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Top 8 E&O Loopholes When Individual Licensees Rely on Their Real Estate Firm’s E&O Coverage

It’s not too late to learn how to protect yourself from real estate Errors and Omissions insurance coverage loopholes that can leave a real estate career in ruins.

Each year in the United States, more than 13,000 real estate professionals are faced with a lawsuit. All too often, those real estate professionals thought their group or firm E&O policy would cover them, only to find out it didn’t. The average cost to them out of pocket? A staggering $80,000.

So how do you know if you’re covered? Do you know which gaps to look for?  The key is to have your own individual real estate E&O policy — so you’re in control of your own protection.

View the webinar replay, listen to the podcast, or see the transcript that follows.

Rob Freedman from Realtor® Magazine:

I’m really excited about the webinar today, because it’s such an important issue. This is a sponsored webinar — the magazine doesn’t endorse the content of the webinar — but we think that the information that you’re going to learn is valuable.

Let me introduce our speakers. First, Steven Sargenti is the CEO and president of CRES. CRES specializes in real estate errors and omissions insurance. Steve has held a variety of positions within the insurance industry, including with Farmers Insurance Group, one of the largest commercial carriers. He was president of Accurate Claims Services which processed claims, and he has also done consulting.

Our other speaker is Robert Sunderland, managing partner of Sunderland McCutchan. His practice emphasizes real estate transactions and the defense of licensees throughout California. In the course of his career, he’s defended in excess of 2,000 licensees in the California courts. In addition, he’s been involved in “mismanagement” consulting services as well as education for brokers and licensed salespeople. And before that, he was a general contractor building residential homes. Let me now turn it over to our first speaker.

Steve Sargenti:

Thanks for joining us today to learn about 8 real estate E&O loophole nightmares that can be career crushing. In CRES’s 20 years of protecting real estate licensees and brokers, we keep seeing these same loopholes come up over and over.

These loopholes occur when firms buy E&O coverage — and licensees solely rely on the coverage bought by the firm.

We’ve designed this seminar to educate real estate licensees and brokers, so you can better protect yourself and your business.

How many of you know a real estate licensee who’s been sued — but didn’t do anything wrong?

If you had to guess how many of your colleagues are going to be slapped with a lawsuit tomorrow, what would you say? If it’s an average day, it’ll be more than 50.

That’s right. That’s 13,000 lawsuits filed against real estate professionals each year. The average lawsuit costs $20,000 — but some of them can cost more than $1 million.

Errors and Omissions insurance companies and the real estate lawyers they hire, like Rob Sunderland, are working to keep the costs down. As a result, claims and lawsuits that involve licensees with errors and omissions coverage end up costing about a third as much as for licensees that aren’t covered. So, it’s in everybody’s interest to make sure more licensees are covered by E&O.

Most active real estate licensees and brokers carry some form of errors and omissions insurance, because they’ve recognized the importance of it. You might think, “My firm has a policy, so I’m covered.” That’s mostly true. Many brokerage firms do an excellent job of vetting the insurance coverage they’re buying, and they try to buy top notch coverage from good companies. And those E&O policies protect their licensees from most or all of the activity they do.

There are two different ways that brokerage firms can provide this protection. First, they buy an E&O policy from a traditional E&O company.

A second way for licensees to receive some sort of E&O protection from a brokerage firm is when the real estate firm is self-insured. Licensees have to be particularly careful to see exactly what your real estate firm is promising to do and when. In most situations, all of these things work out just fine. Licensees are protected, the firm’s bought good protection, everybody wins.

But there are eight particular instances that can leave licensees really stuck out in the cold.

Loophole 1: you decide to move or switch firms

How many licensees stay with the same real estate brokerage throughout their career? Not too many.

Claims sometimes take 10 years to get filed. The average claim against a real estate professional happens more than a year after the closing. Sometimes two, sometimes three, sometimes 10 years after the transaction. You need to be sure you arrange continuous E&O coverage BEFORE you move.

If you don’t, the old real estate brokerage and your new real estate company both point fingers at each other — and don’t cover past transactions.

So keep in mind:

  • When joining a new firm and their E&O policy, the new firm’s policy won’t cover your transactions from before joining the firm, BUT the previous firm and their current E&O policy will cover any acts from a licensee’s time there. (Typically, legal action names the broker, so your prior broker will be involved in most cases.)

