of insurance is here to cover you and your firm. Errors and omissions is also commonly referred to as “professional liability” insurance.
The scenarios in which E&O insurance would come into play range from failures of professional responsibility—such as when you forget or misunderstand a relevant law or restriction in the state you operate your business in—to delayed or incorrectly filed paperwork. Allegations made by clients regarding fraud, failure to obtain client consent on a matter of business, and conflicts of interest will also trigger E&O. Essentially, the matter boils down to this: any mistake you or your business commits that causes some level of expense or losses for your client can be a cause for a claim which E&O insurance is designed to cover.
Example 1: You’re the property manager of a large apartment building, and your firm is responsible for maintenance and upkeep. Due to a malfunction, a roof-mounted HVAC unit leaks and floods the top floor apartment. The property owner is sued by the tenant and in turn, sues you for failing to properly maintain the unit.
Example 2: You’re a real estate agent representing a buyer, and you help them complete the purchase of a home. After closing, the buyer discovers a structural crack in the fireplace that was not discovered during the home buying process. They sue you for failing to discover and disclose this defect to them.
Example 3: Your home inspection company performs an inspection on a property and clears it for sale. After the property is sold, a flaw in the water pipes, requiring major repairs, is discovered, which was not apparent during the inspection. The buyers of the property sue your home inspection company for failing to discover this flaw.
Considerations for real estate agents
As a real estate agent, if you are affiliated with a real estate firm where you are not the owner, you may have some insurance coverage through the firm. Real estate agents are often offered E&O insurance as part of larger packages provided by their agencies. However, real estate professionals with agency-sponsored insurance plans should carefully consider whether those plans provide comprehensive coverage for your work.
Thirteen U.S. states require agents to purchase personal E&O insurance plans, even if agents receive E&O through their agency because agency E&O plans are often not comprehensive enough to cover the gambit of liability claims agents may be subject to. It may be a wise business decision to purchase your own individual coverage.
A few of the downsides of getting coverage through your firm include:
Coverage limits are shared. Many agencies will purchase $1 million in E&O insurance, but this coverage limit is shared among all the agents at the firm. If another agent has a claim unrelated to your work, it would reduce the limit of insurance available to you if you have a claim. The amount of insurance may not be adequate to cover claims for all agents at the firm.
Prior transactions may not be covered if you switch agencies. If you are no longer working with an agency, they may take you off their E&O plan, and you may lose coverage for transactions that you facilitated while working there.
Firms can cancel the policy. As an independent contractor, you may not have any control over whether your agency keeps their E&O coverage. If the firm runs into financial difficulty, they could cancel their E&O insurance without your knowledge or consent, and you would be left uninsured.
What does errors and omissions insurance cover?
Most E&O policies will cover any professional mistakes you make that arise out of your practice as a real estate professional. What is common to any E&O insurance policy is that it covers you personally as well as your real estate firm. It also covers any eligible employees in the area in which you practice.
However, no two insurance providers offer the same policy. Therefore, it’s incumbent upon you to discuss coverage options with agents and brokers and carefully read over the details of any policy you commit to. Many policies will go further in offering coverage for activities only incidental to the real estate business, such as acting as a director, officer, or other member of a professional organization.
The items listed below are typically excluded from E&O insurance claims:
- Criminal, fraudulent, dishonest or otherwise malicious acts
- Services rendered to businesses controlled or owned by the insured organization
- Fiduciary duties to retirement plans covered under the Employee Retirement Income Security Act (ERISA)
- Property damage and bodily injury (these particular claims fall under general liability insurance)
- Claims and lawsuits between real estate professionals who are both part of the same insured company
- Any claims in which a real estate professional or company was aware of the possibility of a claim but did not disclose it before the policy took effect
Limit of Liability
One of the most important considerations when evaluating E&O plans is the “limit” of liability on offer. Liability limits represent the maximum amount your insurance company will pay out in the event of a claim. Higher limits mean higher potential coverage payouts, but this may also bring along higher premium costs.
This limit figure is generally given in a “per claim/aggregate” basis. For instance: a plan may offer a limit of $3 million per claim and $3 million in aggregate. What this means is that the provider is able to cover up to $3 million worth of compensation for a single claim and up to $3 million in combined payments for a year’s worth of claims. For most policies on offer to real estate professionals, any fees associated with legal defenses of claims made are included within coverage limits.
When adopting a new policy, you can choose the amount of your deductible. Deductibles represent the amount of money you or your business are responsible for paying out of pocket before your insurance coverage kicks in. For example, say you have a claim filed against your company in the amount of $50,000. If your deductible is $20,000, you will be responsible for $20,000 of those payments, and your insurance provider will cover the other $30,000.
Different companies will each offer their own options for deductible amounts. A typical deductible amount might range from as little as zero dollars to as much as $100,000. Higher deductibles are associated with lower premiums.
Errors and omissions policies are what’s called “claims-made”: policies that trigger once a claim is filed. Put in another way: E&O kicks in at the moment a claim is filed, rather than at the moment the event which caused the claim occurred. The alternative to claims-made policies are “occurrence” policies, where coverage is triggered by the event itself, rather than the claim filing.
To further clarify this point, consider what would happen in the following scenario. In 2018, a former client of your real estate business, whom you conducted business with during the 2016 calendar year, discovers an error you made in your business with them. Although you concluded your business together in 2016, your insurance policy in 2018 would be what covers this claim, rather than the policy you had in 2016 when the error occurred.
