What should you know about your Real Estate Errors and Omissions policy?
What should you know about your Real Estate Errors and Omissions policy?
This insurance helps protect you and your business from crippling claims and lawsuits, so it’s important to know what it covers, what it doesn’t, and what various terms and coverages mean.
Here are the sections you’ll find in a typical Real Estate Services Errors and Omissions Insurance policy.
Named Insured: what does that mean?
This could be your name as an individual or a company name. For individual policies: this includes you and your franchisor if applicable.
For company policies: stockholders, LLC members (if Named Insured is an LLC), partners (if Named Insured is a partnership) officers, directors, employees, and former officers/directors/employees are covered for authorized duties for the Named Insured while they are/were involved with the Named Insured. Coverage includes independent contractors who are real estate agents or brokers for the Named Insured, and unlicensed employees of licensed independent contractors.
It’s typically one year for real estate E&O policies.
Retroactive Date: what’s that and how does it work for E&O?
It’s the date from which your “claims made” policy will cover you. That means that claims made during your current policy period, for services you provided in the past, may be covered from the first date for which your real estate E&O coverage was continuous (either in your name or your company name).
It’s critical for every real estate professional to ensure that your real estate E&O, whether you or your company pays for it, remains continuous with no gaps in coverage that could leave you vulnerable to claims and lawsuits.
Insured Services for E&O: what are they?
Residential Real estate sales, Residential property management, appraisal, escrow, transaction coordination, mortgage broker, commercial real estate sales, commercial property management.
Your E&O policy may cover several Insured Services. Whatever activities you’re currently involved in, be sure your current policy includes coverage for those services.
Because your policy also covers claims made for services you provided in the past (from your Retroactive Date), be sure EVERY policy covers you for every type of service you may have provided in the past.
If you used to perform property management services but you don’t currently, you still need to have property management coverage on your current policy. Otherwise, if you have a property management claim from your prior activities, you won’t have coverage. If you were involved in selling agent-owned property in the past, be sure your current policy covers agent-owned property sales.
If you’re covered under a company E&O policy, be sure to check your coverage each year. If your company doesn’t include all the Insured Services on the current policy that you were involved in since your Retroactive Date, you won’t have coverage for those past activities.
Limits of Liability: how do they work with E&O?
Your policy “Limit of Liability” is the maximum amount the policy will cover. “Each Wrongful Act” is your per-claim limit. “Aggregate” is your total limit for your policy year. Limits may be expressed as $100,000/$500,000 where the first number is your per-claim limit, and the second number is your total limit for the year.
Your CRES policy may list Lockbox limits here as “to Policy Limit/None”, meaning if your policy Limit for “Each Wrongful Act” is $100,000, your Lockbox Limit is to $100,000 per claim and there is no limit to coverage during your policy year.
Other Endorsements and the amount of coverage for each that your base policy includes may also be listed here.
Retention: what is that?
Retention is the out-of-pocket cost that will be due per claim before policy benefits may be paid. CRES individual policies typically have a $1,000 retention. Company policies can have a range of retention amounts to choose, starting at $1,000.
CRES members have at least two ways to reduce retention: provide a CRES qualified home warranty or provide a CRES Building Permit History Report to the buyer before closing.
Premium: what are the payment options?
Your premium is the cost of your policy for the year. CRES Individual E&O policies can be paid easily online in a single payment. CRES company E&O policies may also be paid in a single payment online, in a series of payments (available in some states), or Per-Transaction.
If your company is eligible for Per-Transaction pricing, the cost of the policy will be paid based on the number of transactions you complete each month (with a minimum of one transaction paid per month).
Endorsements: what does that mean in E&O?
An endorsement is coverage your policy includes in a specific area. For example, most CRES individual E&O policies include a Pollution Coverage Sublimit of Liability of $100,000 or more. For any claim alleging a failure to disclose the existence or presence of any pollutant made during the policy period, Named Insured will be covered for Damages and Defense Costs up to the Sublimit of Liability of $100,000. It is a “sublimit” because the amount is included within the Limit of Liability of your policy.
Claims Made E&O Policy: how does that work?
A Claims Made policy provides coverage for claims made and reported during the policy year from your Retroactive Date to the present. Coverage does not include any Wrongful Acts (claims) committed before the Retroactive Date. (This is why ensuring continuous E&O coverage is so important.)
Defense Costs: The default is for Defense Costs to be included within the Limit of Liability. That means the costs of your defense will come out of your per-claim and total liability limit for the policy year.
An endorsement may be included or available as an option in your state for Defense Outside the Limits. This endorsement gives you an additional limit, typically equal to your total liability limit for the policy year, to cover defense costs.
What is Insured
This section explains how your policy benefits works.
Wrongful Acts include any negligent act, error, or omission, oral or written material that slanders or libels, wrongful entry into or eviction of a person from a room or dwelling that a person occupies, or malicious prosecution.
You are insured for claims made against you arising from a Wrongful Act committed between the Retroactive Date and the end of the policy period.
Claims must be first made and reported during the policy period and must concern property located within the US or Canada. A claim may be covered under the policy in effect on the date the insurance company receives notice of the Wrongful Act.
Your policy will pay sums in excess of the Retention and up to the Limit of Liability on your Declarations Page that you become legally obligated to pay as Damages or Defense Costs, because of claims as a result of a Wrongful Act in performing Insured Services for anyone other than you.