Your previous firm’s E&O policy should cover damages and defense costs, assuming they have enough limits to cover them, and assuming they don’t hire their own attorney (and make you pay for it).

Loophole 2: your new firm doesn’t have coverage for your activity

Robert Sunderland:

The challenge that a licensee may face when changing firms is the new firm may not have coverage for every activity the licensee was or is involved in.

EXAMPLE: the “innocent property manager.” Somebody leaves a brokerage that has property management coverage (even though they may not be doing a lot of property management, but they want to be very careful for their licensees).

The licensee now moves to another firm. That firm may believe, “We don’t do property management, so we’re not going to pay for that in our E&O policy.” So, they just don’t have E&O coverage for property management activities. When the licensee moves to the firm, he or she may not think to ask about this detail of E&O coverage.

The licensee, as a courtesy, picks up some rent checks, maybe calls a plumber to come out to do something for a client they once represented. Guess what? They’re going to be considered a property manager. They get sued as a property manager, and there’s no E&O coverage. The old broker is not going to have responsibility for that necessarily, because it’s not a transaction that involved them. And the new brokerage is going to say, or their E&O carrier is going to say, “There’s no property management coverage.”

The licensee may not even realize they’re doing property management activities – and frequently won’t inquire about whether E&O covers those activities BEFORE the licensee changes real estate firms.

Unfortunately, as you move from one place to the next, you don’t always know what you’re getting. Even real estate brokers that are very good at their profession don’t always understand E&O. It can take an insurance broker who takes the time to explain these things, and/or an attorney who’s also translating some of these items, to insure the real estate broker has the right E&O coverage.

Loophole 3: the real estate firm stopped paying on its E&O policy

Three percent of policies cancel. Three out of every 100 firms stop buying coverage because they haven’t paid for it, typically by accident.

Once there’s a lapse in coverage, the real estate firm may lose its coverage for prior transactions.

It’s like switching health insurance and having a pre-existing condition. If your E&O insurance coverage isn’t continuously in place, then the insurance companies may not cover the prior transactions. So, three percent of real estate firms are canceling their E&O every year — and losing for themselves, their company, and their licensees all the protection for all of their old transactions.

Loophole 4: the real estate firm goes out of business

Steve Sargenti:

A licensee was sued on a transaction that had closed eight years prior. Her broker sadly got cancer and passed away, the firm was wrapped up, and no E&O or tail insurance was bought at all. This licensee is on her own. Even though she was insured by her real estate brokerage at the time that transaction closed, the broker sadly passed away, the business is gone, and she’s the only pocket left to go after.

Loophole 5: the real estate company fails to renew their E&O policy

We looked at a firm that failed to renew its policy with another insurance company on time because their bookkeeper fell ill. That failure to renew led to lost coverage for all prior transactions. There was a $135,000 claim presented against a licensee in the firm, and they are currently struggling to figure out how and who is going to pay for the claim.

Loophole 6: the merger or acquisition event

Mergers and acquisitions are common in the real estate space. Most licensees have no idea whether their liability insurance policies are transferring to the new firm or not, whether there’s a tail insurance policy, etc.  Many cases that we see, that doesn’t happen.

Licensees will call and say, “I was insured with Real Estate Company X, and they were bought by Real Estate Company Y. Real Estate Company X had this insurance protection, so I’d like to make a claim.” The reality is that when Real Estate Company X was sold, if they didn’t plan for continuous E&O coverage, they left all the licensees unprotected.

CRES offers, like all insurers do, these extended periods where an old firm that’s selling can have more time to report claims that come in against their licensees. Any firm of any size can buy that “tail” protection for one, two or three years – but it often isn’t part of the merger/acquisition deal.

Robert Sunderland:

We also see this frequently. Somebody’s retiring or getting out of the business. The new purchaser in these mergers and acquisitions will say, “I’m only entering into an asset purchase, I’m not purchasing the liabilities and therefore, I don’t have any legal responsibility.” But the individual licensees are left sitting in the middle. If they’re sued for a previous transaction, they will not have coverage — because neither of the brokers insured that the E&O policy was going to continue in place.

If your real estate firm has a close relationship with an insurance broker or an E&O related defense attorney that’s extra sensitive to these items, hopefully they will address the E&O issue.

But there are hundreds, if not thousands, of real estate companies that won’t have those advisers guiding them about E&O. When the licensee moves from one company to the next, or there’s going to be a sale or closure of the real estate company, the licensee isn’t going to have coverage. For many licensees, they won’t realize it until it’s too late.