What this means for you, practically, is that the moment your E&O policy runs out is the moment that coverage will no longer be available to you. If you committed a workplace error on the 14th of the month, your policy ends on the 15th, and your client files suit against you on the 16th, your policy will not cover those costs.
Part of any claims-made policy is a “retroactive date”. The retroactive date represents the original date from which your policy is active. Any business performed prior to the retroactive date is not covered under a given policy.
Consider this example: you own a policy with a retroactive date of August 15th, 2018. A client files suit against your real estate business on September 20th, 2018, regarding a matter between you and them which occurred prior to August 15th. Even though the claim in this instance would theoretically be filed during the time of year in which your policy is active, the claim cannot be made, because the matter happened before your policy’s retroactive date.
Real estate professionals who have had continuous E&O insurance throughout their professional careers will not have to worry about this sort of scenario, as their retroactive date will have encompassed all their work from the very beginning.
Due to the nature of retroactive dates, temporarily discontinuing your E&O insurance could result in coverage lost for all business you’ve conducted in the past.
Extended Reporting Period
Oftentimes, claims-made policies include an “extended reporting period”, at no cost. This period allows for some 3-6 months after the policy period is over, within which time you’ll be able to make claims for incidents that occurred during the period in which you were covered. For instance: if your policy ended on August 15th, 2018, and you file a claim on October 10th of the same year for an incident that occurred three months prior, then an extended reporting period of three months or more would allow you to go ahead and file that claim.
Some policies offer the option for extending your already-extended reporting period. For an added price (usually calculated in relation to your premium), you may stretch your reporting period from months into years. There’s even an option called, colloquially, “buying out the tail”. When you buy out the tail, you purchase an unlimited reporting period either from your current insurance company or from another insurance company on the open market.
Changing Insurance Carriers
Because of the restrictions on claims-made policies, you should make sure that your coverage is continuous when switching providers. If you find yourself wanting to change insurance providers, a safe way to ensure you’re covered in all potential cases is to set your new policy’s retroactive date to be the same as the retroactive date of your previous policy.
If your new insurer isn’t willing to offer the retroactive dates you need, you may seek to purchase an unlimited reporting period from your prior carrier or on the open market. If you do not follow these precautions, you may be opening yourself up to liability during that window of time between your two policies’ coverage dates.
Arguably, the most important time to be buying an unlimited reporting period on your insurance policy is when you decide to retire from your career in real estate. If you cancel your insurance policy when you retire without “buying out the tail”, you will not be covered for any legal liability from work done before retirement. Even though you are retired, former clients can still sue you for work done in the past, and you may not have any coverage if you cancel your policy.
The one scenario in which this rule wouldn’t apply would be if you’re retiring from a job where your company provides E&O insurance for its employees. In that case, your work for them would remain covered by their policy even if you’re no longer working. This coverage would remain in effect as long as the company does not cancel their E&O insurance.
Applying for Professional Liability Insurance
Upon applying for a new or renewed E&O insurance plan, your provider will ask you to disclose any potential business matters that have come up in your recent work, which may cause a future claim. You must fully disclose any potential future claims to the extent possible, even if they haven’t come to fruition yet, during this time. If you fail to disclose, you may be denied coverage once the claim finally is reported.
In summary of the information provided above: for a claim to be valid as part of an E&O insurance policy, the policy must be active, the incident in question must have occurred after the policy’s retroactive date, and notice must have been offered to the provider in a timely fashion.
Once you first become aware of a problem that may potentially become a claim, it is important for you to notify your insurer as soon as possible. Providers encourage active reporting because more advance notice gives them time to hire experts who provide help in resolving possible claims before significant damages occur.
Oftentimes, real estate professionals are reluctant to report claims early on in the process, as they fear it will increase the price of their premiums. It’s important to note, however, that reports of a claim do not automatically affect one’s premium costs. So instead of ignoring the situation and hoping it goes away on its own, your best course of action is to report incidents to your provider so they can offer their help to mitigate your problems.
The price of your E&O insurance cannot be reasonably assumed before checking in with providers and allowing them the time to assess you as a potential client. This is because insurance is a game of risk management, so insurers must calculate the risk associated with taking on your business and price their offerings to you accordingly. If you work in a domain of real estate that tends to encounter more legal troubles, you can expect your costs to be higher than those in slightly less risky positions. Common risks the insurance companies will consider when assessing your case include the size and location of your business, how you train employees (if applicable), whether you have quality-control standards in place, and whether you’ve been sued before and why.
If you’re concerned about costs, your best bet is to screen multiple providers and balance what each company can offer you. It is important to remember, though, not to skimp on coverage for the sake of saving a dime. You’ll save the most money possible if you can carefully consider the needs of you and your business and then leverage that knowledge against what policies different companies can offer you.
On top of E&O coverage, there are other options available to real estate professionals and companies who want to further reduce the risk of malpractice allegations.
Perhaps you don’t get to choose the clients you work with, but if you do, make sure to avoid those with unrealistic expectations of what services you can offer. Keeping open lines of communication between you and your client can often resolve what might otherwise turn into bigger issues down the line. Also, documenting your business and communications with a client can also come in handy later on, in case of a problem.