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Are You Protected from Prior Acts? A Guide to How Far Your Real Estate E&O Protection Extends

There are varying levels of understanding among real estate licensees about how Errors and Omissions (E&O) insurance protects them from claims and lawsuits involving prior transactions . . .

Assumption: Many real estate professionals still believe that if the real estate brokerage they are working for has insurance, then they are covered for all services — and all prior acts.

Truth: Every real estate professional should check their company policy yearly to be sure that EVERY type of real estate service they have EVER provided is still covered under the current policy. Becase if you did some property management before and a claim arises from that work, but your current policy doesn’t cover property management, you have no E&O coverage for that claim.

What about prior acts? As long as you have been under the company E&O policy — and that E&O has been continuous with no gaps, then your prior acts should be covered. But if the company has ever missed payments or stopped paying on a policy, there could be gaps in coverage. E&O coverage must be continuous — and you only have coverage for those transactions that occurred while you’ve had continuous E&O coverage (either under your name or a company policy).

Assumption:  Real estate licensees may also believe that should they move firms, the policy of their old firm will cover them for the transactions they performed while at the firm. So, are they correct?

Truth: In most cases, assuming the firm has continued their real estate E&O without interruption, the firm will have coverage for prior transactions. And most claims name the firm as well as the licensee, so you may be covered.

What if your company sells or goes out of business? You will likely not be covered in the event of a claim.

The best option is to maintain personal E&O insurance in your name. With your own portable E&O policy, you will be covered even if the firm’s E&O insurance will not cover you.

Covered Services

Of course, not all real estate E&O insurance covers the same services. Whichever prior act you are being sued for will not be covered unless your E&O policy specifically states that the service is covered (and your E&O coverage has been continuous).

It’s vital to know what your  E&O insurance will cover. With CRES E&O Insurance, you can be covered for the following:

Agent-Owned Property: Do you plan on selling property that you own? Some policies exclude this type of transaction or only cover owner-occupied property, not rental properties. Most, including CRES, require inspections, home warranties, and all disclosures completed.

Retention: How much do you need to pay in the case of a claim before the policy pays? Retentions (out-of-pocket claims expense) usually range from $1,000 (for individual policies). Retention for company policies can range from $1,000 to $100,000.

Disciplinary Hearing Expense: This is usually optional. Some companies include it as part of the policy; some may include it with Risk Management. (For most CRES individual policies, it’s included in the Broad Form bundle.)

Discrimination/Fair Housing: Although not as prevalent, these claims still occur, especially if doing leasing. This coverage is usually optional.

First Dollar Defense: This eliminates the retention for claims that involve only attorney’s fees. However, if damages are paid, you will likely have to pay the retention.

Lock Box: Make sure you have this if you are doing listings. Some policies cover just Property Damage, not Bodily Injury. You want a policy that covers both.

Claims Expense Outside (or Defense Outside the Limit) : This means that attorney’s fees are covered separately from the limit of liability. In essence, it can double your available coverage.

Open House/Showings Coverage (Contingent Liability): Liability coverage usually only covers injuries at the office. This coverage extends injury to third parties and property damage coverage to your professional activities outside of the office, including open houses, showings, and even from your signage.

Pollution Coverage: Hidden dangers can occur, especially on older properties, especially mold. This coverage is usually optional, but most CRES individual policies include $100,000 pollution/environmental coverage including mold.

Prior Acts: Generally, E&O policies provide coverage for claims made against the named insured (and its licensees, if any), for transactions that occurred while the insured (and its licensees) have had continuous E&O coverage. So moving firms will likely cause you to lose coverage because the policy is in the Firm’s name, not yours. And coverage must be continuous to cover prior sales. The safest option is to maintain  your own individual E&O policy which will move with you if you change companies.

REOs and Short Sales: Some policies restrict or exclude these sales. If you list REOs, you may want to also have Property Management coverage.

Risk Management: Having proper legal guidance can be the difference between an easy problem resolution and a claim. Policies should include access to an experienced real estate attorney before a claim is filed (to help you actually prevent claims), not just after.

Residential Leasing/Property Management: These activities may not be covered automatically. Make sure the policy covers licensed and unlicensed activities.

Commercial Sales/Leasing/Property Management: If you do Commercial activity, make sure it is included in the policy. Many policies exclude or limit commercial sales, leasing, etc.

Appraisals: Appraisals are not normally covered. If you do appraisals, you will need your own separate appraiser’s E&O policy to work with mortgage companies and government entities.

Now you know what to look for in your real estate E&O coverage for Prior Acts, and how important it is to maintain your continuous E&O coverage.

See also our Ultimate Guide to Understanding Real Estate Errors and Omissions Insurance


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