Loophole 7: real estate firm hires an attorney instead of filing an E&O claim

It’s not unusual. With my clients, I have a very close relationship with their insurance carriers. I will be approved as panel counsel, and I’m acting essentially as a liaison. I’ve got the carrier on notice of the claim, and I will move forward with it.

However, a lot of brokers will have their attorney just write a letter. The real estate brokerage thinks, “Well, we wrote a letter, and we thought it was going to go away.” They hear nothing for another year, they renew their policy. They don’t say anything about the issue because as far as they could tell, it was dead.

Low and behold, it becomes a lawsuit. And they tender that to the insurance carrier. The insurance carrier sees a letter from a year or more ago and their position is, “You had notice of this, you didn’t report it timely, there’s no coverage.” Although an attorney worked on it, although the real estate broker was responsive to the issue and tried to do their best to prevent it from turning into a bigger issue, there’s a problem because it wasn’t reported correctly.

Loophole 8: your real estate company actually runs out of E&O coverage

Steve Sargenti:

A real estate firm may buy one, two maybe even three million dollars of insurance coverage. And that insurance limit could be used up by a claim against the brokerage and one of their salespeople. When that happens, there’s no more coverage left for anyone. When you start thinking about an average claim costing $20,000 in a firm with 100 or even 1,000 licensees, all dividing up $1M million coverage, it becomes apparent that coverage isn’t always adequate. Not only is that broker on the hook for any uninsured damages, the licensee may be also.

EXAMPLE: a large western real estate firm experienced financial difficulties completely unrelated to the real estate market. They just weren’t running their business quite right and had a couple of judgements against them on non-real estate transactions. They were experiencing such significant financial problems that they stopped paying for their E&O insurance. And they didn’t tell their 2000 licensees.

Not only did 2,000 licensees lose coverage for today’s deals, they lost coverage for all their old deals going back up to 10 years. Some of them were out of coverage for six, eight, twelve months. We couldn’t help them, because they didn’t have that linchpin of protection, that continuous coverage that protects licensees for past transactions.

ANOTHER EXAMPLE: A few years ago, a well-known insurance company started writing E&O insurance for real estate. Well, new companies that come into the E&O business don’t like to take on old liabilities. They like to start new. So, that company didn’t include past coverage in their E&O policies — which meant all of their clients lost all the protection for their old deals. One, two, three, up to 10 years of exposure for all of those deals went away because a firm purchased coverage from a household name insurance company — and never noticed it didn’t cover their prior transactions.

This is something that once you lose you cannot get back.

These are scary stories, but the risk is real. These loopholes cost millions of dollars to real estate licensees and brokers.

And a lawsuit — even a frivolous one — will take a toll on your business

Robert Sunderland:

I had one situation with a very successful licensee. She was a top producer nationally. She was sued relating to a transaction. She did absolutely nothing wrong. She was completely vindicated when it was all said and done. But her business went down. She went from perhaps number 14 to number 78 in terms of sales nationally. The lawsuit had taken a toll on her focus.

There’s absolutely nothing that could be more distracting for a licensee than being involved in litigation. Ideally, your E&O provider will have pre-claim Legal Services (which CRES has) to help you resolve as many issues as possible before they escalate into a claim or lawsuit.

So, how do we make sure these loopholes are as small as possible?

Every licensee must ensure you have continuous E&O coverage

It all boils down to just one thing — this concept of continuous coverage. It’s not like auto insurance where when the car gets into a wreck, whatever policy is in effect takes care of the wreck.

With E&O, the coverage works when the lawsuit happens. It can be one, two, three, sometimes ten years after the transaction closes that a lawsuit happens. You likely won’t know what kind of E&O protection you’re going to have in one, two, three, ten years. And any gap that happened after you got out of the business, say, you retired – still leaves you vulnerable. The only way to close that loophole is to make sure you have continuous coverage, and you have to keep checking every year that you do.

Benefits of having an individual errors and omissions policy

Rob Freedman:

Here is a question from our audience: “My company has just changed to a new company, and I left and I went on my own. I have CRES E&O insurance. How do I make sure that I’m covered , because I’ve been in the business for 12 years?”

Steve Sargenti:

If you have an individual policy with CRES, it follows you everywhere, so it’s portable. As an individual licensee, if you purchased your own E&O insurance coverage and didn’t obtain it through another real estate brokerage, you’re in perfect shape.