The insurance company has the right to appoint an attorney and defend any claim, even if the allegations are groundless, false, or fraudulent. You may hire additional counsel at your expense as well.
The insurance company has the right to investigate any claim and/or negotiate a settlement of a claim, but they will not settle a claim without your consent. If your insurance company recommends a settlement to you but you do not agree, your Limit of Liability is reduced to the total for which the claim could have been settled plus claim expenses up to the time the recommendation was made.
If your claims have exhausted your Limit of Liability in paying Damages or Defense Costs, you have no more coverage under your E&O policy for that policy period.
- Bodily injury to you, including any loss of wages.
- Infringement of copyright, trademark, patent, or other intellectual property rights.
- Unfair competition, restraint of trade, or other violation of antitrust laws.
- Disputes involving fees, commissions, the failure to pay or collect escrow or tax money or commingling of funds or other property.
- Property syndication, real estate investment trusts, limited or general partnerships, including corporations, or ventures when any claim is brought by or on behalf of an investor, shareholder, or partner in the entity.
- Failure to maintain adequate levels or types of insurance.
- Ownership, syndication, or development or property, feasibility studies, property surveys, opinions relating to zoning laws, or activities as investment advisor/manager, construction advisor/manager, risk manager, or title abstractor.
- The performance of services by you which can only be performed by a licensed attorney or CPA or a professional investment advisor or financial management consultant.
- Any theft, misappropriation of funds or property, or the inability or failure to safeguard any escrow, trust, money, securities, property, assets, accounts, or funds as a result of unauthorized, misleading, fraudulent, false, or deceptive information or instructions, including computer fraud, electronic or wire fraud, extortion, or ransom demands.
- Refunds, rebates, discounts, or other fees or charges.
- An intentional fraud claim is a positive assertion of fact, meaning you say something affirmative about a property that is not true, and you know the information isn’t true.
- Expense Reimbursement for Named Insured to appear at our request at any legal proceedings, up to $750/day, $10,000 per claim, $50,000/policy year.
- Disciplinary Proceedings attorney fees and other costs up to $20,000 per claim, $50,000 per policy year.
- Public Relations costs for advisory services up to $25,000 per event (death, serious illness, or other event that can damage the reputation of Named Insured), $50,000 per policy year.
- Subpoena assistance up to $30,000 per subpoena to cover your attorney’s fees, so you can have an attorney provide advice regarding the production of documents, prepare you for sworn testimony, and represent you at the deposition.
- First Party Cyber Liability Coverage up to $50,000.00 per Policy Period for the cost of hiring a third-party consultant or adviser, including client notification costs, to mitigate the potential for claims arising from an actual security breach which results in the loss or theft of confidential client information.
- Not-for-Profit Directors Coverage for Owner/Broker of the Named Insured up to $15,000.00 per claim or $30,000.00 per Policy Period for Damages or Defense Costs arising out of the Owner/Broker’s activities as a Director or Officer of a Not-for-Profit Organization, provided that such activities have been previously disclosed to the Company.
Consumer Financial Protection Bureau (CFPB): Up to $150,000 per Policy Period for Defense Costs incurred in responding to a CFPB Matter. Does not include Damages. Most CRES E&O policies include this coverage.
Escrow Disputes (or Earnest Money Deposits): protects you from alleged failure to pay or refund escrow money, security deposits, taxes or commissions. Most CRES E&O policies include $100,000 for escrow disputes coverage.
Retention Reduction: Retention may be reduced by $2,500 by providing a CRES Building Permit History Report to a buyer before closing. (Most CRES E&O policies include a minimum of 25 free Reports per policy year with discounts on additional reports.) Retention may also be reduced by an additional $2,500 by purchasing a CRES Qualified Home Warranty for your seller. CRES may also reduce your Retention amount by 50% if the claim is settled prior to litigation or arbitration.
Tail Coverage or Extended Reporting Period: At the conclusion of your policy period (within 30 days of renewal), you can purchase Tail Coverage to cover past activities for an Extended Reporting Period of one to four years.
This can be useful if you have individual E&O now, and plan to leave the real estate profession, or if you’re moving into a role with company E&O (when your E&O will no longer be in your name).
For company E&O policies, if your real estate firm is sold or goes out of business, the firm can purchase Tail coverage.
Tail coverage costs can range from 125% of the original premium for a one-year tail, to 200% of the original premium for a four-year tail policy.
Per Transaction Reporting (for companies in select states which do residential real estate sales or mortgage loans): you pay a fee per transaction each month, by submitting a monthly log of transactions, with a minimum payment for one transaction due. Commercial, land, residential properties with 5+ units, or transactions with dual representation by the Named Insured count as two transactions. Reporting and payment is due by the 10th day of the following month.
Excess Coverage (for companies in select states): Excess coverage is in addition to the individual errors and omissions policies of your independent contractors. This coverage may be used if coverage from the individual policies has been exhausted.
Conformity (for states where real estate errors and omissions insurance is required). Amends your E&O policy to meet the requirements of additional states where you hold a valid real estate license.
You must notify CRES in writing as soon as there is a claim or a circumstance likely to result in a claim.
This is especially important when your policy renews. If a policy changes from one insurance company to another, and a claim is known by you in the prior insurance policy period (but not told to the prior insurance company) and you don’t present the claim until the second insurance policy period with the new insurance company, neither one of those companies are going to pay the claim.
Email CRES at GGB.LV2.CRES.Claims@ajg.com.