Many real estate brokers do not understand their professional Errors and Omissions (E&O) insurance, and, consequently, do not do a good job of shopping for that insurance. (Of course, there are those who don't even have E&O coverage; but that's another story.) Moreover, if brokers and owners don't understand their coverage, you can bet that their agents don't either.
These aren't just my opinions. They are concerns that have been expressed by some of the top real estate defense lawyers in California.
It is a real service to its members that the California Association of REALTORS® (CAR) maintains a close relationship with attorneys whose clients are real estate brokerages and local Realtor® associations. A few years ago, a number of those attorneys voiced their strong concerns regarding broker misperceptions (and sometimes downright ignorance) about their professional insurance coverage. There were stories –too many stories -- of brokers tendering claims to their insurers, only to find out that the policy did not cover them for the activity in which they or their agents had been engaged. (Common examples: property management, sale of business opportunities, sale by an agent of his/her own property). Too often they learned that they could have been covered, but their eyes had been fixed on the premium cost rather than the coverage.
As a result of the concerns expressed by the attorneys, CAR formed a working group to address the problem and to make recommendations. The group consisted of Realtor® members, real estate attorneys, and representation from the insurance brokerage community. The group produced an eight-page document - Buyers Guide to Errors and Omissions Insurance - that was presented to CAR directors at their October, 2013, meeting in Long Beach, California.
The Buyer's Guide consists of four sections:
- Steps in Shopping: e.g. Start the shopping process no later than 45 days before you will want coverage to begin. Larger firms should give themselves 60 -- 90 days.
- Tips for Reviewing Quotes: e.g. Make sure the policy covers activities in which you engage -- commercial, property management, etc. Also, do you have a say in choosing legal counsel in the event of a suit?
- A Glossary of Terms: Every insurance specialty has its own peculiar vocabulary. E&O insurance is not different.
- A List of Questions that Agents should ask their Brokers: e.g. Will acts of my personal assistant be covered?
One of the many things that folks in the real estate business don't understand is that E&O policies provide what is known as claims-made coverage. You are covered for claims made against you during the coverage period, though not necessarily for acts that occurred during the coverage period.
Suppose, for example, that you have been insured by Ace Insurance for the past three years, but now you have switched to Super Insurance. During all these years, you did property management and you purchased E&O insurance coverage for that activity. This year, a claim comes in for an alleged property management incident that occurred last year. The claim would be picked up by this year's insurance carrier (Super) even though the incident occurred before you were insured by them. Moreover, if Super does not have property management coverage this year, it would not be picked up by Ace, who had covered you last year, even though that's when the incident occurred.