Rob Freedman:

A question from a brokerage owner. “What should I tell the licensees who are coming over to my new company regarding covering themselves?”

Steve Sargenti:

My suggestion for brokers is that they have all of their individual licensees buy their own coverage. Then the broker, in turn, can buy coverage for the torts of their employees or for credentialing risks, you hire the wrong guy, or for your independent liability. And there’s a couple of reasons for that.

First, brokers really like that the licensees’ policies then take all the losses. Licensees are typically sued in the case for failing to disclose or misrepresenting certain facts. The brokers are often sued for simply failing to supervise that behavior. The brokerage policies end up taking all of the losses which show up on loss runs and complicate buying insurance. But with individual licensee policies, when the licensees take all the losses, the broker doesn’t have that problem.

Another benefit is multiplied limits. A brokerage might buy a million dollars in coverage.  But if the broker had 10 licensees that each bought a million dollars in coverage, that’s a ten million dollar pool of protection for all the brokerage’s transactions, not one million.

And the third benefit is that having individual licensees buy their own E&O coverage more fairly allocates the costs of that risk among the licensees. Licensees might say, “I pay my broker $200 for insurance and Sally pays $200 for insurance, and I’m a high producer and Sally is a low producer or even part-time.” They’re both upset because they think they’re getting a bad deal. If it’s the broker that’s setting that allocation of costs, that can create some friction between Sally, you and the broker. But with individual E&O policies, it removes that problem.

Rob Freedman:

Let’s say the real estate brokerage that you work for has a policy, and the licensees are on the policy. You as an individual licensee purchase individual E&O coverage, so now you’ve got these two sets of coverage. If you get a claim against you, which one actually takes on the case?

Steve Sargenti:

Well, it depends on how you acquire the E&O. If you acquire it from CRES, the licensee policy responds first. And the broker policy then responds second, if the licensee policy either doesn’t respond at all or runs out of money. The relationship between a licensee and broker policy depends on the language in those policies. But our concept is the licensee policies are the ones that should take the losses in most cases, because the licensees are the ones conducting the actual sale of the property and against whom the alleged errors are most commonly asserted.

Rob Freedman:

“If I’m a licensee and I purchase an individual policy, do I then opt out of paying for my broker?”

Robert Sunderland:

I think that’s a question between the broker and the licensee. My experience has been the brokers will say no, because you still have liability exposure to me as the broker. I still need to make sure that I’m providing the services that I’m providing, and there are costs for that. That broker is still required, for perhaps a franchise agreement or simple due diligence, to maintain their own policy, so I don’t think they’re going to give somebody a free pass because there’s another policy. But every broker makes their own decisions.

Rob Freedman:

One person asked, “Would it be better to get individual coverage from the same company as the broker’s policy or does that not make any difference?”

Steve Sargenti:

I think that’s the best way to go about it. It’s not necessary, but that would be the most seamless way to deal with the claim that comes in against both policies, having the same company do it.

Robert Sunderland:

I think the notion with that is you have mirrored image type policies in a perfect world. So, it dovetails more cleanly, you won’t have loopholes from one policy to the next perhaps. Of course, that presumes that everybody’s got the right endorsements, and your insurance broker or your insurance company did their due diligence for you as well.

Property management activities — are you actually involved?

Rob Freedman:

“If I’m a property manager and a real estate licensee, but I don’t handle the maintenance side of the rental portfolio, the firm that I work for has a maintenance department that does handle the maintenance side, am I still responsible if something goes wrong?”

Robert Sunderland:

Absolutely. If you’re collecting the rents or you’re making the phone calls, or it’s your firm that you’re associated with, if there’s going to be a lawsuit, you’re going to be named in it. And you’re going to want to make sure you’ve got property management coverage.

Is errors and omissions insurance required?

Rob Freedman:

Now this question, “Are real estate brokers required to have coverage by law?”

Steve Sargenti:

In most places, no. There are 14 states that require individual real estate licensees to carry E&O insurance as a condition of getting a license. Those states don’t require the firm itself to have insurance, they require the licensed individual to have E&O insurance.

For example, in Tennessee, a broker that has a brokerage license must buy insurance in order to get that license issued. And the broker must have an E&O policy in place every year.

Ask to see your policy EVERY year – and review activities covered

Rob Freedman:

Next question: “My company is self-insured and insists that all licensees pay the one time fixed fee which is good for a year. Should I ask to see the policy?”

Steve Sargenti:

Absolutely. You want to make sure the activities you’re performing are covered. And you don’t just want to see it now, you want to see it every year. Because what happens if you’re conducting property management activity and that’s covered this year. But two years from now, your broker changes the coverage he buys — and doesn’t buy property management coverage anymore.  If a claim comes in against you or a property management that you’ve been doing for several years, you might not have coverage.

Robert Sunderland:

It’s not unusual to ask for some details on the policy. If you’re engaged in REO or bank foreclosure sales, the banks will require that you give a copy, at least of your E&O declarations page, to show what the basic endorsements are. That’s not unreasonable for a licensee that’s paying for something to ask the question. “What am I getting?”

Rob Freedman:

We had a couple of questions dealing with riders. “When do you need to get a rider or multiple riders for your coverage, for your policy?”

Steve Sargenti:

Whenever you change your business activity. So, you’re a real estate licensee doing residential sales for years. Then you decide to do property management, or broker mortgages, or you’re going to be an appraiser, or do a commercial sale. That’s the time to call your insurance company and say, “I’m going to start this activity. I want to make sure it’s insured not only for now, but for now and all future time,” because whatever that activity is can create liability one, two, three, even up to 10 years in the future.

Robert Sunderland:

It’s very critical that the broker or licensee who’s buying a policy has a very clear communication with their E&O carrier about what they’re doing. As an example, a licensee may say, “I’m a residential person. I represent buyers and sellers of residential houses.” They don’t do vacant land parcels, except maybe they do one or two a year. Well, vacant land may be considered commercial, but they say it’s zoned residential. So, that’s not commercial. “I don’t have a commercial endorsement.” Well, the carrier may look at it as commercial, and there may be no coverage.

This is why when carriers ask these questions in E&O applications, they need to know about these items. A good insurance broker is going to spend time drilling down to these issues with the applicants to make sure there’s the coverage. So, it’s always important if you start doing something that you haven’t done, you’ve made a change, or you’re thinking about doing something new, go back to your broker and make sure you’ve got coverage for these items. It’s something that a lot of people forget to do because they’re busy, but things happen mid-stream. You don’t want to find out after the fact that you didn’t have coverage for it.

Reporting claims

Rob Freedman:

This is another audience question. “Can you explain a little bit more about having to report all potential claims, and what is the timeframe for reporting a potential claim?”

Steve Sargenti:

Claim reporting is typically listed as a condition in the insurance policy. Many of them say “as soon as possible.” Some say, “as soon as practical.” Most state laws impose a notice rule that says you can be a little late as long as it doesn’t hurt the insurance company. But if a policy changes from one insurance company to another, and a claim is known in the prior insurance policy period and not presented until the second insurance policy period, neither one of those companies are going to pay the claim.

Retaining client files

Rob Freedman:

We had some questions about individual states: “Our state requires keeping paperwork for seven years. If losses can go up to 10 years, then is 10 years a better timeframe to keep documentation?”

Robert Sunderland:

If you’ve gone out of your way to maintain a good file, to have those disclosures that we recommend, and you’re really striving to do a diligent job and you have a clean file, there’s every reason why you want to have it after the fact. If you get sued in 10 years, you’ll finally be thankful that you saved all that paperwork.

My recommendation is to do an exceptional job all the time and save your paperwork until you run out of space. Or if you’re allowed to under your regulations, you scan and save them electronically, so you have access to them.

Tail E&O Coverage

Rob Freedman:

Now what happens if the licensee stops practicing real estate and then a lawsuit is started say five years after the person’s retirement?

Steve Sargenti:

In order to be covered, you have to continue to carry the E&O up until the time of your retirement and even past. Call your insurance company and tell them, “I’m retiring, but I want coverage for all my old deals.” And they will either cut you a one-time cost right there to sell you a three or five-year tail policy depending on your circumstances, or maybe even an unlimited amount of time to report those claims or come up with some other solution.

The big mistake is to simply let the coverage lapse, believing as many people do, that it’s like car insurance — and the insurance in force at the time of the transaction is the insurance that responds to the claim. It’s not true, it’s the insurance that’s in force at the time of the claim which can be one, two, three or even 10 years after the transaction.

Robert Sunderland:

I had a client involved in a 21-day trial. He was retired, he’d been out of the market and hadn’t sold a property or written a contract in over five years. The poor guy literally was looking at his potential life savings going down the drain. He didn’t have coverage because he was long gone and didn’t think he needed it. So, unless you have an individual policy where you’re controlling your destiny continuously (and it may not be very costly in the later years), or your previous brokerage that you were affiliated when the transaction occurred has maintained that policy continuously, you could be there without coverage.

Whether you’re selling real estate or not isn’t the key. The key is, can you be sued? You could be sued for a transaction you did 15 years ago, and you could argue that there’s a statute of limitations and everything else, but you’re going to need an attorney to do it. And you’re going to need to have an E&O insurance policy that’s active at that time to protect you.

Rob Freedman:

Let’s say you’re covered under your broker’s policy, and then you retire. The broker continues to pay that policy and then you’re sued three or four years later. Are you as an individual licensee covered?

Steve Sargenti:

Most policies will respond to claims made against former salespeople, as long as the salesperson was transacting for the broker at the time. The caveat though is, what happens if that future policy is different or doesn’t really exist.  If you’re not making your own arrangements for continuous E&O coverage, you have no control.

Robert Sunderland:

That also explains why the broker’s probably going to want to continue to charge a licensee for a portion of E&O while they’re there. Because licensees retire, and they may be on the hook down the road.

Per-transaction pricing on a company E&O policy

Rob Freedman:

“Can you pay for E&O on a specific transaction, where coverage stays with that transaction during the current ownership?”

Robert Sunderland:

I think there’s a misunderstanding when E&O carriers allow people to finance or pay their premium on a per transaction basis. The licensee thinks, “I’m paying X amount of dollars with every closing. So, I bought E&O insurance for that transaction.” That’s not really how it works. It’s just a way to allow you to pay the E&O premium by spreading the payments out over time. But you’re not buying E&O for that specific transaction.

E&O for real estate brokers

Rob Freedman:

If a licensee earns a broker’s license, does the liability increase or change as far as the E&O coverage is concerned – if they remain with the original employing broker under the E&O insurance through that firm?

Steve Sargenti:

If they’re remaining with the original employing broker and acting as a salesperson even though they have a broker’s license, their liability does not change. If they’re acting as a broker while actually transacting business, and have licensees or sales people underneath them, then their liability does change. They have multiplied transactions going on underneath their broker’s license.

Rob Freedman:

If I had an individual policy as a licensee, and then later opened up my own brokerage, can my individual policy then be transferred to cover the brokerage?

Steve Sargenti:

If you have CRES E&O, absolutely. You can take your coverage from being a salesperson on your old deals and carry that over into being a broker on your own and other people’s deals. That’s sort of the ultimate continuous coverage.

Generally, coverage for most salespeople is going to run about $200 to $300 per year. California and Texas are going to be $500 to $700 because they’re more litigious places, but it’s remarkably affordable.


Rob Freedman:

If I have licensees who are just getting referrals, do they need to have E&O insurance?

Robert Sunderland:

A licensee will say, “It’s just a referral.” It was nothing different than saying this was a good gardener or good maintenance person. The argument that plaintiffs’ attorneys will come up with is, “How can I sue you as well?” Because they want more pockets to fleece. They’re going to say it was a negligent referral. You had no business referring that real estate licensee to me. If that licensee did something bad, it’s your fault. You should have known they were going to be negligent. I was relying on you, you were my point of contact. And I’ve seen numerous people get sued over the years just based on referrals. It doesn’t mean that they don’t get out of a lawsuit, but somebody has to defend them and that costs money. Having a policy in place to protect you for that is very important.

What is “broad coverage”?

Rob Freedman:

A couple of questions about the term “broad coverage,” what does that mean?

Steve Sargenti:

In our view, broad coverage means coverage for all activities that you conducted, written by an insurance company that specializes in real estate.

For example: A non-real estate specialist insurance company will write a policy that covers a real estate brokerage for services they provide for a fee. Then the claim comes in for services that the real estate firm provided not for a fee, like property preservation in anticipation of a listing that never happens, or a freebie piece of advice. And they find they have no coverage for it.

Or, miscellaneous non-broad kind of coverage provides protection for the named insured which is usually a real estate brokerage and its employees. Well, most real estate licensees and salespeople are classified as independent contractors. An E&O policy needs to have broad coverage by including all independent contractors and even licensed and unlicensed assistants of those independent contractors.

What to look for in an E&O insurance company

Let’s talk about what to look for in an insurance company. First, financial stability. You’re asking a company to be there and protect you one, two, three, five, ten years in the future. The best place to look for that is a website called Amvest examines insurance companies for claims paying ability. A company that’s rated by Amvest as A-, A, or A+ means excellent. That means the company is very well capitalized.

A secondary thing to look at is the category size. 15 is the biggest and that means a company has two plus billion extra dollars over and above the money they’ve already set aside to pay claims.

The third thing to look for is solid business history. Particularly in specialist coverage. Real estate doesn’t work like other businesses for a whole host of reasons, not the least of which is the transactors are not employees in most cases.

The policies have to be custom and crafted in such a way as to provide protection to the independent contractor salespeople for all of the exposures that the insurance company wants to take on. Most insurance companies that specialize in this line of business want to cover more, not less.

Make sure that the firm has specialized in real estate for at least 10 years –because you want the mistakes that they’re going to make to have already happened.

And you also want to see how well you’re treated. There’s a fair amount of changes that can be requested or happen on an insurance policy, and you want a company that’s happy to do that and get you what you need. Not a call center place that treats you as if they’re doing you a favor by modifying your coverage.

Insurance companies that are in business to take your money and transfer risks, in the long run don’t belong in the market place. Insurance companies that help clients be more successful and avoid and mitigate risk are really partners. Look for a company that’s a partner. Look for companies that have prevention tools to help you get out of claims in the first place.

And you want to look for companies that have services and products that help your business and help you close more deals. We’ve created Building Permit History Reports. They’re incredibly valuable. They can tell you when a roof was done, who did it, how much it cost, how old it is, whether the work was done unpermitted or not. All of that information can be really important to your buyers.

Look for Risk Management Legal Services from Real Estate Attorneys

Rob Sunderland handles a number of risk management inquiries for us. That’s not a claim on a policy, that’s us hiring Rob to help our client resolve the issue before it escalates. Those matters don’t just crop up Monday through Friday, they happen on the weekends, too, when you need immediate advice. Make sure you’ve got pre-claim support from your real estate attorneys. And make sure they focus on real estate.

You want a legal specialist that knows the ins and outs of one particular class of activity and knows how best to protect your brokers. Lots of insurance companies will hire some gigantic firm from New York or Los Angeles or Chicago to handle all the matters that they have — whether it’s a director’s and officer’s claim on a securities matter, or a car accident, or a slip and fall in a restaurant. Those aren’t the people you want securing your livelihood. Some junior associate that’s maybe had one other real estate case in her life.

What to Look for in an E&O Policy

Now, on the policy — make sure it lists or covers all the activities you perform. The last thing an insurance company wants to say is, “This client is doing property management with no coverage for that activity. We can’t pay their claim.” Make sure it’s listed.

If you pick up a commercial deal, call your insurance company. If you get a listing on a business opportunity, and you’re not sure if you have the coverage, pick up the phone and call your insurance company to be sure.

Avoid miscellaneous policies that aren’t tailored for real estate. They are the ones designed to fit things that aren’t otherwise defined, and they create enough loopholes and gaps that we could have another webinar on those. Ensure your policy can be modified at any time.

Working with insurance brokers

We’re happy to work with client’s insurance brokers, or we can work directly with the client. The one thing that we suggest all real estate firms look for is an insurance broker with particular expertise in real estate. Otherwise, you could end up like that big real estate company we talked about before that lost all of their licensees’ coverage for their past deals.

Individual E&O policies protect your business now and into the future

In closing, by carrying an individual policy at the salesperson level, you get peace of mind. You never have to wonder, “Is my firm going to go out of business in eight years? Is my broker going to pass away? Is the bookkeeper going to forget to pay for the coverage and wipe out all this old protection?” If you need to add property management, you can call your E&O company and say, “Add property management.”

Portability. One of the questioners asked about moving from an individual salesperson under another’s license to starting their own firm. No other arrangement lets you keep continuous coverage unless you carry it at the salesperson level. And lastly, control. Don’t trust someone else to make all those decisions. It’s your business, it’s your livelihood. For a couple hundred dollars in most states, isn’t it worth it?

Rob Freedman:

I want to thank Robert and Steve for walking us through the benefits of getting an individual E&O insurance policy. I thought it was really interesting and I hope it was valuable for every real estate licensee and brokerage.

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